Where is GGG’s value price?

One of the remarkable aspects of the COVID-19 pandemic is the fact that the economic downturn associated with immediate shutdowns and shelter-in-place restrictions didn’t have a stronger on real estate prices. More than a year later, we’re starting to talk about actual economic recovery on the heels of increasing vaccinations, and an employment trend that has continued to trend in a mostly positive fashion for most of the last twelve months. While unemployment numbers remain very elevated, the fact that so many jobs have come back to the economic picture is arguably just one reason that homebuilding activity has remained healthy.

As an analyst, the bullish trend in homebuilding is interesting – but as a value-oriented investor, that trend draws me more to the companies that service and support the homebuilding industry. I like to compare this mindset to the California Gold Rush – the people that were really making the most money weren’t the ones rushing for the hills, rivers and streams to find gold, but the storeowners back in town that sold shovels, blankets, cookware and so forth to gold miners. That’s why I am even more fascinated by the businesses that homebuilders and construction companies rely on – lumber companies, pipe manufacturers, and so much more.

Graco Inc. (GGG) is an interesting mid-cap Industrial company. 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. Most analysts forecast continued health in the homebuilding segment, which includes new and existing homeowners who should have more and more reasons to start working on home improvement projects.

GGG’s stock price experienced the same drop to bear market levels in early 2020 that most of the market did; but like a lot of other stocks with ties to construction and homebuilding, it didn’t take long to recover from those bear market lows; in fact the stock pushed to a high at around $75 in January that was about 50% above the stock’s pre-pandemic highs before dropping back into the beginning of March. After finding support at around $66, the stock has moved back in the direction of the longer trend, and in the last week even pushed to a new high above $78. Does that mean GGG is poised to extend even further along that bullish trend? A healthy economy, and expected continued strength in a reopening economy 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 $13.2 billion.

Earnings and Sales Growth: Over the last twelve months, earnings grew by almost 52.6%, while revenues increased by 21.5%. In the last quarter, earnings declined by almost -5%, while revenues dropped by about -3.5%. The company has an impressive margin profile, with Net Income that improved as a percentage of Revenues from 21% for the last twelve months to a tad more than 23% in the last quarter.

Free Cash Flow: GGG’s free cash flow is adequate, at a little more than $367 million. That translates to a modest Free Cash Flow Yield of 2.67%, but does mark continued improvement throughout the past year, from $307 million in June of last year.

Debt to Equity: GGG has a debt/equity ratio of .11. This number reflects the company’s conservative financial discipline and manageable debt levels. GGG also has very good liquidity, as the company’s balance sheet indicates cash and liquid assets are a little over $460.5 million versus debt of about $106 million.

Dividend: GGG pays an annual dividend of $.75, which translates to a conservative dividend yield of 0.96%.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $55 per share. Despite the company’s underlying fundamental strength, that means that at the stock’s current price, GGG is overvalued by -29%.

Technical Profile

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

Current Price Action/Trends and Pivots: The chart above covers the last year of price activity for GGG. The red diagonal line traces the stock’s upward trend from a May low at around $42 to its recent peak just this week at around $78. The stock is just a little below that point now, marking immediate support at $78, and expected current support at around $76. That’s a pretty narrow range to work with, and could be part of the reason that the stock could be starting to consolidate between $76 and $78. A break above $78 could have between $2 to $6 of near-term upside, depending on how quickly bullish momentum builds. A drop below $76, on the other hand should find next support at around $72.50, based on pivot activity in February and December of last year.

Near-term Keys: While GGG has some very interesting fundamental strengths, and quite a bit of industry-driven momentum behind the stock’s current movement, there really is no way to call the stock a good value at its current level. That means that the best probabilities with this stock lie in short-term trades. A push above $76 could be a good signal for a swing or momentum trade using call options or the stock itself, with a short-term target price between $80 and $84 per share. A drop below $76, on the other hand would be a good reason to consider shorting the stock or buying put options, with an exit price in that case in the $72.50 price area.