Graco Earnings: Growth in Process and Industrial More Than Offset Contractor Slowdown

Wide-moat-rated Graco’s GGG second-quarter revenue of $559.6 million and adjusted EPS of $0.75 both fell short of FactSet consensus expectations ($576 million and $0.80, respectively), sending shares down roughly 8% intraday. We’ve made some puts and takes in our model, but our $75 fair value estimate for Graco remains unchanged. After the pullback, we see the name as fairly valued, with shares now trading in 3-star territory.

On an organic constant-currency basis, Graco’s second-quarter sales increased by 3% from the same period last year, as growth in the process and industrial segments more than offset a decline in contractor. Process core sales increased 14%, fueled by growth in automatic lubrication, semiconductor, and vehicle service applications. Industrial core sales were up 4%, led by 7% growth in the Americas. Contractor core sales declined by 3% due to weaker results in the pro-paint and home-center channels, partially offset by new product launches and improved product availability. Graco’s second-quarter operating margin widened by 100 basis points year over year, from 27.1% to 28.1%, thanks to higher pricing and favorable product mix.

Management reaffirmed its outlook for full-year 2023 and continues to expect organic revenue growth in the low-single digits. Graco will face more challenging year-over-year comparisons for the remainder of the year as the company laps significant price increases implemented in the second half of 2022. That said, given current order rates and Graco’s elevated backlog levels, we still believe that the company can deliver low-single-digit organic revenue growth for the full year.