The last six months or so have seen a rerating process among industrial stocks. Whether that’s being driven by expectations of higher rates, slowing end-markets, other factors, or “all of the above”, valuations for some frequent high-flyers are getting more reasonable. Of course, “more reasonable” doesn’t mean conventionally cheap, and investors have to weigh that opportunity against the risk that companies will start coming up short as comps get tougher and short-cycle momentum starts to weaken.
Graco (GGG) shares are down a bit from my last update, slightly underperforming the broader industrial space. I don’t think there’s anything wrong here other than the aforementioned concerns about slowing end-market growth, but I think the company should have another year of high single-digit revenue growth in it, and still above-market growth in 2023 as well. Add in a history of demonstrated excellence and some M&A optionality (as well as capital returns), and although these shares aren’t conventionally cheap (trading nearly 27x forward earnings), I think this is an increasingly tempting name.
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