University of Minnesota Duluth
CFA Research ChallengeMatt Murphy, Colt Wolfram, Mike Pochucha, Phil d’Entremont, Appo Agbamu
Investment Recommendation
$70One-Year Price
Target
-5%
$73.94February 10, 2015HOLD
RECOMMENDATION
Foreign Currency Effects
Domestic Acquisition Challenges
Lower Demand from the Mining Industry
Slowing Economic Growth in Key Foreign
Markets
Business Description
INDUSTRIAL
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
CONTRACTOR LUBRICATION
Industrial Segment
59%
% of Net Sales
Source: Company Filings
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
0
50
100
150
200
250
2009 2010 2011 2012 2013 3Q14
$ In
Millions
Operating Earnings
Contractor Segment
31%% of Net Sales
Source: Company Filings
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
0
10
20
30
40
50
60
70
80
2009 2010 2011 2012 2013 3Q14
$ In
Millions
Operating Earnings
Lubrication Segment
% of Net Sales
Source: Company Filings
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
-5
0
5
10
15
20
25
Operating Earnings
$ In
Millions
Corporate Governance
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Board of Directors
Audit Committee Compensation Committee Governance CommitteeManagement Organization
Source: FactSet
Ownership Summary
Institutional Free Float
Management
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Patrick J.
McHale
Chief Executive Officer
Joined Graco in 1989
James A.
Graner
Chief Financial Officer
Joined Graco in 1974
Retiring this year
Charles L.
Rescorla
VP of Corporate
Manufacturing, Distribution
Operations & Corporate
Development
Joined Graco in 2003
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
Patrick J.
McHale
James A.
Graner
Charles L.
Rescorla
Base Pay Bonus Option Award Value Other
Source: Company Filings
Industry Overview
0
20000
40000
60000
80000
100000
120000
50
100
150
200
250
300
350
400
450
GD
P p
er C
apit
a in
Do
llar
s
Pri
ce p
er S
har
e in
Do
llar
s
S&P-400 Diversified Industrial Machinery Index
VS. GDP per Capita
S&P-400 Diversified Industrial MachineryEU GDPEast Asia & Pacific GDPU.S. GDP
U.S. GDP
per Capita Asia Pacific GDP
per Capita
EU GDP
per Capita
0.94 0.81 0.86
Correlations
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Competitive Analysis
Porter’s Five Forces
Source: Bloomberg
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Market ShareINDUSTRIAL
LUBRICATION
Graco
25%
Competitors
75%
Graco
58%
CONTRACTOR
Competitors
42%
Graco
9%
Competitors
91%
Source: Company Filings
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Expansion into New Markets
23 person sales team
in South America
Blue Stars indicates
where staff are
located
New Market
Expansion
Source: Company Presentations
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Comparison Companies
Source: FactSet
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Investment Summary
Japanese GDP Expected to Decline 0.5%
for FY14 (ends in March)
Chinese GDP Expected to Grow at
7.4%, Which is the Slowest in 24 years
Eurozone PMI Rose in January to 52.6
from 51.4 in December
Slowing
Economic
Growth in Key
Foreign
Markets
Foreign
Currency
Effects
Domestic
Acquisition
Challenges
Lower Demand
From Mining
Industry
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP Growth Year-to-Year
East Asia & Pacific European Union United States
Source: The World Bank
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Investment Summary
A Strong Dollar
Will Hurt Graco
Through:
As Central Banks Introduce
New Stimulus Plans We
Expect the Trend to Continue.
Slowing
Economic
Growth in Key
Foreign
Markets
Foreign
Currency
Effects
Domestic
Acquisition
Challenges
Lower Demand
From Mining
Industry
77
79
81
83
85
87
89
91
US Dollar Index Spot Price 1-Year
TranslationSlowing
Exports
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Investment Summary
2005 2008 2012
Slowing
Economic
Growth in Key
Foreign
Markets
Foreign
Currency
Effects
Domestic
Acquisition
Challenges
Lower Demand
From Mining
Industry
Gusmer GlasCraftITW/Liquid
Finishing
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Investment SummarySlowing
Economic
Growth in Key
Foreign
Markets
Foreign
Currency
Effects
Domestic
Acquisition
Challenges
Lower Demand
From Mining
Industry
200
250
300
350
400
450
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
Copper COMEX Spot Price
0
20
40
60
80
100
120
140
160
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
Newcastle Coal Spot Price
Source: Bloomberg
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Financial Analysis
$-
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
$350.00
$400.00
2013 2014 2015 2016 2017 2018 2019 2020
Mil
lions
Net Income Available to Common Shareholders
8.2% CAGR
Income Statement
Source: Company Filings, Team Estimates
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Financial Analysis
0.0%
5.0%
10.0%
15.0%
2013 2014 2015 2016 2017 2018 2019 2020
Return on Assets
Balance Sheet
Source: Company Filings, Team Estimates
Key Points
Strong Cash Flow
Short-Term Asset Buildups
Finishing Brand Holdings, Inc.
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Financial Analysis
Cash Flow Use
Share
Repurchases
Debt
Reduction
Growth
Through
Acquisitions
Dividend
Increases to
Shareholders
Statement of Cash
Flows
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Financial Analysis
Statement of Cash
Flows
$-
$20.00
$40.00
$60.00
$80.00
2013 2014 2015 2016 2017 2018 2019 2020
Mil
lions
Capital Expenditures
Source: Company Filings, Team Estimates
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Strong Cash FlowsMaturing Revenue
Streams
Primary Valuation
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
First Stage
Growth of 10.3%
Strength in America
Lag in Asia-Pacific and
EMEA
RevenueMargins
Gross Margin: 53%
Operating Margin: 25.9%
Net Margin: 18.5%
Net Margin: 17.5%
Source: Company Filings, Team Estimates
$70
Primary Valuation
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Second StageMargins
Gross Margin: 55%
Operating Margin: 27.9%
Net Margin: 17.5%
Net Margin: 19.5%
Growth of 9.8%
Normalized Growth in
Americas
Increased Growth in
EMEA and Asia-Pacific
Region
Revenue
Source: Company Filings, Team Estimates
$(0.25)
$0.25
$0.75
$1.25
$1.75
$2.25
2013 2014 2015 2016 2017 2018 2019 2020
In M
illi
ons
Revenue by Region
Americas EMEA Asia Pacific
Primary Valuation
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Perpetual Growth Rate Components
Global Economic Conditions
Organic Growth
Strong Cash Flow Generation
Currency Fluctuations
Required Rate of Return
Artificially Low Cost of
Debt
Artificially High Cost of
Equity
WACC Breakdown
Cost of Equity 7.4%Cost of Debt 1.9%
Risk Premium 1.7%
11%Total
Secondary Valuation
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
Monte Carlo Analysis
SimulationIntrinsic Value Sensitivity AnalysisLimited Upside
EV/EBITDA P/E Monte Carlo Analysis
10.7
$6.5 X
$70
21
$3.8 X
$80
1000 Observations
Over 252 Trading
Days
$81
Investment Risks
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
U.S.
Housing
Market
Rise in
Interest
Rates
End User
Conversion
Price
Sensitivity
Business
Description
Corporate
Governance
&
Management
Investment
Summary
ValuationFinancial
Analysis
Investment
RisksConclusion
Industry
Overview
&
Competition
$73.94February 10, 2015
-5% $70One-Year Price Target
HOLDRECOMMENDATION
Foreign Currency Effects
Domestic Acquisition Challenges
Lower Demand from the Mining Industry
Slowing Economic Growth in Key Foreign Markets
Conclusion
Valuation
Correlations Since 2009
Income Statement
Balance Sheet
Statement of Cash Flows
Pension Fund
Use of Cash
Business Segments
Ratio Analysis
Questions?Historical Valuation
DuPont Analysis
Corporate Governance
Management Team
Ownership Summary
M&A History
Geographic Breakdown
Channel Checks
Current Environment
Product Breakdown
Index Valuation
Index Leverage
Index Profitability
Index Cash Flow
S&P 500
Top Institutional Holdings
Top Institution Types
Perpetuity Growth Method- Sensitivity Analysis
Perpetuity Growth
2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
Discount 10.0% $ 66.41 $ 69.82 $ 73.75 $ 78.34 $ 83.46 $ 90.27 $ 98.22
Rate 10.5% $ 62.19 $ 65.10 $ 68.44 $ 72.28 $ 76.77 $ 82.07 $ 88.43
(WACC) 11.0% $ 58.47 $ 60.98 $ 63.83 $ 67.09 $ 70.85 $ 75.24 $ 80.42
11.5% $ 55.16 $ 57.35 $ 59.81 $ 62.60 $ 65.78 $ 69.46 $ 73.75
12.0% $ 52.21 $ 54.12 $ 56.26 $ 58.66 $ 61.39 $ 64.51 $ 68.10
12.5% $ 49.55 $ 51.24 $ 53.11 $ 55.20 $ 57.55 $ 60.21 $ 63.26
Valuation
Correlations Since 2009
U.S. GDP
per
Capita
Asia Pacific GDP
per Capita
EU GDP
per Capita
.99 0.98 .56
Industrial Machinery
Index Correlations
Source: The World Bank
U.S. GDP
per Capita
Asia Pacific
GDP per
Capita
EU GDP
per
Capita
0.90 0.98 0.72
Graco Correlations
Income Statement
Source: FactSet
Balance Sheet
Source: FactSet
Statement of Cash Flows
Source: FactSet
Pension Fund
Source: FactSet
Use of Cash
Source: FactSet
Business Segments
Source: FactSet
Ratio Analysis
Source: FactSet
Graco Valuation
Source: FactSet
DuPont Analysis Graco
Source: FactSet
Corporate GovernanceWilliam J. Carroll
Former CEO, Limo-Reid, Inc. d/b/a NRG Dynamix
Eric P. EtchartSenior Vice President, The Manitowoc
Company, Inc.
Jack W. EugsterRetired Chairman, President and CEO,
Musicland Stores Corporation
J. Kevin GilliganChairmance and CEO, Capella Education
Company
Patrick J. McHale President and CEO, Graco Inc.
Lee R. MitauRetired Executive Vice President and General
Counsel, U.S. Bancorp
Martha A. Morfitt President and CEO, River Rock Partners, Inc.
R. William Van SantSenior Operating Partner, Tenex Capital
Management, L.P.
Corporate Governance
Source: FactSet
Management TeamPatrick J. McHale President and CEO
David M. Ahlers VP, Human Resources and Corporate Communications
Caroline M. Chambers VP, Corporate Controller and Information Systems
Mark D. Eberlein VP and GM, Process Division
Karen Park Gallivan VP, General Counsel and Secretary
James A. Graner CFO
Dale D. Johnson VP and GM, Contractor Equipment Division
Jeffrey P. Johnson VP and GM, EMEA
David M. Lowe Executive VP, Industrial Products Division
Bernard J. Moreau VP and GM, South Central America
Charles L. RescorlaVP, Corp. Manufacturing, Distribution Operations and Corp.
Development
Christian E. Rothe VP and Treasurer
Peter J. O’Shea VP and GM, Asia Pacific
Mark W. Sheahan VP and GM
Brian J. Zumbolo VP and GM, Lubrication Equipment Division
Management Team
Ownership Summary
Source: FactSet
M&A History
Source: FactSet
Geographic Breakdown
Source: Company Presentation
Current Environment
Source: Company Presentation
Product Breakdown
Industrial
Products Applied Fluid Tech.
Petroleum
Management
Process Pump
Equipment
Finishing Equipment
Finishing Equipment Finishing Equipment
In-Plant Polyurethane
Equipment
High Performance
Coatings & FoamSealants & Adhesives
Composites
Contractor
Contractor Accesories
Field Marking Equipment
Fine Finish Equipment
Line Striping Eqiupment
Paint Spraying Equipment
Pressure Washing
Equipment
Roof Coating Equipment
Spray Guns
Texture Spray Equipment
Lubrication
Centralized Equipment
Controllers & Monitors
Centralized Equipment
Single Series Single
Point
Mobile On-road
Equipment
Compressor Lubrication
Industrial Lubrication
Mobile Off-Road
Equpment
Index Valuation
Source: Bloomberg
Index Leverage
Source: Bloomberg
Index Profitability
Source: Bloomberg
Average
Gross
Margin
Average
Operating
Margin
Average
Profit
Margin
31.05 9.83 6.51
Index Cash Flow
Source: Bloomberg
S&P 500
Source: FreeStockCharts
Top Institutional Holdings
Source: FactSet
Top Institution Types
Source: FactSet
Channel Checks
Source: FactSet
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