Graco has followed the market’s trajectory closely. The stock is down 13.6% to $73.96 per share over the past six months while the S&P 500 has lost 13.6%. This was partly due to its softer quarterly results and might have investors contemplating their next move.

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Even though the stock has become cheaper, we don't have much confidence in Graco. Here are three reasons why GGG doesn't excite us and a stock we'd rather own.

Why Is Graco Not Exciting?

Founded in 1926, Graco (NYSE:GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Graco’s 5.1% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Graco’s EPS grew at an unimpressive 7.9% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 5.1% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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 quality test. After the recent drawdown, the stock trades at 24× forward price-to-earnings (or $73.96 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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