GGG - Aoris - Graco: Generating 1.5x Profit Margins More Than Peers

2023-04-21 03:30:00 ET

Summary

• Graco’s long-term approach allows it to outgrow its peers through all market conditions.
• GGG believes its vertically integrated model helps Graco generate profit margins more than 1.5x that of its peers.
• We believe the company will continue growing its top and bottom line at an attractive rate for many years to come.

The following segment was excerpted from this fund letter.

Graco ( GGG )

Graco’s long-term approach allows it to outgrow its peers through all market conditions.

Founded in 1926 and based in Minneapolis, Graco manufactures equipment that is used to measure, control, and spray fluid and powder materials. Graco particularly specialises in equipment solutions for difficult-to-handle materials such as ones with high viscosities, abrasive or corrosive properties, and materials that require precise ratio control. You’ll see Graco’s products being used to spray-paint buildings, apply lines on road surfaces, blend fluids in food and beverage manufacturing, and in environmental groundwater remediation.

Graco’s research and development spending as a percent of sales is twice the average of its peers. It works to improve its products each year in ways that save the customer time, improve energy efficiency, reduce weight and help the customer achieve environmental compliance.

Manufacturing at Graco is highly vertically integrated and almost all in America, unusual in its industry, meaning it manufactures rather than purchases most of the components that go into its pumps and sprayers. This approach allows Graco greater control of quality and product innovation, and importantly, greater control over its costs. Graco looks to reduce the cost per unit by 2–3% every year through manufacturing productivity and automation, which has been particularly valuable during the inflationary period of the last couple of years. Control over manufacturing has also been a significant advantage during the supply chain pressures experienced over the same period. Management believes its vertically integrated model helps Graco generate profit margins more than 1.5x that of its peers.

Graco’s management takes a very long-term approach to running the business. During the COVID-19 pandemic, as in the GFC, there were no layoffs and no furloughs at Graco, and no cuts to product-development spending.

Management took the view that staying the course would see the company far better positioned to benefit from the inevitable recovery than its peers, and so it proved in both cases.

Over the last decade, Graco’s revenue has grown on an underlying basis at 7% p.a., well ahead of the growth of its end markets, and we believe the company will continue growing its top and bottom line at an attractive rate for many years to come.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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