Graco (GGG) Exhibits Strong Prospects, Risks Persist

Graco Inc. GGG stands to gain from its efficient management team, product investments and a sound customer base. Going forward, investments in capacity expansion and innovation as well as solid shareholder-friendly policies will likely aid GGG. GGG anticipates organic sales growth (on constant-currency basis) in the high-single digits for 2022. Higher demand is expected for all segments and geographical locations.

Graco focuses on pumping resources into innovation and capacity expansion. GGG’s innovation line comprising Intelligent Paint Kitchen, SaniSpray HP 20 electrostatic sprayer, Voltex Dynamic Mix Valve, PerformAA air-assist, TapeLazer HP Automatic system, airless spray guns, etc. in 2021 is worth mentioning. In 2022, GGG further plans to invest $140 million in expanding its facilities and $190 million in rolling out machinery. GGG is focused on achieving revenue growth of 10% (CAGR) and an earnings improvement of 12% (CAGR) in the long run.

Graco remains committed toward rewarding its shareholders through dividend payouts. For instance, in 2021, it paid out dividends worth $127.1 million, reflecting an increase of 8.7% year over year. Further, GGG hiked its quarterly dividend rate 12% in December 2021.

However, increased product costs, triggered by supply chain, logistics and inflationary woes (mainly in raw materials and labor) are going to be unfavourable for GGG. In fourth quarter 2021, its cost of sales went 17.5% north from the year-ago quarter’s figure while its gross margin decreased 120 basis points (bps). Graco anticipates logistics issues and supply-chain constraints to be worrisome in the first two quarters of 2022.

Due to Graco’s global presence, it is exposed to the risks stemming from geopolitical issues, unfavourable movements in foreign currencies and other headwinds. Foreign currency translation had a negative impact of 1% on both Industrial and Contractor segments’ sales in fourth-quarter 2021. In 2022, adverse movements in forex will likely decrease sales 1% and earnings 3%.

In the past three months, this currently Zacks Rank #3 (Hold) stock has decreased 9.2% compared with the industry’s decline of 10.1%.

Image Source: Zacks Investment Research

Stocks to Consider

Some better-ranked companies from the Zacks Industrial Products sector are discussed below.

Alcoa Corporation AA presently sports a Zacks Rank #1 (Strong Buy). Its earnings surprise in the last four quarters was 27.1%, on average.

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In the past 60 days, AA’s earnings estimates have increased 86.7% for 2022. AA’s shares have gained 42.5% in the past three months.

Ferguson plc FERG presently carries a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 14.2%, on average.

In the past 60 days, earnings estimates for Ferguson have increased 7% for fiscal 2022 (ending July 2022). The stock has declined 26.1% in the past three months.

AGCO Corporation AGCO presently carries a Zacks Rank of #2. AGCO delivered a trailing four-quarter earnings surprise of 56.7%, on average.

Earnings estimates for AGCO have increased 10.7% for 2022 in the past 60 days. Its shares have rallied 13.1% in the past three months.
 

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