A New Wide-Moat Stock for Your Watchlist

Krzysztof Smalec: We recently initiated coverage of industrial firm Graco with a wide moat and a $46 fair value estimate.

Graco manufactures equipment used to manage fluids, specializing in abrasive, corrosive, and hard-to-move materials. We believe the firm has established a wide moat primarily based on customer switching costs. Graco’s products often perform a mission-critical function and are integrated into a customer’s manufacturing process but typically account for a small portion of overall costs (for example, a paint system at an auto assembly plant). The company has a large installed base of equipment, and customers tend to replace components like-for-like, given the potential cost of unscheduled downtime or wasted material from switching to a cheaper alternative. This leads to a relatively stable and high-margin recurring revenue stream, as 40% of Graco’s sales come from aftermarket parts.

Graco’s lean manufacturing capabilities allow it to thrive in a high-mix and low-volume environment, as the firm generates roughly half of its sales from nearly 60,000 different products it sells no more than one per day on average. This aspect of the business creates a barrier to entry, as competitors would struggle to replicate Graco’s scale and compete effectively.

The firm has delivered impressive returns on invested capital, averaging roughly 25% over the last 10 years. Given its wide moat and high barriers to entry, we believe that Graco is well-positioned to continue outearning its cost of capital and creating value for shareholders.