Graham Corporation: Backlog Powerhouse and Strategic Investments Fueling Long-Term Growth

Graham Corporation (GHM) has emerged as a stealthy growth story in the industrial sector, leveraging a robust backlog, disciplined capital allocation, and strategic investments to position itself for sustained profitability. With defense and energy markets as its anchors, the company's focus on high-return projects and operational efficiency is creating a virtuous cycle of cash generation. For investors seeking exposure to resilient industrial players with clear visibility into future earnings, Graham's story is worth close examination.

The Backlog Advantage: Defense Dominance and Revenue Certainty

Graham's backlog of $412.3 million as of March 2025 represents a critical pillar of its growth thesis. A staggering 83% of this backlog is tied to defense programs, including flagship projects like the Columbia and Virginia Class submarine programs. These contracts are not only high-margin (defense projects historically command gross margins above 25%) but also long-lived, providing years of revenue visibility.

The company has structured its backlog for steady conversion: 45% of the total is expected to become revenue within 12 months, with an additional 25-30% converting over the following 18-24 months. This staggered timeline reduces execution risk and ensures predictable cash flows, even as the company navigates macroeconomic headwinds like tariffs.

Strategic Investments: Boosting Efficiency and Market Reach

Graham isn't merely waiting for backlog projects to materialize—it's investing aggressively to accelerate their execution and expand into adjacent markets. Key initiatives include:
- Radiographic Testing (RT) Equipment ($3.6M): Funded partly by a defense customer, this upgrade at the Batavia facility aims to eliminate delays caused by manual inspections, reducing errors in submarine welds by 30% or more.
- Automation and Capacity Expansion: New automated welding systems are cutting labor costs and cycle times, while a $13.5M facility expansion in 2023 has increased production capacity by 20%.
- Cryogenic Testing Facility ($X): A new Florida-based site is targeting high-margin space and energy projects, such as liquefied natural gas (LNG) infrastructure, diversifying revenue away from defense.

These investments align with Graham's focus on projects delivering over 20% return on invested capital (ROIC), ensuring capital is deployed only where it can drive outsized returns.

Financial Performance: Margins Expand, Earnings Surge

The payoff is already evident in Graham's financials. For fiscal 2025 (ended March 2025), revenue rose 13% to $209.9 million, fueled by a 23% jump in defense sales. Gross margins expanded by 330 basis points to 25.2%, while operating margins more than doubled to 7.2%. Net income surged 168% to $12.2 million, and Adjusted EBITDA climbed 69% to $22.4 million.

Looking ahead, fiscal 2026 guidance calls for 10% revenue growth (to $225-235 million) and 12% EBITDA growth (to $22-28 million). Even after accounting for $2-5 million in tariff-related headwinds, the company's backlog and operational improvements suggest these targets are achievable.

Risks and Mitigation

Graham isn't without risks. Over 80% reliance on defense spending leaves it vulnerable to Pentagon budget cuts or delays in submarine programs. Tariffs on steel and other materials could also compress margins further. However, management has mitigated these risks through:
- Diversification: The Florida facility's push into space and energy markets could reduce reliance on defense over time.
- Strong Balance Sheet: With $21.6 million in cash and a $44.7 million credit facility, the company has ample liquidity to weather near-term challenges.

Investment Thesis: A Value-Driven Growth Play

At a forward P/E of 15-18x, Graham trades at a discount to peers like Huntington Ingalls (HII) or General Dynamics (GD), despite its superior backlog visibility and margin profile. The stock's 20%+ EPS growth over the next two years justifies a premium to its current valuation, particularly if the defense sector continues to outperform.

For investors, catalysts include:
1. Backlog Conversion Updates: Quarterly progress reports on submarine projects could drive stock momentum.
2. New Contract Wins: The Florida facility's pipeline in space infrastructure could announce deals as early as 2026.
3. Tariff Mitigation: Rising automation and cost controls may offset tariff impacts faster than expected.

Conclusion: A Long-Term Bet on Resilient Industrial Growth

Graham Corporation's combination of a fortified backlog, smart capital allocation, and margin expansion makes it a compelling growth story in an uncertain economy. While defense sector risks persist, the company's focus on high-ROIC projects and its move into adjacent markets positions it to outperform peers over the next five years. For investors with a multi-year horizon, Graham's stock offers a rare mix of value and growth—making it a “buy” for portfolios seeking industrial resilience.