You probably won’t find the air-powered portable lubricator on anyone’s list of the top 50 inventions of the past 100 years. But for anyone who had to operate a manual grease gun in a Minneapolis winter, the device was a godsend. You see, freezing temperatures can turn grease into thick sludge, making the material difficult to work with. Those were the conditions under which parking lot attendant Russell Gray had his light-bulb moment nearly a century ago. He found a better way, and before you know it, he and his brother had themselves a winning business.
Some 90 years later, Gray’s company is considered one of the top manufacturers of fluid handling products in the world, sporting a market capitalization of $11.3 billion. And when master stock-screener Tom Carr conducted a detailed search for the best opportunities in the industrial sector, this was the company that emerged at or near the top of most of his criteria.
— Bob Bogda, Editor
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Industrial stocks are not on the radar of most stock traders. They are not as “sexy” as the big tech bellwethers — stocks like Apple, Inc., Nvidia, Facebook, and Netflix — for they tend to not move as far or as fast. They can, however, outperform tech during periods of market volatility. Such is the case now. In the wake of all the election uncertainty that plagued the market last month, industrial stocks outperformed tech stocks by 600%. They also posted the strongest quarter (+6.4%) of any sector except consumer cyclicals.
Armed with that knowledge, I recently put together a scan for the market’s best opportunities in the industrial sector. My focus was on mid-sized companies (between $2 and $20 billion) in the “general industrial” category, with rising earnings estimates both this year and next year (a rarity), with strong sales growth, wide margins, strong return on equity (ROE) (these last three are my “safety-moat” metrics) and low peer-relative debt levels.
After running that scan, 22 companies passed through my filters. The one company consistently in the top five in most of these categories is Graco, Inc (GGG).
Headquartered in Minneapolis, Minnesota, this industrial company founded in 1926 makes and markets products aimed at four key sectors of the economy: homeowners, contractors, logistics, and industrial manufacturing. Graco’s primary and patented technology is a hydraulic sprayer used to project various fluids and powdered materials. Applications include painting large surfaces, applying sealant, lubrication for machinery and vehicles, water-proofing, insulation, powdered finishing products, and the dispensing of oil and natural gas.
There is great demand for Graco’s proprietary equipment. Last year the company sold $1.6 billion of its offerings, one of its best on record. In fact, the strength of its recent growth took most analysts by surprise. As announced on the October 21 conference call, revenues in the most recent quarter grew 14% faster than analysts had predicted ($439 million), and EPS beat estimates by 58% ($0.66).
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This is very good news, for it shows that despite the COVID-19 lockdowns across the country, which disrupted so many supply chains and forced analysts to revise their estimates downward, Graco is one of those rare sheltered plays that actually forced analysts to raise their estimates. Indeed, EPS projections for the rest of this year and all of next year are all higher, from 2% to 10% among the various analysts who cover the company. Price targets have also been raised.
One of the things that sets Graco apart from other firms offering similar product lines is that the company is engineering-driven. It has a large coterie of PhD designers whose main job is to dream up new tech and equipment. One recent new product is Graco’s Renegade Torque Series Hydraulic Pump, a tool that will enable fleet maintenance crews, and anyone else who works with large bolts, to do their work faster with less energy output.
“The Renegade hydraulic pump looks different, runs different and even sounds different than any other pack on the market today – because it is different,” said Jon Knutson, Vice President, Worldwide Contractor Equipment Division Marketing at Graco. “We are excited for hydraulic pack users to experience the vast number of benefits these differences can deliver for them on their jobs.”
It is innovations like this, in addition to stellar growth metrics (up 34% quarter on quarter for the third quarter), that has hedge fund managers looking afresh at Graco this quarter. The number of funds increasing positions of GGG at the end of the first quarter this year rose 14%, to 24. At the end of the second quarter it rose another 33%, to 32. Clearly more and more money managers are seeing the value here.
But where Graco really shines is in its “safety-moat” metrics. Both its operating and profit margins rank in the top three among 82 peer competitors, and its return on equity – a function that measures management efficiency and intelligence – is in the top six. The company has very little short- or long-term debt – shares trade at a reasonable 3.3 current ratio – and the stock pays a 1.1% dividend. Zacks Investment Research gives GGG a rank of 2 (“buy”) on its ability to beat and raise earnings estimates, and Investor’s Business Daily gives GGG an SMR rating of “A” (sales/margins/ROE) coupled with a comp rating of 92 out of 99 due to earnings growth and relative strength.
Action to Take: I consider GGG a strong addition to your value portfolio. Consider buying shares up to $69 with a view to selling them at $100.
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