Graco Earnings Question Clouds 22x Valuation
Graco converts $537M in free cash flow annually with a fortress balance sheet, yet trades at 22x earnings on inconsistent quarterly results. The stock is at $76.59, 19% below analyst consensus and bel
Graco Cash Machine Faces Growth Question at 22x
NEW YORK, September 22 —
Graco Inc. (GGG), a maker of fluid-handling pumps, sprayers, and dispensing systems, converts $2.27 billion in annual revenue into $537 million in free cash flow, yet trades 19% below analyst consensus and below where its own director sold shares in August, on a multiple that prices in earnings consistency the business has yet to deliver.
- $537 million TTM free cash flow; $510 million cash vs. $50 million debt; 52.6% gross margin.
- Director Eric Etchart sold 3,218 shares at $80.01 on August 3, $3.42 above today's $76.59.
The Cash Engine's Case for a Premium
Graco's Contractor segment makes paint sprayers, polyurethane foam systems, and road-marking equipment; its Industrial segment runs fluid pumps, liquid finishing lines, and automated lubrication systems for bearings and gears. The product portfolio looks industrial, but the economics do not: a 52.6% gross margin sits well above most machinery peers and converts into $673 million in trailing operating cash flow. Against only $50 million in debt and $510 million in cash, the balance sheet points to lasting durability. For buyers of durable-quality industrials, this profile historically commands a premium. For sellers, the premise shifts once growth softens.
The Consistency Gap at 21.9x
The four-quarter sequence reads miss, beat, miss, beat, with swings of 10.8% and 12.4% on the two most recent. Two data points do not constitute a trend. At 3.3% revenue growth, the Expansion Markets segment's position in semiconductor pumps, oil-and-gas high-pressure valves, and groundwater monitoring adds optionality, but none of it yet shows in consolidated growth. Running a DCF calculator on current cash flows quickly surfaces what terminal growth assumption justifies a 21.9x forward multiple.
| Ticker | Mkt cap | Fwd P/E | 52-wk |
|---|---|---|---|
| GGG | $12.4B | 21.9x | -9.9% |
| IEX | $16.4B | 23.1x | +39.6% |
| NDSN | $17.5B | 24.2x | +39.8% |
| LECO | $14.1B | 20.6x | +9.3% |
| FELE | $4.2B | 18.4x | +0.2% |
The Director's $80.01 Benchmark
Director Eric Etchart's August 3 transaction exercised options at $36.09 and sold immediately at $80.01, a routine liquidation. The stock has since fallen to $76.59, $3.42 below his exit price. No insider purchases followed in the 90-day window, leaving the 94% institutional float as the only organized long-side presence. The thesis turns on the next quarterly print: a beat confirms that upside as a trend; a miss restores the alternating pattern and puts the 21.9x multiple under pressure. Run the free Graco Inc. deep-dive →
Basis Report is independent research for informational purposes. It is not investment advice and not a recommendation to buy or sell any security.
Frequently Asked Questions
How much free cash flow does Graco generate?
Graco generates $537 million in trailing 12-month free cash flow from $2.27 billion in annual revenue. The company maintains a 52.6% gross margin and converts cash flow into a fortress balance sheet with $510 million in cash against only $50 million in debt.
Why is the 22x multiple questioned?
The company's most recent quarter showed a $0.91 EPS result versus a $0.808 estimate, a 12.4% beat, but this follows a 10.8% miss the prior quarter. With only 3.3% revenue growth and an alternating beat-miss pattern over four quarters, the consistency investors expect at a 22x multiple is uncertain.
What did the director do with his stock?
Director Eric Etchart sold 3,218 shares on August 3 at $80.01 per share after exercising options at $36.09. The stock has since fallen to $76.59, and no insider purchases have followed within the 90-day window.
What would justify the current valuation?
The next quarterly earnings print is the key test. A beat would confirm the 12.4% upside as a trend and support the 22x multiple, while a miss would restore the alternating pattern and pressure the valuation.
What's the analyst consensus target?
Analysts have set a consensus price target of $91.29, with management announcing a November dividend of $0.295. These targets signal confidence, but the bull case depends entirely on earnings growth accelerating beyond the current 3.3% rate.
Graco generates $537 million in free cash flow on $2.27 billion in revenue and holds more cash than debt, yet the stock sits at $76.59 — 19% below the analyst consensus target and $3.42 below where the company's own director chose to exit last month. The widening gap between balance sheet quality and market price forces a direct question: does a 21.9x forward multiple price in growth that three of the last four quarterly earnings reports have failed to deliver?
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