Download - Final Graco Presentation - CFA
Bethel CFA Research Team
Investment Overview
Market leader in niche market
Long-term/conservative business strategy
Overseas Expansion
Enduring Company with strong historical
performance
Operational Excellence
Customer Intimacy
Product Leadership
Operational
Excellence
Continuous Improvement
Centralized manufacturing
Human capital
$8,953
$26,974
$37,604
$78,074
Colfax Flowserve Idex Corp Graco
2013 Net Income per employee
8.72x
2.89x
2.08x
Customer
Intimacy
GracoSales Team
Material supplier
Channel partners
R&D Department
End Users
Product
Leadership
66,000 SKUS
Specialized Solutions
Spend 3x R&D as competitors.
Innovative
Products tested to 10x minimum legal requirement
High Product Standards
Graco R&D vs. Competition
0%
1%
2%
3%
4%
5%
6%
Peer Group Graco
R&
D S
pen
din
g 4.7%
1.6%
Innovation
Targeting Growth Through New
Products & Markets
0
50
100
150
200
250
0
500
1000
1500
2000
2500
3000
2005 2006 2007 2008 2009 2010 2011 2012 2013
Net
Inco
me &
Net
Inco
me/E
mp
loyee
# o
f E
mp
loyees
#Employees & Net Income
# employees GGG Net Income Per Employee (in thousands) Net Income (in millions)
$78,100$69,500
13000
13500
14000
14500
15000
15500
16000
16500
0
10
20
30
40
50
60
70
80
90
1/3/05 1/3/06 1/3/07 1/3/08 1/3/09 1/3/10 1/3/11 1/3/12 1/3/13 1/3/14
GG
G P
rice (
$)
GGG Closing Price vs. GDP
GGG Close Price GDP
Real G
DP
( $ B
illion
s)
.87 Correlation
Projected 2 – 3% GDP growth serves as GGG
baseline
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
-
200
400
600
800
1,000
1,200
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sale
s (
$ M
illi
on
s)
GGG Sales to GDP
GGG Sales Real GDP
GD
P($
Billio
ns)
.92 Correlation
40%
15%
13%
8%
6%
5%
4%
4%3% 2%
Industry Factors
Residential and Non-Residential Construction - 40%
Automotive - 15%
Industrial & Machinery - 13%
Other - 8%
Mining, Oil and Gas - 6%
Public Works - 5%
Vehicle Services - 4%
Wood - 4%
White Goods 3%
Chemical - 2%
Segment Outlook
59%
31%
10%
Segment as % of Total Sales
Industrial
Contractor
Lubrication
32.3%
22.5%20.6%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Industrial Contractor Lubrication
Segment Margins
Diverse End Markets in Manufacturing/Construction
Industrials projected to increase with U.S. GDP
Economies of China and Europe may stall growth
Projected to hold margins around 33%
Industrial
42%
32%
26%
Sales % by Region
Americas
EMEA
Asia-Pacific
0
20
40
60
80
100
120
0
200
400
600
800
1000
1200
04 05 06 07 08 09 10 11 12 13
Ind Segment Sales vs. Ind. Indices
Total Sales IPI MaterialsIPI- Bus Equip
Sa
les (
$ M
illio
ns)
Ind
ustria
l Ind
ice
s (0
7=
10
0)
.80 Correlation
Contractor
Majority US Sales
Margins steady at
23%
Proportional of total
sales increase to
30%
Sa
les (
$ M
illio
ns)
Ind
ustria
l Ind
ices (0
7=
10
0)
0.00
20.00
40.00
60.00
80.00
100.00
120.00
0
10000
20000
30000
40000
50000
60000
7000012
/1/0
9
3/1
/10
6/1
/10
9/1
/10
12
/1/1
0
3/1
/11
6/1
/11
9/1
/11
12
/1/1
1
3/1
/12
6/1
/12
9/1
/12
12
/1/1
2
3/1
/13
6/1
/13
9/1
/13
12
/1/1
3
3/1
/14
6/1
/14
9/1
/14
Commercial Construction vs. Sales
Commercial Construction QTR Sales
.70 Correlation
75
80
85
90
95
100
105
0
50
100
150
200
250
300
350
400
04 05 06 07 08 09 10 11 12 13
Sales vs. Industrials
Contractor IPI
Sa
les ($
Millio
ns)S
pe
ndin
g (
$ M
illio
ns)
.90 Correlation
Lubrication
Majority US Sales
Fluid product-line in industrial machinery
Margins steady at around 22%
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
0
20
40
60
80
100
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sale
s (
$ M
illio
ns)
Sales to Oil Production
Lubrication Oil Production
Ba
rrels
(in th
ou
sa
nd
s)
.60 Correlation
Threat of New Entrants.
Insignificant
Bargaining Power of Suppliers.
Low
Competition in the Industry.
Low Bargaining Power of
Customers. Low
Threat of Substitute Products.
Low Porter’s 5
Forces
Currency
At current rates:
• Sales for 2015 would decreased by 4%
• Earnings 10% from currency exchange.
Euro/GBP/CHF22%
Asian 8%8%
CAD4%
USD66%
Sales by Currency 2014
CHF22%
GBP12%
EUR66%
Sales in European Currencies 2014
R&D Tax Credit
0%
1%
2%
3%
4%
5%
6%
Peer Group Graco
R&
D S
pen
din
g 4.7%
1.6%
Innovation
Targeting Growth Through New
Products & Markets
Long-Term Cash Deployment
Priorities> International Footprint
> Product Development
> Production Capacity and Capabilities
> Supplement to Organic Growth
> Leverage Our Strengths
> Dividend Payout Ratio – 30%
> Three Million Shares Remaining on Authorization
Organic
Growth
Acquisitions
Shareholder
Return
Graco Reported Q4 Results$ in millions except EPS Fourth Quarter
2014 2013 Change
Sales $306.0 $271.9 13%
Gross Profit 164.8 145.2 12%
% of Sales 53.8% 54.10% (0.3) pts
Operating Earnings 69.5 63.3 10%
% of Sales 22.70% 23.30% (0.6) pts
Net Earnings 49 44.7 10%
% of Sales 16% 16.50% (0.5) pts
Diluted Earnings
Per Share 0.8 0.71 13%
Diluted Shares in Millions 61 62.9
Includes dividends (post-tax) from Liquid Finishing Business held separate:
Divdiends $4.00 $4.00
EPS Impact $0.07 $0.06
Offshore O&NG45%
Process30%
Onshore O&NG25%
Sales by Application
EMEA60%
Asia Pacific20%
Americas20%
Geographic Mix
O&NG46%
Process33%
Other21%
Sales by Industry*
Asia Pacific11%
EMEA40%
Americas49%
Geographic Mix
$100MM
$250MM
Acquisitions
December 2014
January 2015
Valuation
• Assumptions
Discounted Cash Flow
• Price to Earnings
• Price to Cash Flow
• Price to Sales
Per Share Models
Blending of Methods – $81.50
Competitors
Colfax Corporation (CFX)
Nordson Corporation (NDSN)
IDEX Corporation (IEX)
Flowserve Corporation (FLS)
Discounted Cash FlowWACC Components
Cost of Common Equity 9.39%
Risk Free Rate 1.59%
Market Risk Premium 5.89%
Levered Beta 2.70
Size Premium 0.0
After Tax Cost of Debt 2.49%
Assumed Tax Rate 32.00%
Capital Structure 50 debt, 50 equity
Final WACC 5.94%
Market Risk Premium
Graco 6.15% 0.4 5.89%
Nordson 6.05% 0.1
Idex 5.49% 0.25
Flowserve 5.80% 0.25 MRP
EPS/PE
GGG Premium over IME - 5 Year Analysis
5 Year Numbers NTM - PE NTM - PE
GGG 5-Year Average 19.06 Current IME 17.4
IME 5-Year Average 15.90 Estimated 16.5
Correlation 0.90 Est. GGG 19.94
% Spread Average 20.8%
Recent Month Spread 19.1%
Current PE Premium is 19.1%, which we conclude shows that Graco is undervalued compared to the industry.
-5
0
5
10
15
20
25
30
12/27/04 12/27/05 12/27/06 12/27/07 12/27/08 12/27/09 12/27/10 12/27/11 12/27/12 12/27/13
Daily NTM PE - GGG/IME With Spread
Spread
GGG
IME
Investment Conclusion
Shrinking Sales growth opportunity
Consistent strategies
Cash Deployment
Questions?