The stock of Graco (NYSE:GGG, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $77.06 per share and the market cap of $13 billion, Graco stock is believed to be significantly overvalued. GF Value for Graco is shown in the chart below.
Because Graco is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.3% over the past three years and is estimated to grow 4.43% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Graco has a cash-to-debt ratio of 1.78, which is in the middle range of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of Graco at 7 out of 10, which indicates that the financial strength of Graco is fair. This is the debt and cash of Graco over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Graco has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.7 billion and earnings of $1.91 a share. Its operating margin is 25.87%, which ranks better than 96% of the companies in Industrial Products industry. Overall, the profitability of Graco is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Graco over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Graco's 3-year average revenue growth rate is in the middle range of the companies in Industrial Products industry. Graco's 3-year average EBITDA growth rate is 3%, which ranks in the middle range of the companies in Industrial Products industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Graco's return on invested capital is 27.76, and its cost of capital is 5.05. The historical ROIC vs WACC comparison of Graco is shown below:
Overall, the stock of Graco (NYSE:GGG, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about Graco stock, you can check out its 30-year Financials here.
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