Graco Inc. (NYSE:GGG) Offers Customers Value Proposition Based on Lower Costs and Higher Quality

June 22, 2016

Nick Heymann, Co-Group Head at William Blair & Company, L.L.C., says Graco Inc. (NYSE:GGG) is one of his “outperform”-rated companies given the current environment of modest global GDP growth.

Graco represents our second strategy to outperform the markets for diversified industrials, which is to find the best-run midcap industrial companies with exceptional returns on capital and profitability but that may have temporarily hit perhaps a pothole for their fundamentals or been required to make significant divestitures from their diversified business portfolios. We seek to decipher how these best-in-class small-to-midcap industrials can regain their fundamental cadence. If we can determine how this can be fundamentally achieved, we then seek to buy these exceptionally well-run companies at significant discounts to their historical two-, five- and 10-year relative valuations.

In Graco’s case, it had to divest, based on a Justice Department decree, about 14% of its earnings in 2014. This caused many investors to wonder how they would be able to ultimately replace the earnings from this divested business. In 2015, Graco was able to successfully replace earnings from its divested businesses with five acquisitions and accelerated share repurchase. As the leading producer worldwide for highly engineered fluid management systems, Graco has traditionally been a largely North American-focused business. However, today the company is steadily globalizing and taking their engineered fluid management products and solutions overseas, particularly emerging economies, where they have nominal penetration for their products versus the U.S.

Graco offers its customers a value proposition based on lower labor, material and energy costs, better quality and enhanced environmental compliance. So they offer a multitude of components that comprise their value proposition. With only 10% to 20% of the market penetration in most emerging markets and perhaps 30% to 40% in Europe and Japan that they hold here in North America, Graco is able to grow by selling its products and solutions in less-penetrated overseas markets, particularly now that wage rates are beginning to materially rise in emerging markets.

Nick Heymann