Stock Analysis

Graco Inc.'s (NYSE:GGG) Shareholders Might Be Looking For Exit

NYSE:GGG
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With a price-to-earnings (or "P/E") ratio of 27.6x Graco Inc. (NYSE:GGG) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Graco certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Graco

pe-multiple-vs-industry
NYSE:GGG Price to Earnings Ratio vs Industry December 20th 2023
Keen to find out how analysts think Graco's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Graco's Growth Trending?

In order to justify its P/E ratio, Graco would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow EPS by 72% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 6.6% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is noticeably more attractive.

With this information, we find it concerning that Graco is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Graco currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Graco with six simple checks.

Of course, you might also be able to find a better stock than Graco. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Valuation is complex, but we're helping make it simple.

Find out whether Graco is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.