Gorman-Rupp (GRC): A High-Conviction Buy Amid Infrastructure Tailwinds and Margin Resilience

The U.S. infrastructure boom is reshaping the industrial landscape, and few companies are positioned to capitalize as effectively as Gorman-Rupp (GRC). With a 5.6% year-over-year revenue increase in Q2 2025 and a 90% surge in earnings per share (EPS), GRC has demonstrated both operational agility and strategic foresight. Its business model—anchored in U.S.-centric manufacturing, diversified market exposure, and disciplined cost management—positions it as a high-conviction buy for investors seeking long-term growth amid structural tailwinds.

Infrastructure Tailwinds: A Catalyst for Sustainable Growth

GRC's performance in Q2 2025 underscores its alignment with the U.S. infrastructure spending surge. The company reported a $3.5 million sales increase in the municipal sector, driven by flood control and stormwater management projects. This growth is not accidental; it reflects a deliberate focus on markets where federal and state funding is accelerating. For example, the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) has unlocked billions for water infrastructure, a sector where GRC's pumps and pumping systems are critical.

The data center construction boom further amplifies this tailwind. GRC's industrial and fire suppression systems are in high demand as tech firms and cloud providers expand capacity to meet AI-driven workloads. This secular trend—accelerated by AI's insatiable appetite for data processing—ensures GRC's exposure to a market growing at a 15% CAGR.

Margin Resilience: Navigating Cost Pressures with Precision

Despite a 60-basis-point decline in gross margin due to higher material costs, GRC's operating margin held firm at 15.0%. This resilience stems from two strategic moves:
1. U.S.-Based Supply Chain: By manufacturing in the U.S., GRC avoids the volatility of global supply chains and mitigates tariff risks. CEO Scott King noted that proactive pricing adjustments have offset material cost increases, preserving margins.
2. SG&A Efficiency: Selling, general, and administrative expenses dropped to 14.5% of net sales in Q2 2025, down from 14.7% in Q2 2024. This improvement, coupled with a 50% reduction in interest expenses (from $9M to $6M) post-debt refinancing, has amplified net income growth.

GRC's debt reduction strategy—cutting $30 million in debt in the first half of 2025—has further strengthened its balance sheet. A current ratio of 2.42 and a debt-to-equity ratio of 0.87 indicate robust liquidity and financial flexibility, critical for navigating macroeconomic uncertainties.

Valuation Metrics: Justifying the Premium

GRC's forward P/E of 21.97 and PEG ratio of 1.44 suggest a slight premium to its earnings growth trajectory. However, this premium is warranted when considering its long-term EPS growth projections of 20.2%. Analysts forecast 18.7% annual earnings growth for the remainder of 2025, supported by:
- Structural Demand: Municipal and data center sectors are expected to outperform as infrastructure spending continues.
- Dividend Sustainability: A 1.99% yield with a 43.79% payout ratio ensures dividends remain secure even during economic slowdowns.

Investment Thesis: A Buy for Long-Term Capital Appreciation

GRC's strategic positioning in infrastructure and data center markets, combined with its margin resilience and debt reduction, makes it a compelling buy. Key catalysts include:
- Infrastructure Funding: Federal and state budgets will continue to prioritize water infrastructure, providing a multi-year revenue runway.
- Tariff Mitigation: GRC's U.S.-based supply chain insulates it from trade policy risks, a critical advantage as geopolitical tensions persist.
- Margin Expansion: SG&A efficiencies and interest cost reductions will likely drive operating margin expansion in 2026.

For investors with a five- to seven-year horizon, GRC offers a unique combination of defensive qualities and growth potential. While short-term volatility is possible, the company's 302nd consecutive dividend and its leadership's confidence in pricing power suggest a durable business model.

Conclusion: Seizing the Infrastructure Opportunity

Gorman-Rupp's Q2 2025 results exemplify its ability to harness long-term secular trends while managing near-term challenges. As the U.S. infrastructure boom gains momentum and AI-driven data center demand accelerates, GRC is uniquely positioned to deliver outsized returns. For investors seeking a high-conviction play on these megatrends, GRC represents a rare combination of strategic foresight, operational discipline, and financial prudence.

Final Recommendation: Buy for long-term capital appreciation and income. Hold for those already invested, with a target price of $25–$27 over the next 18–24 months.