Tag: US Market

The company differentiates itself by manufacturing specialized products that handle difficult-to-move liquids, often used for niche applications where competition is limited. 

 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 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 because of 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.

Demand Remains Strong but Supply Chain Issues Pressure Graco’s Third-Quarter Margins

Margins were adversely affected by supply chain interruptions and cost inflation, especially in the contractor segment. 

Graco’s third-quarter sales were up 9% year over year. While demand remains robust, supply chain constraints persist and continue to pressure margins for the remainder of the year. Graco’s third-quarter gross margins compressed 110 basis points year over year due to higher product costs, including material, labor, and freight. Graco implements price increases on an annual basis, so cost inflation will likely remain a headwind in the fourth quarter. However, Graco, affords the firm strong pricing power because of customer switching costs and intangible assets .

Financial Strength

Graco maintains a healthy balance sheet. The company ended 2020 with $150 million in long-term debt while holding approximately $379 million in cash and equivalents. Debt maturities are reasonably well laddered over the next few years, with no major payments due in 2021, and we believe the firm is adequately capitalized to meet its debt obligations and maintain its dividend. Management has indicated that it will prioritize organic growth, M&A opportunities, and increasing the dividend while allocating excess capital to opportunistic share repurchases. 

Bulls Say

• Graco has a large installed base and leading market share across a wide range of niche products.
• Graco has a healthy level of recurring revenue, generating roughly 40% of its sales from aftermarket parts and accessories, which reduces the volatility of its earnings from cyclical end markets. 
• The company generates strong free cash flows, averaging around 17% of revenue over the last decade.

Company Profile

Graco manufactures equipment used for managing fluids, coatings, and adhesives, specializing in difficult-to-handle materials. Graco’s business is organized into three segments: industrial, process, and contractor. The Minnesota-based firm serves a wide range of end markets, including industrial, automotive, and construction, and its broad array of products include pumps, valves, meters, sprayers, and equipment used to apply coatings, sealants, and adhesives. The firm generated roughly $1.7 billion in sales and $410 million in operating income in 2020.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

The global cruise market has historically been underpenetrated, offering long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing tactics. 

However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers slowly resume cruising after a year-plus no-sail halt, cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. On the yield side, Carnival is expected to see some pricing pressure as future cruise credits are redeemed in the year ahead, a headwind partially mitigated by a measured return of capacity. And on the cost side, higher spend to implement tighter cleanliness and health protocols could initially inflate spending. Aggravating profits will be the fact that the entire fleet will likely have staggered reintroductions, crimping profitability over the 2021-22 time frame, ceding scale benefits. For reference, as COVID-19 continues to wane, 61% of capacity (50 ships) is expected to be deployed by November.

Financial Strength:

The fair value of Carnival is USD 26.50 which has been raised by the analysts from USD 25 with a view that more than half the fleet (50 ships, 61% capacity) is expected to be deployed by the end of fiscal 2021, giving the better visibility on the return to profitability.

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $7.8 billion in cash and investments at the end of August 2021. This should cover the company’s cash burn rate over the ramp-up, which is set to increase from the roughly $500 million per month experienced in the first half of 2021 as ship start-up costs arise. Carnival has raised $5.9 billion in debt, $1 billion in equity, and has repriced its $2.8 billion term loan (2025), bolstering financial flexibility. Additionally, Carnival eliminated its dividend ($1.4 billion in 2019), freeing up cash to support operating expense. An additional $3 billion in current customer deposits were on the balance sheet. The company has renegotiated much of its debt, with less than $4.5 billion in short term and current maturities of long term debt coming due over the next year versus $30 billion in total debt.

Bulls Say:

• As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed. 
• A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume. 
• The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Profile:

Carnival is the largest global cruise company, set to deploy 50 ships on the seas by the end of fiscal 2021 as the COVID-19 pandemic wanes. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.