Download - Final Graco Presentation - CFA
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Bethel CFA Research Team
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Investment Overview
Market leader in niche market
Long-term/conservative business strategy
Overseas Expansion
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Enduring Company with strong historical
performance
Operational Excellence
Customer Intimacy
Product Leadership
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Operational
Excellence
Continuous Improvement
Centralized manufacturing
Human capital
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$8,953
$26,974
$37,604
$78,074
Colfax Flowserve Idex Corp Graco
2013 Net Income per employee
8.72x
2.89x
2.08x
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Customer
Intimacy
GracoSales Team
Material supplier
Channel partners
R&D Department
End Users
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Product
Leadership
66,000 SKUS
Specialized Solutions
Spend 3x R&D as competitors.
Innovative
Products tested to 10x minimum legal requirement
High Product Standards
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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
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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
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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
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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
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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%
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Valuation
• Assumptions
Discounted Cash Flow
• Price to Earnings
• Price to Cash Flow
• Price to Sales
Per Share Models
Blending of Methods – $81.50
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Competitors
Colfax Corporation (CFX)
Nordson Corporation (NDSN)
IDEX Corporation (IEX)
Flowserve Corporation (FLS)
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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
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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.
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-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
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Investment Conclusion
Shrinking Sales growth opportunity
Consistent strategies
Cash Deployment
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Questions?