Since the market bottom in 2009, Graco Inc. (NYSE:GGG) has advanced significantly, from around $14.50 per share to more than $67.10 per share at the time of writing. At the end of June, the company was also upgraded by Goldman Sachs, from Sell to Neutral, with the target price increasing from $60 to $68 per share. Should investors buy Graco Inc. (NYSE:GGG) now? Let’s find out.
A cash cow with a reasonable amount of leverage
Graco Inc. (NYSE:GGG) operates in three main business segments: Industrial, Contractor and Lubrication. Most of its revenue, $603.4 million, or more than 60% of the total net sales, were generated from the Industrial segment, pumps sold to factories, while the Contractor and the Lubrication segment contributed nearly $300 million and $110.2 million, respectively, in 2012 revenue. The Industrial segment was also the biggest earnings contributor, with $186.1 million, accounting for 82.8% of the total earnings.
In the past four years, Graco Inc. (NYSE:GGG) has managed to deliver consistent growth both in its top line and bottom line. Its revenue rose from $579 million in 2009 to more than $1 billion in 2012 while the net income increased from $49 million to $149 million during the same period. What makes me interested into Graco Inc. (NYSE:GGG) is its cash flow generating ability. In the past ten years, its operating cash flow has fluctuated in the range of $101 million to $190 million while the free cash flow stayed in the range of $94 million to $171 million. Trailing twelve months, the operating cash flow and the free cash flow came in at $205 million and $190 million, respectively.
The company employed a reasonable amount of leverage in its operations. As of March 2013, it had $507 million in equity, $463 million in cash and investments, and nearly $530 million in debt. The goodwill and intangible assets came in at only $320 million. At $67.10 per share, Graco is worth $4.1 billion on the market. The market values Graco at 13.36 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization).
Peer comparison
Compared to its peers including Colfax Corp (NYSE:CFX) and IDEX Corporation (NYSE:IEX), Graco does not seem to be extremely expensive.
Colfax Corp (NYSE:CFX) is trading at $51 per share, with the total market cap of more than $4.8 billion.
The market values Colfax Corp (NYSE:CFX) at a higher valuation than Graco, at 13.6 times its trailing EBITDA. Colfax Corp (NYSE:CFX) is considered a global industrial manufacturing and engineering company, with more than 50% of its total revenue coming from the Fabrication Technology segment. Looking forward, Colfax Corp (NYSE:CFX) expected to experience aggressive execution of business restructuring including manufacturing consolidation, SG&A savings and corporate office consolidation. The company estimated to accelerate its growth via acquisition, with mid-teens operating margins. The free cash flow was targeted to be consistently higher than the net income.
IDEX Corporation (NYSE:IEX) is the cheapest among the three companies. At $56.80 per share, IDEX Corporation (NYSE:IEX) is worth around $4.6 billion. The market values IDEX Corporation (NYSE:IEX) at 11.3 times its trailing EBITDA. IDEX Corporation (NYSE:IEX), the provider of business solutions, offering pumps, flow meters and other fluidics systems, operating in three main segments: Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. For the full year, the company expected to grow its revenue organically by low-to-mid single digit rate, with the capital expenditure of around $40 million. With the operating margin of around 19%, its EPS estimate stayed in the range of $2.85 to $2.95 per share.
Among the three companies, while Colfax Corp (NYSE:CFX) does not offer investors dividends, Graco and IDEX Corporation (NYSE:IEX) pays its shareholders dividends with yields at 1.5% and 1.7%, respectively.
My Foolish take
Mario Gabelli said that Graco has wonderful management team. He said earnings per share be able to rise to $5. With a simple P/E of 20, Graco could be worth $100 per share in three years time. Indeed, with the consistent positive cash flow generation and a reasonable leverage level, Graco seems to be a good business to hold in a long run. However, despite the $100 target price by Gabelli, I am personally not excited because of high EBITDA multiple. I would rather wait for price correction before initiating any long position in Graco.
The article Mario Gabelli Likes This Industrial Equipment Maker originally appeared on Fool.com is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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