I first met today's sponsor, Ridgeline in 2019.
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This is business breakdowns.
Business breakdowns is a series of conversations with investors and operators diving deep into a single business.
For each business, we explore its history, its business model, its competitive advantages, and what makes it tick.
We believe every business has lessons and secrets that investors and operators can learn from.
And we are here to bring them to you.
To find more episodes of breakdowns, check out joincollosses.com.
All opinions expressed by hosts and podcast guests are solely their own opinions.
Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
I'm Jesse Pugi and today we're breaking down greco, a leading manufacturer fluid handling equipment and industrial products.
Greco was founded in 1926 and has become a leader in the design and manufacturer of systems used to move, measure, control, dispense, and spray a wide variety of fluids and powders.
You might be familiar with greco's products if you've ever used a paint sprayer, but greco's equipment is used for much more than that.
Their fluid handling systems are used on things such as gluing the soles on shoes, pumping ink onto bills, lubricating heavy machinery, and even coating Doritos with flavored powders.
To break down this $13 billion market cap company, I'm joined by Aaron Wasserman, managing member of third period capital.
We cover greco's market position.
It's huge range of skews and what the future might hold.
Please enjoy this business breakdown of greco.
Today we're talking about a company that's a super interesting business.
I think people are going to find it fascinating, but it's not incredibly well known.
Greco, greco industries.
Why don't we just jump in?
What is greco? What do they do?
What do they sell? Help us understand it at a high level.
So greco is a company I have to admit, I know a little bit better than most because I'm from Minnesota originally.
And so greco is headquartered in Minneapolis.
It was started almost 100 years ago as greco company and essentially fast forward to today.
They make fluid handling equipment.
And so if you think about valuable fluids or corrosive materials, things that need to be moved or monitored, their products would help with that.
So that could be in a manufacturing setting where they are dispensing or monitoring the fluid movement throughout a production line or it could be the movement of the fruit filling that goes into a pop tart that would be administered with a greco pump or it could be a painting contractor would use a spray painter to spray your home or to a line on a road.
So there are several thousands of different skews, but essentially it's all about moving liquid or monitoring liquid that is either valuable or hard to handle.
Who are their example customers?
Let me know your guess from what you just said, but who are some example customers?
So a contractor would go into Home Depot or a show in Williams and say, I need a new paint sprayer.
I could use a paint roller to paint a home.
It would take me two, three days or I could use a paint sprayer and do one to two homes a day.
So that's a productivity solution that that professional would go into short Williams.
There would be two different options to choose from.
There would be the greco higher end paint sprayer that costs $2,500, $3,000.
It tends to be more reliable.
There is higher user loyalty around it.
It breaks down less. It's easily serviceable from the field, et cetera.
Or you could go with a Titan sprayer, which is made by their Chief Competitor in that segment, company called Wagner.
The paint contractor would be a typical example.
But Pepsi or whoever, I think Pepsi makes Doritos, they would in the production of the Doritos chip business use an oil sprayer to spray oil onto a chip that the ingredients of the Dorito would adhere to the chip.
And so that's deep in a production line in a manufacturing facility.
That would be a greco customer as well.
So they have contractor customers, they have industrial customers, and they sort of run the gamut really.
So it's almost like there's a B2B and a B2C division.
How is it organized? Are those two big divisions or are there other divisions?
Essentially you can think of it as for more B2C, which you could be a DIY or going into a home depot, you want to buy a paint sprayer.
You're not necessarily paying for uptime.
You're spray painting, you're finishing your lawn furniture for the season.
You don't want to spend $2,500 for a paint sprayer.
You'll go with the Wagner sprayer.
That's $1,000. But that's a pretty small part of their business.
Home depots about 8% of their revenue, there's more competition in that end.
But at the higher end, where the systems are more complex, and the product could cost tens of thousands of dollars, which goes into an industrial system, like we were talking about with Doritos or Popdarts, that's a real business to business sale.
There's very little competition there for Greco.
It tends to be a more customized solution, harder to manufacture, harder to mass produce.
So that's sort of the trade off.
They will sell into Home Depot.
Price points are a little bit more competitive.
But the manufacturing process is more automated.
So that's where they can get their returns.
Whereas more of the business, really, is industrial customers that have unique solutions, where the Greco expertise is very important, and therefore, it's a high margin sale.
And how big, overall, on revenue and any other numbers or stats that gives someone listening a sense for the scale of the business and the reach?
It's very interesting.
So they sell 70,000 skews.
A lot of these products are in the field.
These technicians have been using these products for decades.
And so if you think about it, the technician buys the system.
It could be a paints-brainer.
It could be a greaser, lubricator, whatever.
And over the lifetime of use of that product, there are aftermarket products.
Because again, the liquid going through these systems is very corrosive.
You can think of paint as liquid sandpaper.
And it really wears down the system.
And so you need these aftermarket parts.
And the stream of that revenue, that aftermarket stream, is about five to six times what the system costs.
And so service is very important.
And the reason I'm saying all of this is because they're catalog of products is very, very large.
But it all rolls up into about 2.2 billion a revenue, which isn't that much.
So these are really niche applications.
They don't have a lot of competition in these niches.
Rose margin for the business has been very stable historically at 51% to 55%.
We can talk about why. The pre-tax margin in the business is about 30%.
And there's very little capex in the business.
And so returns on invested capital, about that 30% range, returns on equity, 35% to 40%.
It's honestly a very beautiful business.
There's very little financial leverage in the business.
So they've been generating those returns really just on the robustness of their live will.
I want to come and talk in much more detail about the PL in a second.
Before we do that, you mentioned it was started 100 years ago.
What have been a handful of the most important milestones and flexion points in the company's history?
So it started with two brothers, Lyle and Russell Gray, who created essentially a better way to lubricate a car in a cold winter in Minnesota.
The grease guns would malfunction.
They would become safety hazards.
And they found a way to cut.
I think it was 20 or 30% of the technicians time and the material out of the lubrication of cars.
As the depression kicked in, as the war occurred, they expanded their products at that core pump technology.
They found uses for it in airplanes, combines, excavators, you name it.
So they really expanded their products then.
I think it was about the 60s or 70s where they really decided to expand geographically and really invest in their distribution.
They now sell from third party distribution in 100 countries.
And that is just an incredibly powerful competitive advantage.
There are a few CEOs that have really left their mark.
George Aristides, I think in the 90s, he really pioneered a very deep ROI mindset at this company.
So measuring not just the return characteristics of an acquisition or a capital expenditure program, but really hiring decisions, new product development spend, it was very measured and he was very concerned that it hit a hurdle rate.
And that ROI mindset is very deep in the company, even to this day.
Dave Roberts was the second CEO in the early 2000s.
He came from the Marmen Group, which is owned by Berkshire Hathaway and he did a wonderful job.
He expanded margins. He took that ROI mindset to the next level.
He left Greco in, I think it was 2007.
And what I think is a little bit of a surprise, he left the CEO role to become CEO and chairman of CarLow companies.
And he has an interesting role a few years later in the Greco story, which we'll come to.
But then taking over from Dave was Pat McAill, who storied CEO, shop rat, started as an entry level technician, worked his way up to become CEO, a number of roles in the company, a tremendous amount of humility, and honestly, evidence of some psychological safety around owning your mistakes.
He made some acquisitions in the oil and gas sector that ended up not working out so well.
They were small, but he was very vocal in public about owning them.
And I think that that getting better mindset, continuous improvement, and just the willingness to make and own your mistakes, is a big part of the culture today.
And finding ways to suggest how to make manufacturing processes better and more robust, which is a key element of the culture today.
It stems from the mindset and the personality that Pat had.
And so I think those are the three characters that really left their mark with the company.
And what's interesting is over the last 30, 40 years, the strategy that business hasn't really changed.
Talk about the competitive landscape or market they exist in, sounds like in some places more competitive than others.
And then what are some of their high level differentiators?
Sounds like culture is one of them, but what are some of the other big differentiators?
At the low end, I keep coming back to paint sprayers.
The competitor there is a company called Wagner.
We don't know much about the financial profile Wagner.
It's a private German company.
What's interesting about Wagner, though, is the price points are lower.
If you talk to the distributors, if you talk to people at Sherwin Williams, I was just in a store the other day in receipt at California.
The store manager is wearing a graco shirt, just like, OK.
But if you talk to him, he'll say, yeah, the graco product is priced at a significant premium.
But the loyalty of the users is much higher.
The quality is better. It breaks down less.
So the end user see a real value.
The ROI to the customer is higher, even at that higher initial price point.
But you'll also hear him say often that graco holds more inventory.
So it doesn't push as much inventory to Sherwin Williams, which is a real benefit for them.
And they can clearly inventory faster.
So the turns on the graco product are higher.
And you can even see this at Home Depot.
You'll see the sales technician from Graco leaving his business card or her business card right in the product display window.
If you have any concerns, any questions, give me a call.
So they just do a better job of canvassing distribution.
They invest in their distribution.
They do that more so than Wagner.
I would say graco spends about 4% of revenue on new product development.
It's competitors spend closer to two, which doesn't sound like a big deal, but consistently over decades that really does add up.
I don't know much about the manufacturing process of Wagner, but graco designs and manufacturers its product in Minneapolis for 90% of their products week.
And so that co-location and that kind of mind share between the two parts of the business, it creates more rapid innovation.
It creates a tighter overlap between how do we solve the customer's problem and how do we implement this into the device?
And my sense is their competitors don't have that.
And the other thing that that creates is a much larger spectrum of products to offer the customer.
So my guess is Graco's product catalog is much wider than that of Wagner.
But look, Wagner's one.
There are a few other small pump companies that are owned by large conglomerates.
We don't have a lot of financial detail.
Back to Berkshire halfway for a second, they bought a business called Scott Betzer or Scott Infetzer.
And that business owns a small pump company called Campbell Hossfield.
And Campbell Warren talked about it in his letters is generating returns on equity close to 100%.
So these tend to be small niche industrial businesses that are very well managed, very well run.
You tend not to see moat attacks, although interestingly, in 2011, Graco tried to buy the liquid finishing and powder coneings business of ITW.
ITW at that time was their largest competitor.
And the FTC actually shut down the deal.
So a few years later, they had to sell the liquid finishing piece of that business, which is the majority of the business, two Carlisle companies.
So back to Dave Roberts, the old CEO, Graco.
And at the outset, you could say, OK, this is fascinating.
Here Carlisle has the ability to replicate a mini-graco.
They have this high quality asset.
It was a high quality asset.
Dave Roberts, plus a few other Graco employees, had left Graco to come to Carlisle.
So you have sort of the masterminds behind the business.
And you have the capital to do it.
And it took them a decade.
I think they tried for a decade.
And then last year, they sold the business at a loss, actually, to private equity.
And it's so fascinating.
Because gosh, you think, hey, here's a wonderful business.
We know it really well. Let's replicate Graco.
And they were not able to do that.
Why? What are your theories?
Is it product? Is it people?
It sounds like they do everything well.
They have high standards or everything.
It's wild. I would love to learn more about this.
But off the bat, the business that Carlisle acquired, this liquid finishing business, started to lose market share.
And so that's odd. We don't exactly know what happened.
But very quickly, Carlisle began making small acquisitions, add-ons to this business.
And that probably wasn't the right time to be making acquisitions.
Concurrently, there were some management changes.
There were at least two management changes.
So they didn't really have their feet under them.
It is possible that they lost goodwill with their distribution.
It is possible that their new product development program wasn't as effective as it should have been.
It seems very clear they shouldn't have been making acquisitions.
I don't know that they did a bad job, but they definitely didn't do the kind of job that Graco was doing in that business.
Meanwhile, Graco took the piece of the business they could keep, which is the powder coatings business.
And they've done very well with it.
One, they have taken market share in that part of the business from some other industrial competitors, namely Nordson and Wagner, actually.
And two, they are now expanding capacity for that business.
So not only did Carlisle really stumble with this, but Graco seems to have been doing quite well.
And actually, they sold their liquid finishing business at a gain.
So Pat calls this a mistake, and I don't exactly know what he means by that, because perhaps it was a distraction, but it wasn't a meaningful distraction.
They actually made money on it.
And by the way, to show you what a mench Pat McAle is, he even donated part of the proceeds of that gain to the Graco Foundation and to the employees.
So just a really high quality person.
Earlier you talked about the PNL.
I want to try to wrap my head around a little bit.
So you said 51% gross margins, pretty stable in time, 38% operating pre-tax margins.
Let's talk about revenue first.
It's 2.2 billion. How has it grown?
And when you're sitting there thinking about how it has grown and will grow, what are the drivers of growth for a business like this?
Yeah. If you look historically, the organic growth profile of the business is around 6% a year.
And that's really composed of 3% industrial production growth, 2% pricing growth, and 1% new products and new initiatives.
And that's really been an organic number.
I would say that partly that's been a function of new product development.
20, 30 years ago, the vitality index of the company used to be 30 or more percent, meaning 30% of the revenue comes from products introduced in the prior three years.
And that has fallen. So it is fair to say that return on new product spend perhaps has gone down over time.
But nonetheless, in that 2% to 3% range.
Rice and Greloff has been about 2% historically.
And that should stick around.
And I think a big reason for that is they are really adding value to their distribution customers.
This is not a stocking channel for Greco.
They are a real time. You put in the order by noon.
It's out the door by the end of the day.
Often about 40% to 50% of the time, it's an aftermarket part that their end user really needs.
And so they're delivering a lot of value.
So their compensation is through that 2% pricing.
In the past, acquisitions have moved the needle more than they have over the last five to 10 years.
I think that that's an opportunity for Greco, hopefully not with large and levered acquisitions.
But I know that Mark, the currency, he has beefed up the corporate development rank.
And hopefully that can be an opportunity of value creation.
You mentioned the Razer Razer Blade model kind of that they have.
What's the revenue makeup of Razer's versus Razer blades in the business?
I think 60% 60% of revenue is new systems or products.
Whereas the accessories business is about 40% of revenue.
When you think of the M&A opportunities as big and sell more new stuff or more repeating stuff and into what channel, how do they think about that strategy?
I think the acquisitions that have worked the best for Greco have been around new capabilities or new application areas for some existing technology.
So in the world of electric cars or semiconductor production, you need certain kinds of bonding, materials or certain types of high quality adhesives or frankly through a production process.
There's a lot of heat that's generated in a production process.
So cooling the plant requires the movement to fluid.
So there are all of these niche applications that may or may not be explored by Greco's existing customer set.
So buying small businesses that have a toehold into this end market have proven to be really helpful for Greco.
I think in 2015 they bought a business that was very tied into semiconductor production.
And I think Mark recently said that that business has grown by 10X since 2015.
So I think by the way, that was also aided by some one or two other valve acquisitions.
But the point is that these niche opportunities can grow really quickly very rapidly.
And I think those are the best forms of acquisitions.
I think of acquisitions as being another form of new product development essentially.
And is there a big universe?
Or do you have a sense for the universe of these potential 10X or acquisitions?
These are small, privately held businesses.
And the fact that Greco has been investing to find them at value to creative levels and hasn't really come up with that much over the last few years, I'm not discouraged by that.
I think these are well-run businesses.
They're not going to trade often.
And that's just fine. Because Greco is deep in that pipeline and they are a preferred buyer.
And most likely they're probably run by founders that will eventually want to turn that business over to Greco.
And this seems like they have an amazing advantage in being able to absorb them.
And then push them through their distribution.
Exactly. Pushing them through distribution, but also infusing a lot of intellectual property with respect to engineering, with respect to production, they are value enhancing buyers.
Probably see some competition from Idex and some of these larger diversified industrial companies.
Although you really have to be canvassing these markets well.
Again, they're niche opportunities.
These are $20, $30, $50 million revenue opportunities.
They're not massive. And so they may just not move the needle for a large buyer.
I see this in other situation.
Constellation software can buy small vertical markets.
Same sort of thing. If you're deep in a small vertical, you're going to know who all those wonderful operators are.
And in the gross margin profile, what are the big cost buckets in the cost of goods for this business?
So it's mostly metal and plastic, because labor is actually a very, very small component of cogs.
I think labor is about seven or eight percent of cogs.
And so it's really around procuring metals, plastics, moldings, that sort of thing.
There's a ton of suppliers for that stuff.
For sure, Greco will benefit from beneficial supply agreements.
And again, because labor is such a small component here, it really does make sense to co-locate the manufacturing in the R&D.
Because if you can accelerate your R&D flywheel, well, you're not missing out that much by having all of your labor in Minneapolis, for example.
Not much familiar with industrial businesses, a seven to eight percent best in class.
Or what does that tell you about the business?
I think it tells you that it's a very well optimized company.
So the other way to look at this is, what's their sales per employee?
And in the latest year, it was about 550,000 of revenue per employee.
That is doubled in the last 15, 20 years.
So they are incredibly efficient.
And I don't know what the typical industrial company would look like, but I wouldn't be surprised if it were a third lower or more.
In between Gross Profit and Operating Profit, it seems best GNA type stuff.
Are there any notable cost pockets there?
Same kind of question. Like is sales as a percentage of revenue much lower?
Are there other signals that it's that very well-run business?
Yep, so we talked earlier about new product development.
So that's about four to five percent of sales.
And that's been very constant for a very long time.
GNA is about seven to eight percent of sales.
There hasn't been much movement in that.
I would say you've seen some leverage on the sales and distribution spend from more accessories, revenue being sold.
You just don't need to invest in that much because you have a captive customer at that point.
So they've been able to leverage that a bit.
So I think 20 years ago that sales and distribution spend was about high teens per cent of revenue.
Today it's closer to low teens.
So it's almost like they've kept this employee or fixed cost base and they've just continued to get more and more out of it every single year.
That's exactly right. And this is a good time to say the reason for that.
And that's very intentional.
The part of the culture of this company is, let's take our fixed cost base, our cost to produce.
And the goal for the manufacturing team and really for the whole company is, let's keep that basket of goods, the cost to produce that, laugh, year over year.
How do we do it? Well, it's so fascinating about this company is their culture is around what kind of suggestions, ideas can we offer to make our own internal systems more productive, more efficient.
You'd say, well, of course, that's part of their culture because they are creating that in a product.
Their product that they sell to customers is a productivity enhancing tool.
And they prove it by instituting that as a core part of their culture.
And so if you think about that to keep your cost to produce flat year over year, that's a really challenging task, especially when the economy is doing what it's doing, metal prices are going to do what they do.
And most of the time, they accomplish it.
And so you see that in the financial model as well.
It feels like the apex for the whole company is productivity, whether it's our product, whether it's the way we show up, whether it's our relationship with our customers.
It is such a beautiful balance of, we can do more stuff in-house, we can do more molding in-house, we can experiment with less expensive metals, we can change the odd of our manufacturing process to balance the line depending on the volumes.
There are so many different ways that they can explore making themselves more efficient.
And that then allows them to develop a product suite that's more and more compelling to their customers.
And it also allows them to invest more in their distribution, which enhances their ability to serve the end user.
For such a mature business, I'm guessing the questions, the answer's no, but do you think about unit economics at all in a business like this?
I think a lot about the customer ROI.
So back to the contractor who can paint two homes now instead of one, you're going to pay a premium for that product, but wow, it allows you to be so much more efficient.
The relationships they have with Pepsi or something, I assume they've had them forever, but every time they put in a new system, that thing just has an amazing return profile for them.
Right, and it's so critical to their production line.
And so, hey, if a pump goes down and the Doritos production line shuts down for a day or two, what kind of gross margin is that customer missing out on?
It's important. I don't know how much that system costs Pepsi, but the Greco-Pump's system within a larger industrial process could cost 100 grand.
That is a small piece of an overall mission-critical production process.
It definitely would not make a whole lot of sense to switch out the pump supplier if you find someone you like, especially one that's servicing your account well, attuned to what kind of customer pain points you may want.
It creates a relationship.
There's a trusted relationship between Greco and its customers.
And I think what that leads to over time is these uncontested growth opportunities where Greco can think of a solution.
And there's a lead time to it.
You don't see it by recorder, but it leads to a lot of stability in their relationship.
They're like the only one in the game.
So when an issue comes, they can be the one to solve it, essentially.
Yeah, I don't see anyone existing player.
Nordson competes well on the industrial part of the business.
I definitely don't see any new entrants.
And when I think about Nordson, again, a great competitor, Greco would say the same of them.
But the key here is how do you stay focused on the flywheel?
And one of the things that I see happening now with Nordson is they're getting into larger acquisitions with leverage that just creates a little bit more uncertainty around their ability to focus.
The way Greco has shown that it can do.
And I think anything that would take Greco's focus off of its core flywheel today is a concern, is a risk.
And we're starting to see that play out a little bit with Nordson.
You've mentioned the flywheel a couple times just to put a fine point on it.
How would you describe the flywheel?
So it starts with a choice to invest more than peers in new product development to create a high quality, highly reliable product that is going to be more reliable over the duration of the service.
So that's a choice. That's number one.
Number two, don't sell it yourself.
Relay on and invest in tens of thousands of distributors in a hundred countries.
And make the intentional choice to let them earn enough margin to be able to serve your end users really well.
Develop a relationship with those distributors and retain them.
That's two. Three is to make your manufacturing process and your R&D lockstep operating at the hip such that they can iterate and design and manufacture with speed and high quality, all of those customer solutions that you think you can sell.
And four, have a corporate culture that's supportive of that flywheel.
And we talked a little bit about it earlier, which is making it important for the company to suggest improvements, to offer ideas to take cost out of the system and to keep that flywheel operating at a fast speed.
The margin profile, so we said 30% call it on 2.2 billion, 600 is $1 million.
And then you mentioned that they're very efficient from a cash conversion.
What's the free cash flow look like and then talk about how or why are they able to be so cash efficient?
The pre-tax earnings and really net income are essentially the same as cash flow.
They've gotten very good at any sort of cyclicality with their cost of goods, like managing inventory and managing the balance sheet around keeping that fairly smooth.
The production facilities to make these products, there are periods where they go through growth cap ex cycles.
And I think over the last three, four years, cap ex has been in the eight, seven percent of revenue range.
Part of that expansion is earmarked towards future sales.
So for example, the power coatings business, they bought in 2011, they haven't expanded capacity of that acquired business, but they're doing it now because they're winning market share from Agner and Nordsson in that business.
So they're rightly going to be expanding capacity there.
But Greco also from time to time will build production facilities and distribution facilities to collapse the existing less efficient footprint into.
And so they tend to see good savings from those types of projects.
But really, there's been a fair bit of automation invested in over the years by the management team.
And so these production facilities are very efficient and the capital requirements just aren't that high.
So maintenance cap ex is two ish percent of revenue, rough justice, two to three percent, and total cap ex is three to four, maybe five percent process.
So they do it their cash then, how do they think about capital allocation?
Most people would look at the Greco balance sheet and say it's over-equitized.
You could put a couple of trends of debt on this thing and pay out big dividends or buy back their shares.
They do buy back their shares.
So I think it was late 80s or maybe late 90s, Greco bought 22% of its stock from the Grey family at about 16 times earnings.
So by the way, the stock has never been that cheap for that long.
And then Dave also bought 5% of the stock also had around 16 times earnings in the mid 2000s.
So they do buy back their stock, one to two percent a year of their stock.
And they'll make small acquisitions here and there, 50 million here, 50 million there.
But for the most part, they pay a regular dividend and they have just let the cash build.
The cash is really important.
In 2011, shortly after the Grey financial crisis, they used their balance sheet to be able to buy ITW's business.
Even that was 20% of the market capital company.
It wasn't huge, but they don't issue equity to do any of their deals.
And I think they would like to buy back more stock, but North of 20 times earnings, they probably aren't as enthusiastic about it.
But they're very thoughtful.
And I think having that cash, it's interesting because some people would say debt focuses you.
I understand that, but I also think that the cash focused is you.
In other words, having that robustness to your business gives you the freedom to be focused.
In Grey goes case, they have been very focused in part because they haven't had to worry about servicing debt.
And so in this case, I'm just fine with it.
At 20 times earnings, how do you think is an investor about what it takes to continue to grow into that valuation or do you get returns to investors at that valuation?
I think the secret is out on Grey Co.
It's a good business, although it's interesting because as an industrial company, every now and then, it will get inexpensive.
So 08, no 9, system sales were down.
Utilization of existing equipment was down.
Revenue was down a lot. The stock traded to 12 times earnings or something like that.
But there's always going to be industrial companies that are cheaper than Grey Co.
As you would expect, because most aren't as high quality as Grey Co.
So I think this tends to be an under-owned company, even though the secret is out.
If you think about what they sell, it's a productivity solution.
So in high wage countries or rising wage countries, which is many products of the world, I would think that demand for their productivity solutions will be there.
And there will always be a desire to explore ways in which you can swap labor for capital.
It's interesting in the US, I was just reading about this.
If you strip out the effects of inflation, real wages, they're up about 50% over the last 60, 70 years.
So you could think about this as global wage rates continue to rise.
There will be demand for these types of products.
And therefore, I think there's no shortage of opportunity for Grey Co.
If they can continue to compound revenue in the six, seven, eight percent range with the help of some acquisitions, they're going to get a few points of margin expansion, honestly, from the pricing gains alone.
If they can use their balance sheet to continue to buy back stock, EPS is growing at least double digits.
That's pretty compelling.
And by the way, for a sleepy little industrial company, they've beaten the S&P over the last 10 years by three points.
So the compounding potential here is not necessarily the opportunity to buy it at 10 times earnings.
But rather, this is a really robust model.
And there are, I think, really an unending amount of solution sales that this company can think of.
What about the opposite?
If in 10 years they underperform what you think, what went wrong?
What are the big risk factors here?
I think there's two risk factors that will have run their course or have become more poignant.
One is their new product development opportunities just have not been productive.
And so their organic revenue growth has fallen much lower than 6% has dried up effectively.
And you could say that, hey, their vitality index, not only is it not 30%, but perhaps it's not even 20% today.
We don't really know. They stopped disclosing it.
And that is something that is worrisome.
I know that Mark has really tried to emphasize new product development.
He's actually of late been quite excited about it.
But they need to continue to be productive from a new product perspective.
Frankly, though, the thing I would worry about more is Greco does a very large acquisition and levers the balance sheet.
And it's not that they can't handle it.
But what it would tell me is the potential for distraction is greater.
And challenge the culture almost.
That's it. When you do something like that, you just lose your robustness.
And it creates more uncertainty in the model.
And investors don't like uncertainty.
So I think that would be the greater and frankly, more likely risk.
There is another risk here, which is that insiders don't really own that much of the stock.
So a diversified industrial company could come along and pay a 46% premium.
And we're done. It rolls into some larger company and it loses the magic.
I don't know that people would consider that a bear case.
But if you're thinking about this business, that would kill it.
I know Aaron, your fund, one of the things is not only great businesses, but businesses that have a mindset, a cultural orientation that you admire or the people are doing good stuff.
Can you talk briefly just about that in this business?
I think what attracted me to the Greco culture is not necessarily that they do well by their employees and their communities, although they do.
It's how appropriate the culture is for their actual business.
So Pat McKayle once said, the only real safe zone at Greco is the one you create for yourself through good performance.
And that daily drum beat for the individual, as well as within the larger group, is an intense drum beat.
But one that strikes me as very appropriate for this specific kind of business.
And so I like that overlap.
The alignment. Yeah. The alignment is really what's very important.
And I think that alignment and the focus is what allows the balance here to work.
It's just so rare to find these drum beat and just real businesses that can stay the way they are even as they grow larger.
They're getting the right things right.
It sounds like. Exactly.
It's the balance and the focus.
I think that that's the key here.
And Carlisle, when it thought it struck old with this acquisition, they're buying the sweetheart Greco like business.
And let's recreate the magic.
They showed you that the balance wasn't there.
I can't tell you exactly why it was off.
But when the balance isn't there, it's obvious.
When the balance is there, you want to keep the balance strong.
As we wrap your question to Ozaz, lessons for investors, lessons for builders, let's just take them one at a time.
So when you think of the Greco story, what's the number one lesson for investors out there?
Yeah, I think the number one lesson is to stay focused on what you know.
We often come across companies that we lose focus of, because they aren't as compelling as they used to be.
Their multiple has run up or whatever.
And we lose sight of them.
We drift from them. But that's really the work, just to figure out is this a cyclical or earnings down because of, oh, eight, no, nine, or has there been a fundamental change to the flywheel?
But I think the lesson is, stay close to what you know so that you can seize these opportunities to buy these great businesses.
That's the lesson, I think, for the investors.
For the operators, I would say, hey, try to build that flywheel, try to build that balance, try not to be tempted by the next shiny thing, try not to be tempted by acquisitions, slow your corporate hiring programs to keep your culture really strong.
One of the things we didn't say about Greco is that they have a worker trial program where new workers come in and they're really assessed by the rest of the manufacturing group to see if there's that cultural alignment and fit.
I think it would have been really wonderful for a lot of companies to have slowed their hiring over the past several years to see that there's a fit because speed creates uncertainty in a lot of different businesses.
So I think creating that balance in the robustness through the pace at which you make these decisions is very important.
So that would be a lesson for operators.
I love it. Well, Aaron, thanks for sharing the Greco's story with us.
I think this is not one I think a lot of people have heard of, but is a perfect fit for business breakdowns and the investor story.
Thanks for coming on. Thank you very much, Jesse.
Thanks for having me. To find more episodes of breakdowns, ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out joinkolasis.com.
That's J-O-I-N-C-O-L-O-S-S-U-S dot com.
