Graco has been treading water for the past six months, recording a small loss of 1.4% while holding steady at $83.78.

Is there a buying opportunity in Graco, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Graco Not Exciting?

We're swiping left on Graco for now. Here are three reasons you should be careful with GGG and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Graco grew its sales at a mediocre 6.3% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Graco, its EPS declined by 1.7% annually over the last two years while its revenue was flat. This tells us the company struggled to adjust to choppy demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Graco’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Graco isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 26.7× forward P/E (or $83.78 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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