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Here's Why It's Worth Investing in Graco (GGG) Stock Now

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Rising demand for U.S.-made machinery, expanding industrial production, and favorable policy changes, like the Tax Cut and Jobs Act introduced in December 2017, appear to be boon for industrial tool makers. Growth of the global and U.S. economy, as well as infrastructural investments, creates additional tailwinds.

Of the many investment options in the machinery space, we believe that choosing Graco Inc. (GGG - Free Report) will be a smart choice. The stock currently carries a Zacks Rank #2 (Buy). Further, it dons a favorable Growth Score of B.

Moreover, the industry, to which Graco belongs, is positioned in the top 32% of more than 250 Zacks industries. Per our research, the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Over the past month, Graco’s shares have yielded 12% return, outperforming 3.9% growth recorded by the industry.

Let’s delve deeper and discuss why Graco is a suitable investment option.

Earnings — Solid Performance & Robust Outlook: Of the last four quarters, Graco surpassed estimates in two, the average earnings surprise being +4.05%. In the third quarter of 2018, the company’s earnings beat estimates by 8.7%. Moreover, sales growth and solid operational performance drove bottom-line results by 31.6% year over year.

We believe that healthy demand for Graco’s products in the end-markets served — including industry & machinery, residential & non-residential construction, automotive, and others — will be a boon. This, along with efforts to boost margins, might support bottom-line growth in the quarters ahead.
Graco does not provide earnings projections but upward revision in earnings estimates by brokerage firms is reflective of positive sentiments toward the company. In the past 30 days, earnings estimates for 2018 have been raised by eight brokerage firms while that for 2019 have been increased by six. Currently, the Zacks Consensus Estimate for earnings per share stands at $1.88 for 2018 and $2.02 for 2019, reflecting growth of 2.2% and 2% from the respective 30-day-ago tallies.

Graco Inc. Price and Consensus

Graco Inc. Price and Consensus | Graco Inc. Quote

Further, Graco currently has an Earnings ESP of +0.16% for 2018 and +0.11% for 2019. This, when combined with the company’s Zacks Rank of 2, indicates the possibility of positive earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Revenues — Segmental Business Strong: Graco’s revenues in the third quarter of 2018 expanded 10% year over year on the back of healthy results of its three segments — Industrial, Process and  Contractor.

In the quarters ahead, all three segments will gain from the company’s efforts to launch innovative products. Of many innovative products introduced in the past few quarters, ToughTek F800e and OptiStar 4.0 belong to the Industrial segment; Husky and SaniForce 2150e to the Process segment; and DutyMax GH 675DI and TexSpray FastFinish to the Contractor segment. For 2018, Graco’s organic sales are projected to grow in a mid- to high-single-digit range.

The Zacks Consensus Estimate for revenues for Graco is pegged at $1.65 billion for 2018 and $1.73 billion for 2019, reflecting year-over-year growth of 11.9% and 4.9%, respectively.

Capital-Allocation Strategies: Graco uses its capital for the development of products, capacity expansion, acquisitions (detailed in the next point) and rewarding shareholders handsomely. For 2018, the company anticipates investments on machinery and equipment to total $35 million and that for the expansion of distribution capacities and development of products to be roughly $40 million. Moreover, similar investments are likely to total $100-$120 million in 2019 and 2020.

Graco rewards its shareholders in forms of dividend payments and share buybacks. In the first nine months of 2018, the company repurchased shares worth $155.6 million and paid dividends amounting to $66.8 million.

Acquisitions: Over time, Graco fortified product portfolio and leveraged business opportunities through the addition of assets. Here, the buyout of Smith Manufacturing (in December 2017) and ProHydro, Inc. (in March 2018) are worth mentioning. Since acquired, Smith Manufacturing has been strengthening the company’s line striping and pavement maintenance equipment offerings in the Contractor segment while ProHydro has been adding value to the Process segment.

It’s worth mentioning here that buyouts added 3% to sales growth in the third quarter of 2018.

Debt Profile: Graco’s long-term debt at the end of the third quarter of 2018 was $266.4 million, down 10.4% from the balance at the end of the second quarter of 2018. Moreover, the company’s debt profile is better compared with the industry. Its debt/equity of 33.4% is lower than the industry’s 81.9%.

Other Stocks to Consider

Other top-ranked stocks in the industry are DXP Enterprises, Inc. (DXPE - Free Report) , EnPro Industries, Inc. (NPO - Free Report) and Luxfer Holdings PLC (LXFR - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for all these three stocks have improved for the current year. Further, positive earnings surprise for the last quarter was 17.95% for DXP Enterprises, 23.64% for EnPro Industries and 60.61% for Luxfer.

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