Graco Inc. (GGG) is one of the stocks that William Blair & Company Analyst Nick Heymann is currently recommending. He says the stock currently meets the criteria for low 20s return on invested capital, mid-20s EBIT, and mid-single-digit organic growth, as well as very strong free cash conversion.
“In Graco’s case, their forward fundamental visibility has recently been diminished because they were required by the Department of Justice to sell a business called Liquid Finishing, which accounted for about 12% or $0.46 of their earnings of $3.65 last year,” Heymann says. “They completed that divestiture for a good price in April this year, and investors currently haven’t quite figured out how all those earnings are going to be replaced.”
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At this point, Heymann believes that $.40 of the $.46 of earnings from Liquid Finishing has now been replaced based on recent acquisitions or accelerated share repurchase. And, he says Graco has additional opportunities in the second half of 2015 to further expand incremental earnings potential.
“With $300 to $400 million of additional cash optionality and financial flexibility, they can continue to repurchase their stock or make small accretive acquisitions,” he says. “Alternatively, they can generate incremental sales and earnings growth from their continued efforts to accelerate their very nominal penetration for their products in emerging markets.”
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