Graco Leveraged To Ongoing Economic Improvement, But The Valuation Is Already There

There is basically nothing to find fault with at Graco (GGG) from an operational or strategic perspective. Graco is a phenomenally well-run company with both strong operational efficiency (manufacturing, etc.) and strong product development and market share in its core markets. With exposure to a range of industrial markets, including autos, and leverage to growth trends like electric vehicles, I have no concerns about Graco’s ability to continue to outgrow its markets and compound its cash flows.

My concerns are solely on the valuation side. Graco has typically traded at a fairly robust premium to the industrial space (about 15% to 40% on forward PE), and that’s fair given the superior margins, returns, and growth. Still, I do believe the industrial space is expensive and already anticipates a lot of the recovery growth that is on the way.

If I had to buy an expensive industrial stock, I could certainly argue that Graco is one where I’ll sleep better at night and where there is a better-than-average chance of the company outperforming. Still, I don’t have to buy an expensive industrial stock, and I’d rather take the risk of missing out than buying into substandard future returns.

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Graco Leveraged To Ongoing Economic Improvement, But The Valuation Is Already There