Graco designs, manufacture and market equipment to pump, meter, mix and dispense a wide variety of fluids and coatings. The products are used in automotive, construction, industrial, mining, oil & gas, process, public works and other industries.
With its vast variety of products, it’ll be too much to explain the products and many of us may not understand industrial products. To simplify it, look at this picture. Graco manufactures those equipments to spray and provide coating to other surface (cars in this example).
Graco’s key competitive advantage is that it’s operating in a niche market and is the leader that dominates with economic of scale. With its scale, it achieves cost advantage. 80% of production is based in US, so Graco is not the type of company to shift production to China to save cost, but rather, it focuses on high-quality and efficient labor force in its own country. Graco spends ~4% of its revenue annually on research and development, among the highest R&D spending compared to the peers (average 1.6% of revenue). As a result, it regularly introduces new products to the market with advanced features.
Revenue breakdown by geography: America 60%, EMEA 23%, AsiaPac 17%
Revenue breakdown by business segments: Industrial 47%, Process 22%, Contractor 31%
Look at the financial performance below over the past 10 years. You will immediately notice how well the company has been doing over the years with its relatively stable margins and consistent growth.
A few things to take note:
1. The company has been able to grow its revenue and earnings year after year, except during the global economic crisis in 2008-2009. However, during the crisis, the company was still making net profit of 8.5%.
2. Dividends grow along with the earnings.
3. Its return on capital has been above 20% most of the times. Even though it’s facing declining trend from 48% in 2005 to 20% in 2014, we’ll have to understand that return tends to get lower as the size gets bigger. In this case, the 48% return on capital was exceptionally high in the first place. 20% return on capital and 37% return on equity are considered very good for industrial companies.
I bought the shares of Grace last Friday (17 July 2015) and today, the share price rose 7.7% following the Q2 result release a day earlier. I consider myself lucky to have bought the share prior to the rally. No, I don’t have any sensitive information to make the Buy decision. Never talked to anyone regarding this company. I have been admiring this company since 2009. It’s my mistake not to invest in it much earlier. It’s purely luck that I bought the shares just a few days earlier before the price rally.
There are hedge funds out there whose strategy is to anticipate results release and execute the trade to profit from it. That’s more like trading strategy than investing strategy. To me, when it comes to investing, it must be value investing. I try to estimate the value of the company and compare it to the price to decide whether it’s undervalued, fairly valued or overvalued. As for trading, the focus is to anticipate where the price is going in near term and try to buy low and sell high (or short high and cover low). So, with trading, there can be many strategies. I’ll have to stop this here. 2.50am here. Will continue some other day on Graco.