Shares of painting industry supplier Graco Inc. (GGG -0.69%) jumped as much as 8.4% in trading on Thursday after the company reported third-quarter 2023 results. Shares closed the day up 7.1%.
Graco's earnings impress
Net sales fell 1% to $539.7 million, but the cost of goods sold dropped and led to a 15% increase in net income to $133.1 million, or $0.77 per share. Analysts were only expecting earnings of $0.73 per share, so that's where the market got excited.
Management said there was a drop in demand in Europe, the Middle East, and Africa of 4%, which was largely to blame for the revenue drop. But price increases offset those lost sales and a drop in volume in the contractor segment.
The one strong business was the process segment, which had a 9% increase in sales.
Slow and steady growth at Graco
Management said its outlook is still for "low single-digit growth on an organic, constant currency basis" for the full year, which was enough for investors to bid the stock higher. In an environment of slowing growth, being able to increase prices and margins is a nice trade-off to make.
What concerns me as an investor is the value shareholders are getting. Shares currently trade for 25 times earnings, which is expensive for a company that's seeing revenue drop. Even if the company reaches low single-digit organic growth, the multiple seems high.
So, the market may have been impressed by beating expectations today, but I don't see a reason to buy into the stock. I think shares are still too expensive given the trends for the business.
