GRACO INC (GGG) stock intrinsic value fair value estimate & owner earnings analysis

Graco designs and manufactures equipment that moves, measures, mixes and sprays fluids and powders: airless paint sprayers for contractors, protective-coating and pavement-marking rigs, industrial finishing and Gema powder-coating systems, sealant and adhesive dispensers, process pumps, lubrication equipment and, since the November 2024 purchase of Corob for about $276 million in cash, paint-tinting and colour-dispensing machines. A large share of revenue comes from replacement parts, guns, tips and accessories that the installed base of equipment keeps consuming, which is why Graco has sustained high margins for decades. In 2025 sales were $2.24 billion and net earnings $522 million; about 60% of sales were in the Americas, 24% in Europe, the Middle East and Africa and 16% in Asia Pacific. How we measured earnings. We start from operating cash flow, strip out swings in working capital, charge share-based pay as a real cost and deduct the capital spending needed to keep the business running. One judgement matters a lot: from 2019 to 2023 Graco's capital spending ran well above its old run-rate of about $40-55 million a year, reaching $128 million in 2019, $134 million in 2021, $201 million in 2022 and $185 million in 2023, because it was building new factory space (the company's own 2023 plan of about $200 million included $130 million for building projects to expand production capacity). That is investment in growth, not the cost of standing still, so for our normal level we treated maintenance spending as roughly equal to depreciation ($40 million in 2021 rising to $77 million in 2025 as the new buildings came into service); 2023's spending net of the building projects ($55 million) matches depreciation almost exactly. On that basis the business generated cash before interest of about $424 million (2021), $462 million (2022), $551 million (2023), $500 million (2024) and $527 million (2025). We use the middle of that five-year span, about $500 million or roughly $3.01 per share on today's 165.7 million diluted shares. The window covers the 2021-22 boom and the 2024 slowdown, when sales fell 3.7%, so it is neither a peak nor a trough. Interest is negligible: Graco paid about $3 million in 2025. Recent trend. Reported owner earnings per share jumped 25% in 2025, but most of that came from capital spending dropping to $46 million; on our normalized basis the increase was about 6%. Management plans about $100 million of capital spending in 2026, but only $28.5 million was spent in the first half, so we kept maintenance spending at depreciation. First-half 2026 sales rose 2.8% and net earnings 4.7%. Our base case assumes 3.5% growth in year one, below last year's normalized rate. Base case ($83 per share). Cash earnings grow 3.5% a year for ten years, then 2.5% a year for the following twenty, then hold flat. The growth credited is organic only: Graco has raised prices and grown sales through repeated cycles, with revenue compounding about 6% a year from 2016 to 2025, part of which came from steady small acquisitions. We did not credit those acquisitions because the cash they cost is not deducted from our earnings figure, so counting their growth would count a free benefit. The long tail rests on the installed base of sprayers and pumps that keeps buying parts, and on a brand that has held its position since 1926. The business is worth about $13.4 billion; it owed about $25 million at the end of 2025 (a renminbi credit line at 2.74% and a small Italian bank loan due 2026) and held $508 million of cash at June 26, 2026, of which we treat $100 million as needed to operate. Net of that it has about $383 million of surplus cash, or $2.31 per share. Bear case ($47 per share). Earnings settle near the 2021-22 level of about $440 million, the result of a construction and industrial downturn like the one that cut 2024 sales, plus higher costs on the materials and components Graco sources mainly from Asia Pacific. Growth is 1% a year for ten years, in line with the roughly 1.4% a year sales grew from 2022 to 2025, then flat for fifteen years, then a slow 2% annual decline as acquired technology and customer relationships (amortization rose to $28 million in 2025) wear out and competitors close the gap. The business is worth about $7.4 billion, plus the same $383 million of surplus cash. With almost no debt, even this case carries no refinancing risk. Bull case ($107 per share). The normal level is the 2025 figure of about $527 million, which includes a full year of Corob. Graco keeps raising prices and growing at 5.5% a year for ten years, a little below the 6% a year its sales compounded over the past decade, then 3% for twenty, then flat. The business is worth about $17.4 billion plus $383 million of surplus cash. What could make this wrong. The value depends mostly on Graco keeping its pricing power and parts annuity for decades. A lasting shift of contractors to cheaper imported sprayers, or a long housing and industrial slump, would push results toward the bear case. Capital spending running at the $100 million plan instead of near depreciation would cut our normal level by about 5%. Separately, if the 2019-2023 capacity expansion turns out to be the start of a permanently higher spending rate rather than a one-off, our normalized earnings are too high. Changes since our previous estimate. We previously put the shares at $35.80, $65.10 and $118.30. We now discount every case at the same 6% rather than at rates that varied by case, which raises the bear and base values. We also recognized that the 2019-2023 spending surge was capacity building rather than upkeep, which raises the normal earnings level. The bull case is lower because we no longer credit acquisition-driven growth, and we now count only surplus cash, about $2.31 per share instead of $3.76.