EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of Graco With Wide Moat Rating and $47 FVE

Graco is a wide-moat industrial firm that has consistently delivered returns on invested capital around 25%. The company differentiates itself by manufacturing specialized products that handle difficult-to-move liquids, often used for niche applications where competition is limited. The firm offers a range of products, including pumps used to move peanut butter or caramel, automotive paint spray systems, and injection pumps for the oil and gas industry.Graco generates half of its sales from nearly 60,000 products that it sells up to one per day on average. Graco’s relentless cost control and commitment to lean manufacturing allow it to leverage shared components across different product lines to operate its plants efficiently and lower the overall cost of its products. The high-mix, low-volume nature of the business and the relatively small size of many niche end markets act as a barrier to entry, as rivals would struggle to establish the scale needed to challenge Graco’s competitive position.While Graco is a high-quality business protected by a wide economic moat, the main challenge we see is generating growth, as the firm mostly competes in mature end markets growing at low-single-digit rates. Historically, Graco’s organic growth rate has outpaced GDP growth thanks to its commitment to research and development, which has allowed the company to generate additional sales by developing new products, penetrating adjacent markets, and capturing market share from competitors. We think that Graco can continue to increase sales 100-200 basis points faster than GDP growth thanks to its strategic initiatives, and we project mid-single-digit average organic sales growth over the next five years.To achieve its 9%-10% annual revenue growth target, management will have to rely on mergers and acquisitions. So far, Graco has largely avoided overpaying for M&A and managed to use a steady stream of tuck-in acquisitions to boost growth without diluting ROICs, which gives us comfort that management will remain prudent. But the strategy carries execution risk if the firm struggles to find targets at attractive prices.