Is GGG a good play for the Industrial sector?

January 18, 2019

Is GGG a good play for the Industrial sector?

For the last couple of days, the market has been rebounding, driven primarily by what look like encouraging signs that trade talks between U.S. and China are productive and making progress. It’s a good bet that any kind of deal that eases tensions and tariffs is going to be taken as a positive sign by the markets. Yesterday the market also got an additional boost from the Philadelphia Federal Reserve’s factory index, which reversed three straight months of declines by rebounding in January. That supports positive price movements in the Industrial sector, which has seen an impressive, almost 7% rally since the beginning of the year as measured by the S&P 500 Industrial Sector SPDR ETF (XLI).

A rebound in Industrials, which like many of other sectors, tested bear market territory in late December, could be a bullish indicator for the broad market. The Chicago Fed President also gave the market some encouragement, saying that while the economy is doing well, the Fed can afford to be patient in making decisions about future interest rate increases. That means that it could be a good time to start looking at Industrial stocks in more detail and depth.

Graco Inc. (GGG) is an interesting mid-cap Industrial company. The stock’s performance has pretty much mirrored the sector over the past year, but does trail the rest of the sector so far in 2019, since it is up a just a little over 2% since January 1. This is a company that manufactures equipment used in construction, manufacturing, processing and maintenance industries, which means that while you might not recognize the name quickly, if you’ve ever used a paint sprayer, a pressure washer, abrasive blaster or a line striper to name just a few examples, you’ve probably got some experience with one of their products. On the consumer level, they’re probably most easily recognized for their exterior and interior paint sprayers, which you can pick up at your local Home Depot (HD) or Lowe’s (LOW) store. 

A healthy economy, and potential rebound in the Industrial sector could be a good thing for a stock like GGG, but let’s dive in and take a look to see if it is a stock that could also be considered a good value.

Fundamental and Value Profile

Graco Inc. designs, manufactures and markets systems and equipment used to move, measure, control, dispense and spray fluid and powder materials. The Company specializes in equipment for applications that involve materials with viscosities, materials with abrasive or corrosive properties, and multiple-component materials that require ratio control. The Company operates through three segments: Industrial, Process and Contractor. The Industrial segment markets equipment and pre-engineered packages for moving and applying paints, coatings, sealants, adhesives and other fluids. The Process segment markets pumps, valves, meters and accessories to move and dispense chemicals, oil and natural gas, water, wastewater, petroleum, food, lubricants and other fluids. The Contractor segment markets sprayers for architectural coatings for painting, corrosion control, texture and line striping. Its equipment is used in the manufacturing, processing, construction and maintenance industries. GGG’s current market cap is $7.1 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings grew by almost 30.5%, while revenues increased by 9.5%. In the last quarter, earnings increased by just over 4%, while sales dropped by -2%. The company has an impressive margin profile, with Net Income that improved as a percentage of Revenues from a little under 19% for the last twelve months to a tad more than 22% in the last quarter.
  • Free Cash Flow: GGG’s free cash flow is adequate, at a little more than $295 million. That translates to a Free Cash Flow Yield of 4.19%.
  • Debt to Equity: GGG has a debt/equity ratio of .33. This number reflects the company’s manageable debt levels, and has dropped over the last quarter from .42. The company’s balance sheet indicates cash and liquid assets are a little over $137.5 million versus debt of about $266 million.
  • Dividend: GGG pays an annual dividend of $.64, which translates to a dividend yield of 1.51%.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GGG is $4.79 per share, and translates to a Price/Book ratio of 8.92 at the stock’s current price. Their historical average Price/Book ratio is 7.86, which suggests the stock is overvalued by almost -12%, and that puts the stock’s long-term target a little below $38 per share. Based on that measurement, the stock’s actual bargain price is around $30 per share – more than 30% below its current level.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The greatest portion of the stock’s decline for the year came from September through October. After hitting a 52-week low around $33 per share, the stock rebounded, then dropped back to its late December low around $38.50. From that point, the stock has rallied by a little over 10%. It is currently very near to its closest resistance between $43 and $44.
  • Near-term Keys: I think it’s hard right now to justify a position in GGG from a value-based standpoint; however, if you’re looking for a shorter-term trade, and the sector continues to rally, a push above $44 looks like a good signal for a swing or momentum trade using call options or the stock itself, with a short-term target price at around $47.50 per share. A break below $42, on the other hand could offer a decent opportunity to short the stock or buy put options, with an exit price in that case in the $38 price area.