GGG 1Q10 earnings announcement

Graco is based in Minneapolis, where I also live, so it's easier to follow. Graco makes fluid handling and management equipment (paint sprayers, equipment for lubrication, finishes, coatings, etc). A lot of their business comes from contractors and housing, so needless to say things have been rough the past couple of years. But with the latest quarterly report things look to be on the upswing. EPS came in at $0.34/share, Revenue grew 19% (16% constant currency), with over half of the increase coming from Asia. Each of their 3 divisions (Lubrication, Contractor, Industrial) showed revenue growth and much better operating margins. They have beat analysts estimates in each of the last 4 quarters.

Their press release did not include a balance sheet or cashflow statement. This usually upsets me, but as is customary with Graco, they filed their 10Q on the same day as their earnings release. I am primarily interested in the cashflow statement - it is usually desirable to see cashflow from operations higher than net income. Plus, I want to compare the growth rate of cashflow year-over-year to revenues and earnings. For me, cash speaks much louder than earnings.

For this quarter, cashflow from operations of $16M did not impress me. This is 20% less than net income for the quarter and a larger drop from the year ago period. This was caused by an increase in inventories and account receivables, which the company attributed to the growing sales. So this may turn out to be a good thing, and for now I'm not worried about it, but will definitely watch it over the rest of the year.

Graco looks to be setting themselves up for continued growth. As the economy improves, the lubrication and industrial divisions should grow well. And once the housing market returns that will bode well for the contractor division. As this quarter also showed, Asia and Europe are also showing good growth.

Graco is a great example of the type of company I like to invest in - a small, shareholder-friendly company in boring industries. They've raised their dividend every year for at least the past 10 years, and for the last 5 years the dividend has increased at an average rate of 8.9% annually. They also will occasionally pay a special dividend, the last time was a $1.50/share dividend in 2004. They're not in a high-growth industry but by being innovative and careful with spending they continue to generate a lot of cash and grow earnings. I will write more about why I like Graco in a later post.