No. of Recommendations: 38
Hi all,

Since there are several interested in GGG, I thought this old (wrote at least several months ago so data is not up to date) post I did for the IV boards might be of some interest. FWIW, the IV estimates are probably a low.

Graco designs, manufacturers and markets an assortment of fluid handling products including air-diaphragm pumps, sprayers, nozzles and related equipment for commercial and industrial applications. Some have called this a boring business. Maybe, but the returns to shareholders have been wide-eyed huge. A $10,000 investment in Graco shares 10 years ago would be worth over $138,000 today, a 1,288% increase, a compound annual growth rate of about 30% per year!

Sales totaled $730 million over the trailing twelve months (TTM) and Graco sports a $2.6 billion market cap and a $2.7 billion enterprise value.

Sales broken-down by world regions are shown in the table below and are taken from the latest 10K:
                    2005
Sales
Source: (millions) Percent
Americas $ 486 66%
Europe $ 151 21%
Asia Pacific $ 95 13%
Total $ 732 100%

Graco has a toehold in the Asia Pacific region and since the population there is significantly greater than in the Americas (more than 10x), it isn't too much of stretch to conclude that many years of growth are possible by simply expanding in this region, alone. As it is one of the worlds fast growing regions, it bodes well for Graco's prospects.

It is enlightening to read management's stated goals for Graco (from the 10K):


The Company's long term financial targets include: growing revenue by 10 percent and net earnings by 12 percent per year; achieving returns on sales exceeding 10 percent, on assets of at least 15 percent and on equity of at least 20 percent; generating at least 30 percent of each year's sales from products introduced in the last three years; and generating at least 5 percent of each year's sales from markets entered in the last three years. Initiatives for 2006 include, among other objectives, investment in emerging markets, expansion of global sourcing, and commencement of production at the Company's new manufacturing plant in Suzhou, People's Republic of China ("P.R.C.").


This simple paragraph speaks volumes about the management at Graco. It shows that management is committed to growth, not growth at all costs, but profitable organic growth (some acquisitions, but it doesn't overdo it). Graco has its eye on expanding into world markets, giving particular attention to China at present. Finally, management is devoted to developing new products on a regular basis to drive additional growth in existing markets, as well as in new markets. This paragraph, alone, makes me want to own shares in Graco. However, a company must be able to execute. As we will see in the Appendix at the end of the post, Graco delivers results. Results that far exceed managements stated goals.

I believe Graco is strategically positioned to blossom in the coming decades into one of the very rare companies on which fortunes are made.

APPENDIX

Rate of Returns

In my book, it is very important for a company to earn rates of return higher than the “market” as a whole and better than the industry and sector averages. As the following table shows, Graco beats them all, not to mention its own goals, by a wide margin.
Management Effectiveness (%)       Company  Industry  Sector  S&P 500
Return On Assets (TTM) 30.11 9.17 7.52 8.07
Return On Assets - 5 Yr. Avg. 26.28 7.02 5.6 6.32

Return On Investment (TTM) 41.82 12.16 10.71 11.91
Return On Investment - 5 Yr. Avg. 37.97 9.09 7.96 9.86

Return On Equity (TTM) 48.64 21.86 20.33 19.68
Return On Equity - 5 Yr. Avg. 45.3 18.82 17.22 17.75

Notice too, that Graco's TTM numbers exceed the 5 year averages – so, things are great and getting better.

ROE Components

The component parts making up ROE are shown below. Remember that

ROE = Net Margin * Asset Turnover * Leverage
ROE Components                      Company     Industry    Sector    S&P 500
Net Profit Margin (TTM) 17.83 7.39 7.76 13.98
Net Profit Margin - 5 Yr. Avg. 16.14 5.78 5.31 11.44
Asset Turnover (TTM) 1.69 1.32 1.04 0.98
Leverage Ratio (Avg.) 1.72 N/A N/A N/A

Graco enjoys a superior net profit margin compared to the industry, sector and the S&P and well above its stated goal of 10-percent. The turnover ratio is relatively high, for a manufacturer, indicating that it deploys its assets efficiently and minimizes waste. Leverage is not excessive and quite attractive after realizing that Graco has minimal debt and no long-term debt (see table below).

Debt

Graco is able to achieve its superior returns on equity without the aid of debt.
Financial Strength          Company  Industry  Sector  S&P 500
Quick Ratio (MRQ) 1.4 1.29 1.03 1.27
Current Ratio (MRQ) 2.13 2.19 1.71 1.78
LT Debt to Equity (MRQ) 0 0.47 0.69 0.59
Total Debt to Equity (MRQ) 0.01 0.56 0.89 0.74
Interest Coverage (TTM) 176.34 14.23 12.02 13.22

And, interest coverage is comfortably in triple digits – just where I like them.

Working Capital Management
 Efficiency            1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Days Sales Outstanding 73 74.8 70.2 65.9 61.1 66.1 67.1 65.6 62.7 57.9
Days Inventory 77.6 74 66.9 61.9 53 48.6 46.7 42.9 45.7 50.1
Payables Period 25.8 22.8 21 22 19.8 18.1 18.3 20.8 22.7 22.4
Cash Conversion Cycle 125 126 116 106 94.4 96.7 95.6 87.7 85.7 85.5
Receivables Turnover 5 4.9 5.2 5.5 6 5.5 5.4 5.6 5.8 6.3
Inventory Turnover 4.7 4.9 5.5 5.9 6.9 7.5 7.8 8.5 8 7.3
Fixed Asset Turnover 4.6 4.3 4.4 4.8 5.8 5.2 5 5.7 6.4 7.3
Asset Turnover 1.7 1.6 1.7 1.9 2.1 1.8 1.5 1.4 1.6 1.8

Notice the steadily decreasing DSO and CCC over the last 10 years.


Growth

Historically, Graco's growth rates have not disappointed and have been improving in recent years. The dividend (1.5% yield) has been growing faster than both sales and EPS suggesting that Graco hasn't outgrown its shareholder's.
            1 Year  3 Years  5 Years
Sales % 20.94 14.53 8.16
EPS % 16.48 19.88 12.32
Dividend % 31.71 39.25 26.17

Looking forward, analysts projected growth rates for the next 5 years is:
                    # of   Mean  High  Low   Std.
Ests. Est. Est. Est. Dev.
LT Growth Rate (%) 3.0 14.7 18.0 11.0 2.9

One final aspect of growth, necessary for the valuation, is my estimate of growth from fundamentals. To be conservative I adjusted the ROE to account for share buybacks (add back the value of share repurchases over the last ten years back to shareholder equity, then recalculate the ROE). When I do this I get a ROE of about 23.5%. Armed with an EPS of $1.93 and a dividend of $0.58 I calculate a payout ratio of 30% and a reinvestment rate of 70%.

Therefore,

Growth = Reinvestment Rate * ROE

Growth = 0.70 * 23.5 = 16.45 %

This exceeds analysts mean estimate of growth (14.7), so I will base my valuation on 12% growth going forward. This is the rate the company states is its goal and is conservative when compared with historical growth and analysts estimates.


Other

Graco has been listed (No. 85) in Business Ethics magazine's top 100 Best Corporate Citizens http://biz.yahoo.com/bizj/060502/1282731.html?.v=1

and is not likely to fall under the dark cloud raised by options abuse. The share count has hovered between 68 and 71 million shares since 1999 and has declined over the past three years.

Valuation

When I started writing this Graco was trading north of $45, but today the stock is offered up at under $38. Someone said it best; recently, this is no market to be a hero. So, I plan to let the sellers get finished and then swoop in and claim my prize (the best laid plans . . . . .).

Given Mr. Market's tendency to overreact, I want a nice conservative valuation in my back pocket to help me judge when to start adding shares, slowly. I've approached the matter from several different angles, some of which I've not seen posted before, so would appreciate any comments you might have on them.

Looking at the customary valuation ratios:
                                        Stock  Industry  S&P 500  Stock's 5Yr Average*
Price/Earnings 19.9 21.7 20 20.6
Price/Book 8.4 3 3.9 8.8
Price/Sales 3.5 1.5 2.7 3.4
Price/Cash Flow 16.4 14 13.9 18.4
Dividend Yield % 1.5 1.5 1.9 ---
* Price/Cash Flow uses 3-year average.

Well, it's obvious this isn't Ben Graham's idea of a value play, to say the least. But, I think it's safe to say the current price is consistent with the company's 5-year average. Graco trades at a premium to the Industry and S&P and its rate of returns and historic growth suggest that it probably should.

A historical comparison of P/E with the S&P:
P/E            1997   1998   1999   2000   2001   2002   2003   2004   2005
Stock's 14.6 14.7 12.6 12.2 18.9 18.3 21.7 24.1 20.3
S&P 500 23.8 26.9 32.9 36.6 23.8 20.1 21.1 19 17.3
Relative P/E 0.61 0.55 0.38 0.33 0.79 0.91 1.03 1.27 1.17

Considering relative P/E, a rock bottom price for Graco might be for it to trade at a P/E of about 1/3 that of the market, or 1/3 * 20 = 7 say. With ttm EPS of $1.93, that puts a minimum value of about $13.50.

More realistically, a reasonable range of relative P/E might span between 0.75 and 1.0 times the S&P P/E. Then, one might expect the shares to trade between $29 and $39.

So, perhaps, an attractive buy in price, based on relative P/E, would fall within the bottom 1/3rd of this range, say below $32.50.

Until joining IV, my preferred method of valuing a stock was to treat it like a bond and calculate the internal rate of return considering earnings growth, dividends paid, and assuming a P/E at the time of sale. So, if I assume an earnings growth rate of 12%, a dividend of $0.58, EPS of $1.93, and a P/E of 18 at the time the shares are sold (in 5-years):
Year         Start                 1         2           3            4            5
EPS $ 1.93 $ 2.16 $ 2.42 $ 2.71 $ 3.04 $ 3.40
DPS $ 0.58 $ 0.65 $ 0.73 $ 0.81 $ 0.91 $ 1.02
Cash Flows: $ 33.00 $ (0.65) $(0.73) $ (0.81) $ (0.91) $ (62.25)
Price Paid $ 33.00
Sale Price $ 61.22 = 18.0 X $ 3.40
IRR 15.1%

This calculation says one could expect a 15% compound annual return on investment if the price paid was $33 per share. (Incidentally, $37.50 corresponds to a 12% internal rate of return).

As my final method, I'll use a Dividend Discount Model with the following inputs:

I assume a high growth period extending 10 years, with the shares growing at 12% and discounted at the rate of 12% and current EPS of $1.93. To be consistent with fundamentals, I will adjust the payout ratio to about 49% (up from 30%) to account for the lower growth used in the valuation – my justification for this is that Graco recently announced a share buyback and the value of the buyback could be added to the dividend to get a higher return to shareholders then calculated considering just the dividend, alone.

Following the high growth period, I assumed a 5 year transition period to stable growth. The stable growth rate used was 4%. An 18% ROE (corresponding to industry average) was used in the stable growth phase, resulting in a payout ratio from fundamentals of about 78%. I used a discount rate of 10.5% for the stable growth period.

Based on those inputs I calculate an IV of $35.35 broken out as follows:
Estimated Intrinsic Value:       $        35.35  100.0%
Extraordinary Growth Value $ 11.33 32.1%
Stable Dividend Growth Value: $ 15.03 42.5%
No Growth Dividend Value: $ 8.99 25.4%

If I demand a minimum 15% margin of safety then I have a buy below price of $30. So after all that, I'll be looking to add shares below $30. If recent market action is any indication, the stock price should be at $30 some time next week. :)

Thanks for reading.

Rich
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No. of Recommendations: 3
An additional observation is that they have about 67mm shares outstanding. They repurchased about 2mm shares over the past year and have about 5mm of room left under a previous repurchase announcement which goes through Feb. 2008. If previous behavior is indicative of future action, they will buy these shares back on any weakness in the stock...and those buybacks make sense given the economics of the business (ROIC) and the relative cheapness of the shares.

et
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Wow, what a post, thanks! Before yesterday when someone mentioned Graco, I didn't know a thing about the stock. But when I look at the chart, consistently raising EPS, year over year is like a breath of fresh air compared to lot of other companies out there. This is definitely at least on my watch list now!
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Thanks for a great post.

Delwin
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And of course, the negatives need to be examined:

The company has exposure to the housing market, both at the commercial side and at the retail level (via Home Depot.)

They have exposure to the mall construction market.

Their competitors are not going away.

et
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et,


And of course, the negatives need to be examined:

The company has exposure to the housing market, both at the commercial side and at the retail level (via Home Depot.)

They have exposure to the mall construction market.

Their competitors are not going away.

et


Thank you for pointing out those key risks. It is precisely these risks that have kept me out of the shares todate. Everyone should consider these points carefully and not get all giddy with enthusiasm.

However, Mr. Market hasn't shown any desire to throw the shares away at bargain pricing, yet. Perhaps, a testiment to GGG's strength in management and its bright future.

Rich
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Rich-

I just looked at the "Stocks (you) Own" section in your profile. Spooky how much overlap with my own I see there. There are a couple I have owned in the past that I no longer hold, and a some I don't own, but it is clear that we are wired in a similar way.

May the gods smile on you and yours.

et
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Considering relative P/E, a rock bottom price for Graco might be for it to trade at a P/E of about 1/3 that of the market, or 1/3 * 20 = 7 say. With ttm EPS of $1.93, that puts a minimum value of about $13.50.

More realistically, a reasonable range of relative P/E might span between 0.75 and 1.0 times the S&P P/E. Then, one might expect the shares to trade between $29 and $39.



I think in Glaco's case the expanding p/e ration over the last decade is the main indicator to remain on the side lines now. Not that Glaco doesn't deserve the valuation relative to the market in general, unfortunately it's indicative not of a hidden gem but a discovered gem.

Here's a snip from Value LIne:
Graco's common stock is no longer timely, It is now ranked 3 (Average) for year-ahead performance. Also, these shares offer below-average capital gains potential over the 2009-11 pull. Although the company is running well and healthy earnings advances out to late decade are likely, the stock is currently trading at a price-to-earnings multiple that we feel is inflated. Until the P/E ratio returns to a more normalized level, we would suggest staying in the sidelines. However, cautious investors may be intrigued by the Above-Average Safety rank (2), market-average Beta, and excellent ratings for Earnings Predictability and Price Growth Persistence.
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et,


May the gods smile on you and yours.


Right back at you.

We should compare watch lists or something. Perhaps, with two of us working together we can make twice as much money! ;-)

Rich
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Kelbon-

You are not going to find any company with the financial metrics of GGG trading at anything like a 7 forward p/e with interest rates near current levels. High ROA/ROE/ROIC/buybacks, reasonable growth, modest compensation plans, reasonable visibility, and a history of under-promising/over-delivering comes, well, much more expensive than that with a 4.80-5.0% 10yr note.

Sure, you'll find deep cyclicals (like shipping) oil/gas producers, and Bermuda insurers trading there now, but GGG isn't in any of these camps.

If you wait for a 7 forward p/e, you'll have to wait for a 15% fed funds rate and a 13% 10yr note. If that's what we're waiting for, we should not own any stocks at all.

Or else, you can buy a superior business at a reasonable price like GGG. I'm not suggesting that it can't trade to a -2RMS BMW level of cheapness - it certainly can. The VL "analysis," as it were, makes little sense to me. What do they say about MMM?

et

et
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et and all,

MMM's valueline report can be had for free because its a Dow stock. Here's a link:

http://www.valueline.com/dow30/f5993.pdf

It's not real current. But it concludes:


This high-quality issue has lost some
of its long-term appeal since our August
report when we strongly recommended
it. Since then, the stock consistently
saw-toothed upward as inventory
corrections in the fast-growing D&G department
boosted investor confidence.
Still, from a total-return perspective,
the timely equity has long-term legs.
The company's operational and geographic
diversity, along with strong finances to
support a growing dividend, stands it in
good stead.


Rich
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It always really bothers me when a company takes on debt to fund buybacks. PII, for example, did this just recently, and I ended up selling half of what I own (and I'm pretty close to dumping the other half).

But sometimes, as it was with GGG, it turns out to be a brilliant move.


http://www.fool.com/news/foth/2001/foth010130.htm

In July 1998, Graco repurchased 22% of its outstanding shares from a trust that had been established by one of Graco's founders. To finance the $191 million purchase -- which essentially eliminated all of its equity -- the company took on $176 million of long-term debt.

I looked at the stock shortly after this transaction, and concluded that it wasn't cheap enough given the risk associated with the debt. But since then, Graco has used its strong free cash flow to pay down its debt to only $35.1 million (and the company has $11.1 million in cash).


Do you guys seriously think GGG will hit $30?



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"ggg" != "qqq"

That's php speak for "Graco" is not the same thing as "NASDAQ 100 Trust Shares." Based on this interesting thread I did some research on Graco.

My conclusion is that the share price is outpacing earnings and outpacing cash flow even more which means that the market should wake up any one of these days and realize it is not being efficient. Value line is already hinting at it. :)

From the S&P Stock Report:

2006 1997 Growth CAGR

Cash flow 2.14 0.66 3.2 12.5
Earnings 2.17 0.51 4.3 15.6
Price high 50.00 7.84 6.4 20.4
Price low 35.52 4.64 7.7 22.6

In fact, the market has known it for at least two years and the stock has been flat

http://finance.yahoo.com/q/bc?s=GGG&t=5y&l=on&z=m&q=l&c=

There are many reasons for not selling a stock that is not performing: You don't want to pay taxes, you want to give it one more chance, you love your stock, you have faith that the market segment is about to have a move on the upside. I held on to ARMHY for years before pulling the plug this week because I also wanted to give the company a chance after I had liked it so much in the past. Flat as a pancake for the last three years:

http://finance.yahoo.com/q/bc?s=ARMHY&t=5y&l=on&z=m&q=l&c=

We have seen so many stocks moving sideways for years because they had gotten ahead of themselves that I would not bet on GGG being the exception to the rule that advance has to be digested before advancing again.

Well, at least now I know the GGG is a company and not an index :))

Denny Schlesinger
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Hi Hokie,

I understand your concern about debt to fund buybacks. If its a solid, non-cyclical business its alright. BUD has done it for over a decade and recently increased its goal for Debt to Equity ratio.

GGG's situation in 1998 was significantly different.


In July 1998, Graco repurchased 22% of its outstanding shares from a trust that had been established by one of Graco's founders. To finance the $191 million purchase -- which essentially eliminated all of its equity -- the company took on $176 million of long-term debt.

Reading between the lines a little, I'm guessing that Graco had no choice but to buy these shares from the trust of one of Graco's founders.

It happens in private business all the time. Founders or principals want to retire and everything they have is tied up in the business. The only way to "cash-out" is for the business (other shareholders) to pony up the money. Since, no reasonably captialized business can pay this kind of money from cash accounts, debt is a necessity.

I think it is safe to say, that this was a one time thing not likely to happen again. Unless, there is another founder with a large quantity of shares nearing retirement. I don't think there is.

As you eluded to, GGG bought the shares at what turned out to be very attractive pricing and that was good for all shareholders.


Do you guys seriously think GGG will hit $30?

It seems like a pipe dream, don't it. Obviously, no one knows for sure. But, just about every BMW stock has experienced some kind of dramatic sell-off that enables the smart investors to acquire shares at bargain prices. Will it happen to GGG, who knows. But if it does, I'm ready with my DD done or with only a short refresher necessary.

That's not to say GGG won't make a fabulous investment at today's prices, either. It boils down to how much risk an investor is willing to accept with his/her purchase.

Rich
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Or else, you can buy a superior business at a reasonable price like GGG. I'm not suggesting that it can't trade to a -2RMS BMW level of cheapness - it certainly can. The VL "analysis," as it were, makes little sense to me. What do they say about MMM?

eurotrash01


I think that is a fair question so I did the same analysis on MMM as I did on GGG:

2006 1997 Growth CAGR

Cash flow 5.43 3.57 1.5 4.3
Earnings 5.06 2.53 2.0 7.2
Price high 88.35 52.75 1.7 5.3
Price low 67.05 40.00 1.7 5.3

Since the stock price is rising faster than cash flow but slower than earnings I would say that MMM is a better relative bet than GGG at this time. According to Mike's 20 year chart MMM has come down to it's low CAGR.

http://invest.kleinnet.com/bmw1/stats20/MMM.html

Denny Schlesinger
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Yes, the BUD thing made me laugh. Valueline wrote something like "BUD is once against showing its dediciation to its shareholders by taking on more debt [to fund buybacks/growth]." I suppose it makes perfect sense if you are BUD or WMT. PII obviously doesn't have the same kind of competitive advantages.

That really did work out amazing well for GGG, considering where the share price was at the time.
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That really did work out amazing well for GGG, considering where the share price was at the time.
JustPlainHokie


Can't say I like it! :(

5. On July 2, 1998, the Company repurchased 5,800,000 shares of common stock, for $190,887,000, from its largest shareholder, the Trust under the Will of Clarissa L. Gray, pursuant to an agreement executed in May 1998. The stock repurchase was funded with cash of $32,887,000 and $158,000,000 from the credit facility discussed below.

http://preview.tinyurl.com/yudxtv

I guess the market didn't like the idea, the share price dropped from $34.19 on June 29, 1998 to $20.56 on October 5, a drop of over 60%

http://finance.yahoo.com/q/hp?s=GGG&a=00&b=1&c=1998&d=00&e=1&f=1999&g=w

They essentially borrowed the entire net worth of the company to accommodate a founder. To me that sounds like criminal behavior. A lot of people put up Warren Buffett as the poster child of investing. Well, he refuses to buy back shares except when they are offered as a real bargain. What price did GGG pay for the shares?

$32.91, just 4% under the market price on June 29 and lets not forget the interest that they had to pay subsequently on the loan. To me that sounds like criminal behavior.

In 1998, interest expense, net of interest income, increased to $5.4 million due to the borrowing incurred to fund the repurchase of 5.8 million shares of Graco Inc. common stock from the Trust under the Will of Clarissa L. Gray.

http://preview.tinyurl.com/2oqz5t

That's a dollar a share in interest in 1998 alone!


Denny Schlesinger
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Excellent discussion.

Mike's chart shows current CAGR is only 1% below average (22.6% vs. 23.7%). The price drop has not been precipitous. And -2RMS is $35.

http://invest.kleinnet.com/bmw1/stats16/GGG.html

I believe there are better candidates and will pass on this one for now. To each his/her own.

MW
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Hi Denny,

What your analysis fails to account for is that since 1998 the stock has split 3 for 2 on four different occasions.

The $32.91 paid by the company in 1998 is equivalent to $32.91 * (2/3)^4 = $6.50 compared to Friday's close of $40.57.

So the company bought back shares in 1998 at a mere $6.50 on today's share count or 16% of the value of the shares today. Or, it trades today at just over 6.2x what it did in 1998.

I would settle for those kinds of returns and if guaranteed would mortgage the house to do so (kidding). It looks like a very good buy to me.

Rich
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I second what Rich said about the big company purchase of the insider stake in 1998. Graco's ability to buy back such a large percentage of its shares over the years and quickly/easily work off debt is one of its big attractions. At the time that looked like a big nut to chew, but proved no problem at all. And from the end of 1996 through the end of 2001 the total return in GGG shares (divs reinvested) was basically a quadrupling in price.

They currently have next to no debt and could easily lever up to repurchase more shares and still have what you would consider a conservative balance sheet. Do I expect this to happen? If we move toward $36/share, sure. High ROE, high margin, relatively high asset turnover...the company really is rare to find in a global manufacturer in what would otherwise look like a business that should attract competitors.

FWIW, I think MMM could stand to lever up a tad to repurchase shares as well, but with all the factory build-outs they have slated for 2007 I don't think they'll pick up the pace much over the 2006 level. Nice to see that they did buy more in Q3 when the stock got shellacked.

et
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What your analysis fails to account for is that since 1998 the stock has split 3 for 2 on four different occasions.

The $32.91 paid by the company in 1998 is equivalent to $32.91 * (2/3)^4 = $6.50 compared to Friday's close of $40.57.

TMFRichDad


I was ready to wipe the egg off my face but no, there is no egg there that I could find. I quoted un-split shares everywhere so my numbers are right. If you are going to use the current split shares for the computation, you have to adjust all the numbers: 34.19 becomes 6.72 and 5.8 million shares becomes 29.5 million.

I'm not saying the deal didn't turn out well. What I'm saying is that, at the time, the deal was terrible. Why didn't the estate simply make a secondary offering to the market? Probably because they knew that they would not fetch $32.91 or 6.47 split adjusted from the market. Instead, they juice the company for all the retained earnings and then some. The shares were paid for out of retained earnings and when the deal was done the company had negative equity! The company was made totally vulnerable to any unforeseen event with no reserves of any kind. On the surface, they were guaranteeing the loan with their own shares which would have become worthless in a bankruptcy. I'm willing to bet the bank asked for some outside guarantees and that the sellers gave it.

I stand by my post 100%.

Denny Schlesinger
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et:

I don't question the fact that, in hindsight, the deal turned out well. What I question is the gamble that management took to favor a founder's estate. This is the kind of management that I want to have nothing to do with. Others include poison pills, stock options abuse and voting privileges for founders like in the case of GOOgle (No investing without proper representation).

Denny Schlesinger
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Right. Like I said, and as you quoted, it really worked out amazingly well.

JustPlainHokie
(who always keeps a tissue handy)
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I hope I haven't drawn the discussion too far away from the BMW Method with the GGG discussion.  
I simply mentioned that I bought some and look what happened.

I don't think that the company really lends itself well to BMW metrics because it is so young 
and fast-growing, and the business plan morphs quickly and heavily over time.  It isn't, say, 
like a McDonalds, a MO or a WFC in this regard, where the basic strategies that were in place years ago 
have not morphed so much. I'd add the aggressive buyback of the insider
shares (in 1998) to the list of BMW disqualiers.  That did reduce
shareholder's equity significantly (see the excerpt from the 1998 10k):


Periodically,  the Company  initiates  measures  aimed at enhancing  shareholder
value, broadening common stock ownership,  improving the liquidity of its common
shares and effectively  managing its cash balances.  A summary of recent actions
follows:

o    repurchase of 5.8 million shares in 1998 from Graco's largest  shareholder,
     the Trust under the Will of Clarissa L. Gray;
o    three-for-two stock splits paid in 1998 and in 1996;
o    an 18 percent increase in the regular dividend in 1997; and
o    a 17 percent increase in the regular dividend in 1996.

LIQUIDITY AND SOURCES OF CAPITAL

The following table highlights several key measures of asset performance.

(In thousands)                                           1998               1997
- ------------------------------------                  -------            -------
Cash and cash equivalents                             $ 3,555            $13,523
Working capital                                       $48,354            $87,312
Current ratio                                             1.6                2.3
Average days receivables outstanding                       67                 75
Inventory turnover                                        6.3                4.9

In 1998,  working capital  decreased $39.0 million to $48.4 million.  During the
first half of 1998,  Graco  increased its cash balance by $20.7 million from the
end of  1997.  In  July,  the  Company  borrowed  $158  million  under  a  newly
established  $190 million  five-year  reducing  revolving  credit  facility (the
"Revolver")  and combined the proceeds of the Revolver  with  available  cash to
repurchase 5.8 million shares from the Company's largest shareholder,  the Trust
under the Will of Clarissa L. Gray. As a result of strong cash flow,  the amount
outstanding under the Revolver was reduced to $109.5 million by the end of 1998.
Receivables  decreased  $6  million  as a result  of lower  sales in the  fourth
quarter of 1998  compared  with the same period in 1997.  Inventories  decreased
$9.9 million in 1998 as a result of several factors, including the restructuring
of the  Company's  automotive  business  and  branch  closings  in Los  Angeles,
California,  and Toronto,  Canada. Cash provided by operations was $77.1 million
in 1998,  versus  $36.3  million  in 1997 and $48.6  million  in 1996.  In 1998,
additional cash needs were funded by bank  borrowings.  Significant uses of cash
included  the  repurchase  of 5.8 million  shares of Graco common stock for $191
million in 1998 and capital expenditures and dividends in 1997 and 1996.



and,

In July 1998,  the  Company  entered  into a  five-year  $190  million  reducing
revolving  credit  facility  (the  "Revolver")  with a  syndicate  of ten  banks
including  the lead bank,  U.S.  Bank  National  Association.  The  Revolver was
subsequently reduced to $147 million by December 25, 1998. The Company's initial
borrowing of $158 million financed a portion of the stock  repurchase  discussed
in Note F. The $109,509,000 outstanding balance bears underlying interest at the
London  Interbank  Offered  Rate plus a spread  of 0.625  percent.  This  spread
reduces  as the  ratio of total  debt to  earnings  before  interest,  taxes and
depreciation  and  amortization   declines.  The  Revolver  specifies  quarterly
reductions of the maximum amount of the credit line, and requires the Company to
maintain certain  financial ratios as to net worth, cash flow leverage and fixed
charge coverage. The Revolver effectively restricts dividend payments that would
cause a violation of the tangible  net worth ratio  covenant.  The amount of the
restriction was $18 million at December 25, 1998.

and of course, as Denny mentioned:

(In thousands)                                   1998           1997           1996
- --------------------------                   --------       --------        -------
<S>                                          <C>            <C>            <C>
Common Stock
Balance, beginning of year                   $ 25,553       $ 17,047       $ 17,265
Stock split                                        --          8,516             --
Shares issued                                     344            250            188
Shares repurchased                             (5,800)          (260)          (406)
                                             --------       --------       --------
Balance, end of year                           20,097         25,553         17,047
                                             --------       --------       --------
Additional Paid-In Capital
Balance, beginning of year                     26,085         22,254         20,397
Shares issued                                   4,535          4,171          2,337
Shares repurchased                             (6,728)          (340)          (480)
                                             --------       --------       --------
Balance, end of year                           23,892         26,085         22,254
                                             --------       --------       --------
Retained Earnings (deficit)
Balance, beginning of year                    105,030         85,232         64,949
Net income                                     47,263         44,716         36,169
Dividends declared                            (10,102)       (10,033)        (8,657)
Change in accounting period                       300             --             --
Stock split                                        --         (8,516)            --
Shares repurchased                           (178,369)        (6,369)        (7,229)
                                             --------       --------       --------
Balance, end of year                          (35,878)       105,030         85,232
                                             --------       --------       --------
Other, Net
Balance, end of year                            1,202            841          1,517
                                             --------       --------       --------
Total Shareholders' Equity                   $  9,313       $157,509       $126,050


http://www.sec.gov/Archives/edgar/data/42888/0000042888-99-000007.txt

I do understand why Denny thinks this episode was a major gamble and not
the kind of undertaking he'd like to see from his nest of BMW portfolio
CEOs.  He can have his way too.  GGG's CEO, David Roberts, took over in
2001 so the cowboys who executed the highly successful cap-shrink are
now gone, rich and retired, on their own yachts off the coast of
Venezuela...because they held onto their GGG shares.

Again, I like the company but acknowledge that it doesn't really fit the
BMW mold as well as other companies.  We measure what we've seen because
we can, but who knows if GGG has had a long enough history over various
market cycles to justify this board's interest.

et
[Apologies to kelbon for any previous offense]



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No. of Recommendations: 1
By "young" I mean the Graco that we see now, not the old/small/stodgy company founded by Mr. Gray. I think it is fair to say that the company we've seen from the mid-90s on out is not the company founded in the 1920s.

et

("Squirt a little more pizza sauce - thru a Graco product- on that large pepperoni pie, Lin-Lin.")
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No. of Recommendations: 1

FWIW, I think MMM could stand to lever up a tad to repurchase shares as well, but with all the factory build-outs they have slated for 2007 I don't think they'll pick up the pace much over the 2006 level. Nice to see that they did buy more in Q3 when the stock got shellacked.


Guess I was wrong.

I suppose it will be a while before we see $73 handles again. Bummer.

et
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