Gorman-Rupp Q4: Quality Business Justifies A Higher Valuation (NYSE:GRC)

Investment Rundown

The Gorman-Rupp Company (NYSE:GRC) has been on a steady uptrend for the past months, and since my last coverage, the stock is up 10.91%. One of the major improvements year over year from the recent report by the company was its ability to price its products even higher and maintain more or less the same amount of cost of goods. The market didn’t necessarily react in a big fashion when the report was released, partly because the beat on top and bottom against estimates was quite slim as well. The same qualities that I saw last time I covered GRC, that being in late August I think exist now. I am covering the stock again to give my updated view on it for GRC, and to make a long story short, I am still bullish on the business and will be reiterating my buy rating.

Company Segments

GRC has been in business for a very long time and focuses on the designing, manufacturing, and selling of pumps and pump systems in the US primarily, which makes up around 75% of total company sales. The rest of the sales are international, but with a big part from Europe and South America, 28% and 19% respectively of total international sales for GRC. With a well-diversified footprint globally GRC has been able to consistently rate the past decade, with revenues growing over 5.3% and net income 11.5% over the past 3 years annually.

GRC has built up a diverse range of pumps, including self-priming centrifugal, magnetic drive centrifugal, submersible, and high-pressure booster pumps, among others. These products are used for various applications in water management, wastewater treatment, construction, industrial processes, and the petroleum sector. The broad offering has meant that GRC is also well diversified in terms of its targeted markets, with industrial/chemical & HVAC supply being the largest right now at 21% – 23% and fire suppression at 19% – 22% of total company revenues. These two markets are not necessarily high-growth markets but I do see a steady demand for GRC within them still. Both are estimated to generate between 2.5% – and 6.5% in CAGR market value in the next 7 years.

Going forward I expect GRC to average a slightly higher annual revenue growth than its 10-year average of 5.35%. The pricing hikes that GRC has been able to perform are why I state this. The company seems likely to continue this trajectory given the necessity of some of the markets it works with, and how capital expenditures tend to remain high. Fire suppression for example will likely be a leading market for the business in the next decade. Global warming is making wildfires and fires in general more prominent and likely to happen. Building up a robust defense strategy for this involves investing and purchasing products that GRC makes.

Earnings Highlights

The most recent earnings report by GRC was released not that long ago, on February 2 GRC announced a slight beat on both the top and bottom lines against estimates. The Q4 and FY2023 report showcased continued demand for the business but worth keeping in mind is the impact that a favorable Fill-rate sale had, but higher volumes and price hikes contributed very much as well to the strong results for the business. Revenue came in at $659 million for the full year and EPS at $1.34 for GRC. The management noted in the report that the approach of operating in several markets has been a factor in delivering continued growth even in higher-interest market environments. The strength of GRC lies in the diversified nature of the business, which is why I continue to be bullish on the business going forward.

On the balance sheet, I think GRC has continued to make improvements, with the cash now at $30 million and inventories at manageable levels of $104 million. Total assets also grew to $890 million, a $18 million improvement YoY. Debts are manglebet though at $382 million, seeing as EBITDA is $115 million TTM, netting a ratio between the two of below 4, which is a threshold I tend to look for. Furthermore, the long-term debts have been decreasing YoY actually and GRC has not seen it necessary to take on more. If they can grow organically and not through debt then I see that as a very qualitative aspect of the business, and a reason for higher valuation as well.

Estimates are for continued EPS growth for GRC but perhaps slower revenue sales in the coming years. EPS growing faster than revenues I think will come from the capability of GRC to continue to raise prices, like they have done the past 4 quarters, but also thanks to hopefully declining interest rates later on this year. $382 million in long-term debt has equated to $41 million in TTM interest expenses. Should this be cut in half the EPS would grow by over 50% for GRC, putting it at an even lower valuation. If rates go down and average around 2% for 2025 I would assume that net income will land between $45 – $50 million for GRC, or $1.91 on the higher end.

With that EPS in mind for 2025 and using a 20% discount to the 5-year averaged p/e for GRC I land at a price target of $38 or an upside of 13.3% for investors. Paired with a dividend yield of 2.1% I would argue that investors are getting a pretty satisfactory return here with GRC. Note that the EPS guidance includes a cut down to 2% for 2025, but does not account for the organic EPS growth that might occur for GRC as they hike the prices of their products like they have done the past 12 months. All in all, it paints the picture of a very solid business with continued EPS growth ahead, and an appealing price right now to start a position at.

Risks

Risks with GRC mainly are about continued strength in its markets. We have seen how they have remained resilient the past several quarters, but if capital expenditures were to be cut for a lot of them I would assume the revenues and orders for GRC to dive down.

Sales have been prone to be affected by weakness in the construction market before. The two main markets I have mentioned make up nearly 50% of all revenues for the business, but agriculture and construction are also significant markets for the business, nearly 30% together. In previous years declines in domestic gas and oil production seem to also have meant declining sales for GRC. Watching for strong Capex in companies in the construction and industrial sector is a great way to then determine the outlook for GRC and others too. Right now I think the fundamentals remain strong, but broad economic weakness could change this and pose a risk to both GRC and investors. GRC is priced as a business that can grow its EPS very well in the next few years, trading at a premium of 15.7% to the industrial sector. A risk also exists in that GRC fails to post strong EPS growth, which would make the valuation seem too high and risk a correction.

Final Words

GRC is a company I have covered before and I figured it was time to do so once again after it posted its Q4 and FY2023 results just a few days ago. I think the results were solid, nothing major apart from continued pricing strength was noticed on my part. The stock has appreciated over 10% since my last article and I continue to see strength in 2024 with an upside of over 13% for investors. I will reiterate the same rating I had the first time, that being a buy.