Graco Earnings: Core Sales Climb 10% Despite Weakness in Asia-Pacific

Wide-moat-rated Graco GGG posted strong first-quarter results, featuring double-digit year-over-year core sales growth despite headwinds in Asia-Pacific. However, management said on the earnings call that order rates in Asia-Pacific improved throughout the quarter and that it anticipates full-year sales growth in the region to be positive. We’ve increased our fair value estimate to $75 per share from $73, which reflects our slightly more optimistic operating margin assumptions as well as the time value of money.

On an organic constant-currency basis, Graco’s first-quarter core sales increased 10% from the same period last year. Contractor core sales grew 7%, despite an 8% decline in Asia-Pacific, thanks to new product launches and improved product availability. Industrial core sales increased 7%, fueled by 17% growth in the Americas. Lastly, process core sales were up 16%, with growth across all product applications and regions. Graco expanded its first-quarter operating margin by nearly 400 basis points from the prior-year period, from roughly 26% to 30%, thanks to higher pricing and favorable product mix. We view strong pricing power as a feature of Graco’s wide moat, and we were pleased to see the company deliver a stellar 80% incremental margin in the first quarter.

In the contractor segment, growth in the commercial and multifamily residential end markets more than offset a slowdown in single-family housing starts in North America. We expect the segment to benefit from new product launches as well as healthy infrastructure and commercial project pipelines.

Despite a strong start to the year, management maintained its full-year outlook due to macroeconomic uncertainty. Graco continues to anticipate organic revenue growth in the low single digits.