Graco Inc. (GGG) | The Buildout — AI Infrastructure

The Verdict

Graco designs, manufactures and markets systems and equipment used to move, measure, mix, control, dispense and spray fluid and powder materials. It reports through three segments. Contractor supplies paint and coating sprayers, from homeowner units to commercial equipment, plus spray foam and polyurea systems. Industrial sells pumps, liquid finishing, fluid dispensing, lubrication and powder coating systems, including the Gema powder business. Expansion Markets includes the White Knight business, which makes high-purity pumps and wet-cleaning systems for semiconductor tool manufacturing. Management describes semiconductor as the cleanest area of AI exposure; data-center construction and thermal-management applications touch the other two segments, and both are unquantified.

Earnings

Graco reported record fiscal Q2 FY2026 net sales of $590.6M, up 3% year over year, with acquisitions adding 3 points and currency 1 point while organic revenue slipped 1%. Operating margin was 30% of sales versus 26% a year earlier, on operating earnings of $175.1M, up 11%. Reported net earnings were $144.9M, up 14%, with diluted EPS of $0.87 and adjusted EPS of $0.91, up 17%. Gross margin rose 130 basis points, helped by $9M in tariff refunds net of surcharges.

Management tone: Management's tone on end markets improved between the two 2026 calls. Contractor went from 'softer than we would like' in Q1 to a record quarter with the first Americas organic growth in nearly two years, though the CEO said it is 'still pretty early.' Semiconductor commentary moved from 'demand remained solid' to a 'multiyear favorable trend.' On disclosure, management initiated quarterly revenue guidance and framed it as permanent, attributing the change to the new CFO. Management also capped its own AI narrative, saying the data-center benefit is 'not like hundreds of millions of dollars.'

Management Guidance

Management maintained its FY2026 revenue framework of low-single-digit organic growth on a constant-currency basis and mid-single-digit growth including acquisitions. It initiated a Q3 FY2026 revenue guide of $580–600M — prepared remarks say this excludes Valco Melton, while in Q&A the CEO says it includes M&A — and committed to quarterly guidance 'going forward.' It lowered the currency translation benefit to net earnings to about 1% from 2%, cut unallocated corporate expenses to $39–42M from $40–43M, and held capex at $90–100M, including approximately $50M for facility expansion, with an adjusted tax rate of 20–21%.

Trajectory

Revenue is not following a clean trend — it moves with order timing across quarters. Q1 FY2026 sales were $540.1M with organic revenue down 6%, then Q2 FY2026 sales were $590.6M with organic down 1%. Year over year, Q2 revenue rose 3% while organic revenue slipped 1%, and margins improved: gross margin of 53.7% versus 52.4% a year earlier, and EBITDA margin of 33.6% versus 32.3%. Cash conversion looks healthy, with trailing-twelve-month free cash flow covering net income at 116%. The direction depends on converting the order build rather than on a change in underlying demand.

The Model

The model projects FY+1 revenue of $2,363.0M with EBITDA of $768M, a 32.5% margin, and FY+2 revenue of $2,545.0M with EBITDA of $844M, a 33.15% margin. The near-term figure lines up with management's second-half conversion expectations against the backlog build; FY+2 carries the semiconductor momentum and industrial recovery the company describes as multiyear.

Projections are the median of 4 independent model runs. The model’s revenue sits 5.1% above analyst consensus.

Management maintained its FY2026 revenue framework of low-single-digit organic growth on a constant-currency basis and mid-single-digit growth including acquisitions. It initiated a Q3 FY2026 revenue guide of $580–600M — prepared remarks say this excludes Valco Melton, while in Q&A the CEO says it includes M&A — and committed to quarterly guidance 'going forward.' It lowered the currency translation benefit to net earnings to about 1% from 2%, cut unallocated corporate expenses to $39–42M from $40–43M, and held capex at $90–100M, including approximately $50M for facility expansion, with an adjusted tax rate of 20–21%.

What Could Go Right — and Wrong

Looking Ahead

Over the next 12 months the outcomes to watch are conversion of the ex-acquisitions backlog build into revenue, the deferred powder/Gema project acceptances in Q3 and Q4, and whether the contractor inflection and semiconductor order rates persist. Valco Melton began reporting from Q3 FY2026, and Color Service laps into organic in Q3. Management has committed to quarterly revenue guidance and may add segment-level detail, though it gave no date for that. Tariff refunds, the Section 232 assessment, and the ~$35M Middle East exposure all remain open, with the Middle East topic silent since Q1.

Financials

Annual Summary

Key Ratios (Trailing)

The Company

Graco designs, manufactures and markets systems and equipment used to move, measure, mix, control, dispense and spray fluid and powder materials. It serves niche markets with differentiated products and reports through three segments. Contractor covers paint and coating sprayers, from homeowner units to professional and commercial equipment, plus spray foam and polyurea systems and the COROB/Color Service tinting acquisitions. Industrial sells pumps, liquid finishing, fluid dispensing, lubrication and powder coating systems, including the Gema powder business. Expansion Markets includes White Knight semiconductor pumps, oil and gas valves, environmental equipment and high-torque electric motor licensing.

Graco runs on mostly owned manufacturing. Its FY2025 10-K lists 31 sites, predominantly owned, concentrated in Minnesota, with other U.S. plants in Ohio, Pennsylvania, Michigan, Utah, Indiana and South Dakota and international sites in Belgium, Italy, Switzerland, Romania, Germany, China, India, Vietnam, Australia and South Korea. It also grows by acquisition: management says about 30% of 2025 revenue came from acquired businesses, measured from 2012, and it would like roughly a third of revenue growth through a cycle to come from acquisitions.

Business Segments

Competitive Landscape

Graco describes itself as serving niche markets with high customer value through product differentiation. An Ingersoll Rand filing names Graco among its primary competitors, alongside Dover, IDEX Corporation, KNF Neuberger, Netzsch, NOV, Sartorius, SPX Flow, Thermo Fisher Scientific and Watson-Marlow. In semiconductor fluid handling, mapped competitors include Trebor International, described as a direct White Knight competitor, plus IWAKI, Levitronix and Entegris. The source material does not claim a sole-source position for Graco; the only single-source language in the record is about Graco's own inputs.

Supply Chain

Graco sits upstream of semiconductor toolmakers and fabs through White Knight pumps, and upstream of paint and coating users through Contractor and Industrial equipment. Its supplier and customer relationships are mostly third-party mapping; only one customer concentration is documented, and no neighbor transcript names Graco.