If boring sounds pretty good after the wild ride your portfolio has been on over the past month -- the S&P 500 is down 10% -- I've got you covered. Graco (NYSE: GGG), in all its excitement, makes widgets that pump and spray. For example, the company's widgets dispense tomato sauce onto pies in frozen-pizza assembly lines, and spray stain onto endtables. If you so desired, Graco's technology could whip you up a spray tan that would make the cast of Jersey Shore jealous.
Before you nod off, know that Graco is incredibly profitable, having ridden its boring business to gains 11 times those of the market over the past 25 years (a cool 4,700% versus 434% for the S&P 500). I'm stoked to be able to add a 4% allocation to the Un Portfolio.
Super high-tech paint sprayers
Many of Graco's widgets contain onboard processors and other highly engineered monitoring mechanisms. The company is a technological wunderkind and has a consistently hefty research and development budget. Its focus on high-tech new products has allowed it to out-innovate its competitors, charge higher prices, and dominate its product niches. It's rare to find an American manufacturing firm that generates returns on capital consistently north of 25%, but Graco passes this test with ease. Innovation, unmatched quality, and established distribution enable the pricing power that drives the company's results and leaves it head-and-shoulders above the competition.
|
Company |
5-Year Average ROIC |
Long-Term Growth Rate |
Normalized FCF Yield |
Forward P/E |
Debt to Capital |
|---|---|---|---|---|---|
| Graco | 28.0% | 16.0% | 7.2% | 23.5 | 32.4% |
| IDEX (NYSE: IEX) | 9.5% | 13.9% | 5.8% | 19.1 | 36.8% |
| Colfax (NYSE: CFX) | 13.6% | 14.7% | 3.5% | 29.0 | 24.0% |
| Gorman-Rupp (AMEX: GRC) | 12.8% | 14.0% | 8.3% | 27.7 | 8.5% |
Source: Capital IQ, a division of Standard & Poor's.
The BIG THREE reasons I'm buying
- Competitive advantage. Graco excels as a manufacturer. The company tests each piece of equipment rigorously to ensure it works perfectly, which helps it keep warranty costs at less than 1% of sales. Customers have realized that Graco's products are of unmatched quality and warrant a higher price. Low cost, high price -- it is a powerful formula.
- Advanced technology. Graco consistently reinvests 4% of every sales dollar back into research and development to stay ahead of the curve. To keep competitors chasing, Graco's internal bogey is to have 30% of sales come from new products. It also works hand-in-hand with chemical materials manufacturers to ensure it is first to market with products to handle new coating materials. New products that embrace new technology have translated into consistently high profits and returns on capital.
- Graco saves its customers money. Global industrialization plays into Graco's hands beautifully. In the face of a slow global economy, factories will look to do more with less. Graco's products take costs out of the manufacturing process by reducing waste and automating workflow. In fact, they are primarily sold on a return on investment basis, so customers know exactly how much money they will save by buying each product.
What's so "Un" about Graco?
Global economic fears are mounting and companies tied to industrial output have gotten crushed lately. Graco suffers from a double whammy because 55% of its sales come from an apparently weakening industrial segment and another 35% come from contractors tied to housing and construction. That market remains well below pre-recession sales levels, and many investors fear it may never come back. And as Graco comes upon some difficult comparisons, its growth may appear stunted.
Finally, investors are unsettled by the Federal Trade Commission's request for additional information regarding Graco's attempted acquisition of a $305 million complementary finishing business owned by Illinois Tool Works (NYSE: ITW). Investors may doubt that federal approval is likely, or they may have reservations about Graco's new debt-filled balance sheet. For whatever reason, Graco shares have fallen out of favor fast, declining 30% over the past month.
That's a buy
At only $2.3 billion in market capitalization, with its ultra-boring business and its recent share price slide, Graco is officially unknown, unsexy, and unloved. But it is also a great business with a fantastic track record. I'd happily buy this entire business if I had $3 billion, but I'm keeping the initial investment small -- 4% of the Un Portfolio's capital. I'd be happy to add to the position if shares continue to drop. While there could be more pain as the global economic picture gets murkier by the day, I'm confident that Graco will be a winner over the long term.
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