Graco Inc. (GGG) | The Buildout — AI Infrastructure
The Verdict
Graco designs and manufactures systems for managing fluids, coatings, and powders in industrial and commercial applications. Its equipment moves, measures, mixes, controls, dispenses, and sprays materials for contractors, factories, and specialized markets such as semiconductor manufacturing. The AI-infrastructure link runs through semiconductor equipment pumps, thermal-interface-material dispensing for data-center heat management, and protective coatings and foam used in data-center construction.
| Market Cap | — |
| Revenue (TTM) | $2.3B |
| Revenue Growth | +4.6% |
| EBITDA Margin (TTM) | 32.2% |
| Net Cash | $462M |
| Earnings Beats | 1 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Semiconductor bookings rose 58% in Q2 and 33% year to date, with the most recent six-week average up 36%.
- Backlog excluding acquisitions was up $57 million, or 28%, from the start of 2026 as of July 17.
- Q2 total company operating margin reached 30%, up from 26% a year earlier.
- Management disclosed about 30% of 2025 revenue came from businesses acquired since 2012, with a long-term goal of one-third of revenue growth from M&A.
- Valco Melton, agreed at $447 million cash, brings gross margins of 50% or more and over half of revenue from parts and accessories.
What We’re Watching
- Whether the $57 million, or 28%, backlog build converts in the second half as management expects.
- Whether Contractor can sustain the first simultaneous Americas paint and home-center organic growth in nearly two years.
- Whether semiconductor bookings can hold recent growth; management says hot periods typically run 3–5 years.
- Tariff refunds added $9 million net to Q2 gross margin; Section 232 component-level assessment is incomplete.
The evidence is mixed-to-improving: order momentum, semiconductor acceleration, and early Contractor stabilization point in a constructive direction, but Q1 and Q2 organic sales were still negative. The open question is whether the order book converts into reported second-half organic revenue growth.
Earnings
Graco reported Q2 FY2026 net sales of $590.6 million, up 3% year over year, with organic sales down 1%. Gross margin improved 130 basis points to 53.7%, and operating earnings rose 11% to $175.1 million. Net earnings were $144.9 million, up 14%, while organic orders grew 5% and the six-week booking average was up 14%.
| Metric | Q2 FY2026 | Q1 FY2026 | Q2 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $591M | $540M | $572M | +3.3% |
| Gross margin | 53.7% | 52.0% | 52.4% | +130bps |
| EBITDA | $198M | $166M | $185M | +7.3% |
| EPS | $0.86 | $0.70 | $0.76 | +13.9% |
| Organic orders growth, y/y | +5% | n/a | n/a | — |
Together, these positive trends give us confidence in a stronger second half.— Mark Sheahan, CEO, July 23, 2026
Management tone: Management's tone shifted from defensive and anchored by order timing in Q1 to more constructive in Q2, after record second-quarter sales and operating earnings. Management described semiconductor demand as 'pretty sustainable,' but on Contractor said it was too early to get 'irrationally exuberant.'
Management Guidance
Management maintained 2026 full-year guidance of low single-digit organic constant-currency sales growth and mid-single-digit growth including acquisitions. It initiated a Q3 revenue guide of $580 million to $600 million, excluding Valco Melton, and said quarterly revenue guidance would continue going forward. Capex guidance was reaffirmed at $90–100 million.
Trajectory
Reported revenue has been uneven: Q1 FY2026 revenue was $540.1 million, down 9.0% sequentially, and Q2 FY2026 revenue rebounded 9.4% sequentially to $590.6 million. Organic sales were negative in both quarters—minus 6% in Q1 and minus 1% in Q2—while organic orders and backlog built. Gross margin moved from 52.0% in Q1 to 53.7% in Q2, helped by price realization, manufacturing performance, and a $9 million net tariff refund.
The Model
The model projects FY+1 revenue of $2,415 million and EBITDA of $751 million, a 31.1% EBITDA margin. For FY+2, it projects revenue of $2,610 million and EBITDA of $827 million, a 31.7% margin. The near-term is anchored by the order book and expected second-half conversion; the model source does not disclose the assumptions behind the FY+2 projection.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $2.2B | $2.4B | $2.6B |
| YoY Growth | — | +8.0% | +8.1% |
| EBITDA | $718M | $751M | $827M |
| EBITDA Margin | 32.1% | 31.1% | 31.7% |
Projections are the median of 5 independent model runs. The model’s revenue sits 5.5% above analyst consensus.
Management maintained 2026 full-year guidance of low single-digit organic constant-currency sales growth and mid-single-digit growth including acquisitions. It initiated a Q3 revenue guide of $580 million to $600 million, excluding Valco Melton, and said quarterly revenue guidance would continue going forward. Capex guidance was reaffirmed at $90–100 million.
What Could Go Right — and Wrong
- Contractor records two or three more consecutive quarters of positive Americas paint and home-center organic growth.
- Semiconductor bookings sustain elevated growth, lifting the roughly 7%-of-sales Expansion Markets base.
- Data-center coatings, powder systems, and thermal-interface-material dispensing grow into a meaningfully larger revenue stream.
- Valco Melton closes in Q3 and hits integration milestones, adding high-margin parts and accessories mix.
- Backlog conversion pushes total company organic sales positive in the second half.
- Backlog continues to build but revenue does not convert, missing the full-year organic growth guide.
- Contractor's Q2 Americas paint and home-center growth reverses, leaving the largest segment in its prior stagnation.
- Semiconductor bookings cool from +58% toward the 3–5 year cyclical pattern management described.
- Tariff refunds do not recur and Section 232 component-level tariffs become a structural cost.
- A disruption involving the unnamed over-10% customer in Contractor and Industrial segments.
Looking Ahead
The next twelve months turn on second-half backlog conversion, the first quarterly revenue guide, and the Valco Melton integration. Management expects powder finishing system order acceptance in the second half, Color Service to become organic in Q3, and semiconductor demand to continue through 2026 and likely into the next year.
- Q3 2026Valco Melton close — Expected close of $447M cash deal; tests packaging dispense integration.
- Q3 2026First quarterly revenue guide — Q3 revenue of $580–600M ex-Valco tests guide and backlog conversion.
- H2 2026Backlog conversion — Management expects positive backlog trends to support a stronger second half.
- H2 2026Powder finishing acceptance — Order acceptance expected in second half; Color Service becomes organic in Q3.
- Through end of 2026 and next yearSemiconductor booking persistence — Tests management's multiyear AI-linked demand view.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $2.1B | $2.2B | $2.3B | +5.8% |
| Gross Margin | 53.1% | 52.5% | 52.7% | 67bps |
| EBITDA | $657M | $718M | $5.5B | +9.3% |
| EBITDA Margin | 31.1% | 32.1% | 32.2% | +103bps |
| Net Income | $486M | $522M | $534M | +7.3% |
| Free Cash Flow | $515M | $638M | $3.8B | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)52.7%
- EBITDA Margin (TTM)32.2%
- Net Margin (TTM)23.5%
- ROIC23.9%
- FCF Conversion84.6%
- SBC / Revenue1.5%
The Company
Graco Inc. designs, manufactures, and markets systems and equipment for managing fluids and coatings in industrial and commercial applications. Its equipment moves, measures, mixes, controls, dispenses, and sprays fluid and powder materials, and the company targets niche markets with product differentiation rather than scale. The 10-K divides the business into Contractor, Industrial, and Expansion Markets.
Manufacturing is concentrated in Minnesota, with U.S. sites in South Dakota, Ohio, Pennsylvania, Utah, Michigan, and Indiana, and international locations including Belgium, Italy, Switzerland, Romania, China, Vietnam, and India. Graco has grown partly through acquisitions; management disclosed that about 30% of 2025 revenue came from businesses acquired since 2012.
Business Segments
Competitive Landscape
Graco says it targets niche markets and competes on product differentiation rather than scale. The provided source material does not name specific competitors.
Supply Chain
Graco sits between upstream component and raw-material suppliers and downstream contractor, industrial, and semiconductor-equipment customers. The source set contains no direct mention of Graco by name from value-chain neighbors.
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