Gorman Rupp (GRC) Could Be 35% Undervalued On Its New Growth Plan

Gorman-Rupp (GRC) has outlined a new growth plan centered on organic expansion, renewed interest in acquisitions, and continued debt reduction. Management is highlighting opportunities in data centers, water infrastructure, and international markets.

Gorman-Rupp’s recent growth update comes after a mixed stretch for the stock, with the share price down 6.12% over the past month, up 3.41% over 90 days, and showing a 58.33% year to date share price return. The 1-year total shareholder return of 80.34% and 3-year total shareholder return of 145.56% point to momentum that has built over a longer horizon.

Scan for other industrials pursuing similar growth plans and balance sheet discipline with the curated list of list of solid balance sheet and fundamentals (52 results).

Gorman-Rupp has a clear plan and strong recent shareholder returns. After such a move, the key question is whether the current share price still offers a reasonable entry or already reflects that strength.

Preferred P/E of 32.3x: Is it justified?

On the latest data, Gorman-Rupp trades on a P/E of 32.3x, which is paired with a last close of $76.22 and a recent share price run that has already been strong. The valuation sits above several reference points, so it is worth unpacking what the market might be pricing in.

The P/E ratio compares the current share price to earnings per share. For a company like Gorman-Rupp that designs and manufactures pumps and pump systems across multiple end markets, the P/E effectively reflects what investors are willing to pay today for each dollar of current earnings, given the current earnings profile and forecasts.

Gorman-Rupp has a few data points that help explain why investors may be comfortable paying a higher multiple. Earnings grew by 20.3% over the past year and have grown by an annual rate of 22.1% over the past 5 years. Earnings are also forecast to grow by 18.5% per year, which is faster than the US market forecast of 17.2% per year. At the same time, Gorman-Rupp has high quality earnings, net profit margins of 8.9% that are above last year, and a record of earnings growth that exceeded the Machinery industry over the past year.

Against this, the P/E of 32.3x is higher than the estimated fair P/E of 24.1x. It is also higher than the US Machinery industry average of 26.3x and the peer average of 30.4x. That suggests the current P/E is stretched when compared to both a fair ratio estimate and sector peers, and it points to a level the market could move towards if expectations change.

Explore the SWS fair ratio for Gorman-Rupp

Result: Price-to-earnings of 32.3x (OVERVALUED)

However, a P/E above both fair value estimates and Machinery peers, along with recent share price strength, leaves Gorman-Rupp more exposed if earnings expectations soften.

Find out about the key risks to this Gorman-Rupp narrative.

Another view on Gorman-Rupp’s value

The P/E suggests Gorman-Rupp is expensive, yet our DCF model points the other way. With the stock at $76.22 and an estimated future cash flow value of $116.65, the DCF view presents Gorman-Rupp as trading at a sizeable discount. Which signal should you weigh more heavily?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Gorman-Rupp for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 45 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With Gorman-Rupp showing both strong recent returns and a rich P/E, it helps to test the optimism and the concerns against your own view. If you want to weigh the upside against the potential downsides using the same data set, take a close look at the 3 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Gorman-Rupp?

If Gorman-Rupp has sharpened your focus on quality and valuation, do not stop here. Broaden your watchlist now so you are not reacting after the fact.

• Target resilient compounding by reviewing companies with strong fundamentals and supportive balance sheets using the 45 high quality undervalued stocks.
• Strengthen your income stream by scanning for established payers in the 12 dividend fortresses.
• Protect your capital by filtering for companies with sturdier financial footing through the 75 resilient stocks with low risk scores.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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