Are Investors Missing the Opportunity in Industrials?


Industrial companies don’t have the sexiest stocks, but they can offer investors strong moats. Nick Santhanam is the CEO of the Fernweh Group and a co-author of the new book The Titanium Economy: How Industrial Technology Can Create a Better, Faster, Stronger America.

Motley Fool producer Ricky Mulvey caught up with Santhanam to talk about topics including:

  • Why investors often misunderstand the industrial sector.
  • How companies are using 3D printing and blockchain technology.
  • Why family-run companies have key advantages for long-term investors.
  • The biggest challenge for companies in the “titanium economy.”

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 30, 2022.

Nick Santhanam: Really, it is finding out companies with the point you made with very strong moats. Right, where they have a very good operational performance. They have a very good management team. They have a very good product line. You’ll identify the next HEICO, you’ll identify the next Bracco, you’ll identify the next Trex. The beautiful part is, you’re not looking for a needle in a haystack, you’re really shooting fish in a barrel, which means you look, you’re going to find.

Chris Hill: I’m Chris Hill and that’s Nick Santhanam. He’s the CEO of the Fernweh Group and co-author of the brand new book, The Titanium Economy: How industrial technology can create a better, faster, stronger America. Ricky Mulvey caught up with Santhanam to dig into some under the radar manufacturing companies and talk about why family run businesses have key advantages for long-term investors. 

Ricky Mulvey: You start the book with a heater. You’re saying this sector is underappreciated, undervalued, disrespected by investors. Actually, I’m not even going to read the quote from the book because those are the themes. Talk to me about why you believe that it’s those three things.

Nick Santhanam: You know, Ricky, if you ask one line to describe the industrial sector, it’s exactly what you just said. Misunderstood, undervalued, underappreciate. Let’s start with why is it misunderstood. First of all, when people talk about industrials, people talk as if it’s one mono, let one big sector. In reality, it’s 90 plus what we call micro-verticals. Think of it as Amazon rainforest on one end, the Sahara desert on the other. Which one are we talking about? The second actually very related to that. Whenever you talk about industrials, most people and not all of them will have a rueful past, oh it was a great sector, the ’50s was wonderful. It was a sector which was lost, stolen, given away. The reality is none of that is true, it is actually we are on the beginning of a great innings. We’re on the first innings, the best things are yet to come. Let’s start with that.

It’s completely misunderstood. Now then let’s talk about undervalued. You know this way better than I do, Ricky, when people talk about companies, that is all about multiples, how quickly do multiples expand. That drives total return to shareholder value. If you look at all sectors across an S&P 500, industrials is a one sector where you saw pure value creation because margin expanded. Not because the multiples expanded versus every other tech company or consumer company, the multiples expanded. As Tina Turner used to say, I work hard for my money or she works hard for our money.

This is a sector which has worked hard for the money compared to a tech or a consumer or a SaaS or pick any one of those where most of the value creation came because of multiple expansion. Then let’s talk about unappreciated. I think the best line to say is, when the party is happening in the penthouse, this is a sector which is in the basement, or put it differently, a lot of innovations you and I see around today, are happening because of the industrial sector. Yet the credit goes to somebody else. People talk about it, people think about it. When you look at it, you say, wow, this is an amazing sector which is a diamond in the rough. It’s not even a diamond in the rough, it is a diamond, and yet very few people know about it, very few people talk about it. I would probably go even that further to say it doesn’t get the respect it deserves to get.

Ricky Mulvey: I can understand why there’s a couple of reasons. One of which is that, as you point out in the book, the founders needs to be a little bit more forward about telling their story, and then there is an immediate angle. If I’m looking at stories to talk about on the podcast, it’s a lot more fun to talk about Netflix than a Fluid Handling Company putting gels and capsules.

Nick Santhanam: Absolutely Ricky, my kids are grown up, but when my son was young, he once came to me and said, “Dad, why don’t you work for a cool company?” I said, why do you say that? He said, “I talk to people and we’re here in Silicon Valley and they talk about [Alphabet‘s] Google and Amazon and Apple. They are all cool companies. You talk about companies like Welbilt and AZZ and JBT.” Because he used to eavesdrop me when I used to pick them up from school, and he’s like, none of those companies are cool. How can it be cool you were working for a company which makes an oven for a commercial kitchen? How is it cool that you’re working for a company which is making these airports ducts? For a five-year-old kid it was not cool. I can tell you, Ricky I’m pretty sure you probably don’t consider it cool either, but they are the bedrock of what we do and everything we touch.

Ricky Mulvey: It’s very cool. I’ve also learned that what I think is cool isn’t necessarily where I want to put my money.

Nick Santhanam: Good point.

Ricky Mulvey: I want to start with some trends. Titanium economy, we are talking about more advanced manufacturing. One of the trends you highlighted earlier in the book is 3D printing. This was one of those, especially for investors like a few years ago, 3D printing was all the rage. Long-time Fool, Mac Greer, one of my colleagues would say is, we’re going to print out a pencil in your house and there was a ton of investor interest in it. Now I don’t hear a lot of investors talking about 3D printing, but in your book, you highlight this as a major trend for manufacturers moving forward. What is it about 3D printing that’s got you excited?

Nick Santhanam: Look, it’s like everything when you talk at a high level. On average, it is very easy to mistake or miss the nuances, Ricky. So you’re absolutely right. Four, five years or even maybe 10 years ago when 3D printing came out. It’s exactly what people’s oh I can print out my pencil and I can print out my toothbrush. The reality is, you don’t have to and it creates no value. What ends up happening is all that hype you started out. People said I’m not going to spend pick a number, $100,000 or $10,000 to buy a machine to print out by toothbrush when I can go to the Safeway and pick it up for a dollar. But you know what we talk about 3D printing in our book is 3D printing is very helpful when you’re dealing with a lot of complex parts, onesies-twosies, a big supply chain issue.

What you saw in the last couple of years during COVID, what you’ve found is you are building a million-dollar part or build a million-dollar component and you couldn’t ship it out because you are missing a 0.30 part. In that case is because you’re waiting for it to come from somewhere, the logistics lead time was 12 weeks or 16 weeks. Then you said, look, if I could make the studies in part because I need only one of them, but I needed to fill in a million-dollar order, then it becomes important. The context matters, Ricky, and I think in that context, we do believe as supply chain becomes complicated, convoluted as lead times become different. Where you have high complexity low volume mix, 3D printing is going to become important or it has already is pretty important.

Ricky Mulvey: That would be for a company like you highlight HEICO, which is making these parts for airlines or these airline interiors where you need to be able to have a metal or casing installation that can withstand extraordinary heat, cold, that thing. You need to specifically format for these airplanes that even across a Boeing line of 747s are going to be extraordinarily different in how they fit.

Nick Santhanam: Bingo, you hit the nail on the head and you want a different material, you want a different composite, you don’t want to stand in material. But you want a material which is slightly different, has an extra 0.1 percent carbon and 8.1 explicit into Itanium. You can really think of it a customized to what you want Ricky. That’s where 3D printing place at all.

Ricky Mulvey: Let’s talk about another trend, blockchain, which I’m not getting into crypto, but I’m starting to think that the biggest use case now for blockchain across company in the titanium economy, is for supply chains. You have a company like Sealed Air, which is a packaging company, and they’re using blockchains to track the chain of custody in terms of where the supplies, materials are coming from. When you’re looking at these companies and you’re looking at trends, is that ultimately the biggest use case for blockchain technology is just monitoring supply chains?

Nick Santhanam: Ricky, when people talk about blockchain, immediately within three milliseconds, people start talking about crypto, and then three milliseconds, they start talking about Bitcoin. You hit the nail on the head. Look, I am the last guy to talk about fintech and crypto and Bitcoin, so let’s take that up. But you hit the nail on the head. Blockchain at the end of the day is very simple de-centralized ledger. I don t know you, you don’t know me, and you and I need to do a deal where we can get it based on trust. Not trust because I know you and I say, OK, I can after you and I can sue you, but it’s like a transaction which is seamless, which is quick, and can happen very quickly.

Blockchain is going to take off or will start taking off Ricky, in areas where you have a high-value item. Like when you and I are buying something where it’s a very high value, very high fidelity of data matters. You really want to know that this supplier is real, there’s not a fake product. I put it into my supply chain, I get messed up. Third is, it should really cost me less. If I have to deal with a third party, and the third-party is going to charge me three percent put money into escrow and lead time. In applications like that Ricky, blockchain is absolutely going to play a role in supply chain. It’s a matter of when it’s not a matter of if.

Ricky Mulvey: Let’s say I’m using a raw material to buy these steel from an airline parts, or I’m buying a specialized component. In other cases, money would go in escrow before the part was shipped to me. But in this case with blockchain, you can just see where it is, so you don’t have that escrow waiting transaction.

Nick Santhanam: Bingo. You reduce interaction time and you reduce interaction cost.

Ricky Mulvey: In your book you talk about micro-verticals. I’m not taking a leap here. A micro-vertical is pretty much a moat. I want to talk about some of the moats and micro-verticals that these companies have created because it’s very specialized areas where these companies have really carved out a niche for themselves. What I’m particularly interested in is the Brady Corporation, its ticker, BRC. They’re making specialized labels and you highlight how in World War II they were essentially differentiating electric wires on boats. That they’ve got these fancy pants labels where you’ve got embedded holograms for hospitals, there’s pharmaceutical companies using them to differentiate different medicines. As you’ve studied this company, how did the Brady Corporation really carve out this micro-vertical, this moat in label making?

Nick Santhanam: I think you actually gave me the answer. You gave the answer to the audience on this Ricky. Be really focused on the micro-vertical. When you look at Brady Corp and they started, they had been around for a long time. They said, what are we good at? When they were good at this, they did a bunch of stuff and when you start doing a bunch of stuff, you get bit fragmented. But then they started saying no, no, no let’s really go back to our roots. Let’s focus at what we’re good at. You hit the nail on the head there. Good at identification. I mean, if you put it in a broad bucket, which is if you’re in the hospital a newborn baby, obviously it’s very important for the mother and the parents to know where the babies are. You want to track and the hospital needs to know.

They said look, we’re going to get that technology and we’re going to get the technology, right We’re really going to be the best at what we do. By doing that, they didn’t focus on anything else, they didn’t focus on making adhesive guns like Graco, they didn’t focus on making aircraft parts like HEICO, they did not focus on this management like Acela. They focused on their specification; a market they knew the with a product they had, with an application they understood better. By doing that very quickly, what you find, and this is the best part about a micro-vertical, Ricky, is you’re very good at what you do and bluntly, you’re very bad at the stuff you don’t do and that’s OK. If you look at each one.

I mean, Brady Corp is a great example. HEICO is a great example, AZZ is a great example. We talk about this in the book. Everybody does one thing and that market is good enough. I mean, you don’t have to be like I have to do A and B and I’ll find three and seven. Wait a minute, those are not even same language, same things, you don’t have to put them together. The one thing you do, you do it very well and when you do very well, you understand the customer better, you understand the applications better, you really have a great product and a great solution. When you do that, you know, everybody wins at the end. You make a lot of money, your employees make a lot of money, and it’s a win-win.

Ricky Mulvey: Are these companies creating a mode than with just the amount of time they’ve spent in the market where they have the institutional knowledge built up that you can’t really have a competitor come in. In the case of the Brady Corp, say, you know what? We’re going to be able to quickly make a cheaper identification tag for newborns in the hospital because I’m a dummy, for me it seems like you could get a bracelet and a QR code and that would be good enough.

Nick Santhanam: You just hit the nail again on the head. Good enough. But now if you’re a mom and you’ve given birth your baby and I’ll say, “Look, I can put a label which will make sure that you get your baby or it’s a good enough.” Which one are you going to choose? You’re going to be like.

Ricky Mulvey: World class.

Nick Santhanam: That’s where it makes a difference, Ricky. I mean, seriously, can you do a product which is good enough? Of course. But in a lot of this industrial applications, unfortunately, good enough is not good enough.

Ricky Mulvey: Speaking of specific measurements, let’s talk about Graco because this is one way that I found an interesting division, if you will, where you just talked about where you need to be able to do one thing extraordinarily well. Graco, which is a fluid control system so essentially they make sure you get the right amount of peanut butter in a package. I think pharmaceuticals companies also used them to put the right amount of, let’s say gel in a medicine capsule. Is this a company though that might struggle from too much differentiation because essentially, the founder told you when you were writing the book that they have to be an inch deep, mile wide in terms of being able to build these vastly different machines that don’t have a ton of connection to each other and it’s a lot of onesies and twosies because the same machine that’s doing, let’s say peanut butter filling, is going to be significantly different from the machine that’s doing the gel capsule filling.

Nick Santhanam: In this case, Ricky, you have to go back. What is their capabilities. They are very good at fluid handling. Fluid handling can be, as you said, putting peanut butter in a jar or can be putting a grease into engine at -30 degrees if you’re in Minneapolis. It’s a fluid is a fluid. I would actually say what they have done, Mark Sheahan is the CEO of Graco, he’s done an amazing job in steering the company along the right vectors. He used to be the CFO before. What you find is he really understands what matters to the customer. This again goes back to the mode. He says, Ricky, I really don’t care what industry you are in, but I know you as a customer care about this or have this pain point, let me go solve this pain point. That is what makes him great. Hat’s what makes a company great. I mean, as you probably know, way better than I do. Look at their multiples, look at their performance has been phenomenal. Again, fortunately or unfortunately not a lot of general investor would know Graco, but they’re probably one of the best performing stock out there and they’ve done very well over the years, both on multiples and economic value and terms like that.

Ricky Mulvey: Any other micro-verticals you want to talk about. I know you mentioned AZZ. We can talk about Casella Waste Systems.

Nick Santhanam: This is the beauty of it, Ricky, there are 90 micro-verticals and every one of them are beautiful. No, I’m serious. Like Casella is a great example of base management. You talk about it in the book. They were on the verge of going bankrupt, they turned around, they’re one of the best-performing stock. John Casella, who is the CEO. I mean, his story is a story of a true, what I call only made in America story. AZZ, they are a company in Fort Worth. Amazing story of where they’re the leaders in hot-dip galvanization, which is a protection against corrosion. Tom Ferguson, who’s the CEO, made a very good comment. He said, “Nick, corrosion is 24/7 and we are 24/7.” I mean, that’s an example of they do it. We can go list electrical infrastructure. I mean, we as fund, we have invested in this company which we spun out of AZZ, or they are still 40 percent owner, we are 60 percent owner.

Electrical infrastructure grid, making enclosures and switch gears. If you’re in utility and given all the power issues we have been having, I think you’d be the first guy to say, look, I don’t want my grid to go down, you make a product. The list goes on and what we find about each one of these micro-vertical, Ricky, is they are critical for what we as a country in an economy is needed and they do a great job. They are the unsung heroes, but they do a great job. By doing this, they create great economic value not only for their investors, which is fantastic, which is the focus for this show, but even for their employees. I mean, you’ll find that a lot of employees who after working there for 20-30 years, end up with a million-dollar 401K and leave, which I don’t think you can say that it’s true in a lot of other sectors.

Ricky Mulvey: We can absolutely talk about employees and community and that sort of thing because the major challenge that you highlight is for a lot of these companies is they’re offering, in a lot of cases, well-paying jobs, well-paying middle-class jobs, and yet talent retention is across the board, the talent attraction, I should say, finding people to take these jobs is the number one problem for every single one of these companies.

Nick Santhanam: Ricky, you got to the second point which I wanted to make. When we wrote this book, as I said, we really wanted to tell the story because we really wanted to sell to two of our biggest suppliers; suppliers of labor and suppliers of capital. What you’ll find in this industry is talent retention is not an issue. When people come in, they understand in every one of these companies, we talked to folks who had worked with the company for 20, 30, 35, 40 years. Unlike tech sector or Silicon Valley where I am, retention is an issue, talent retention is not an issue. Talent attraction is absolutely an issue because people just don’t know what an amazing sector this is and what a great career and life you can have. Let me just give you one statistic. An average manufacturing job pays $63,000 a year. An average service job pays $30,000 a year. Two, in 460 counties in this country, industrial jobs or manufacturing jobs account for more than 20 percent of the jobs. This is not a fringe thing. It’s not like, oh, John, I’m going to be really doomed to not have a future. Getting that message out is going to be absolutely critical because I strongly believe once we get the talent attraction, you’re going to have a domino effect. You’re going to have the multiplier effect happen.

Ricky Mulvey: I’m walking by a school close to my neighbourhood and it says, basically, college-ready kids, and it’s every day you have this banner up for these kids walking in to say you need to go to college. I think one of the major problems that we haven’t discussed here, but you discussed on The Titanium Economy is that there aren’t a lot of other options for kids and people in high school outside of college to learn skilled trades like there are in other countries.

Nick Santhanam: Look, I’m not saying, if you want to go to college, you’re absolutely shit. But I think it’s also important to get the message out like that’s not the only path. Today if you see, there are lot of trade schools and conventional schools, complication schools, community things where you can go learn trade skills, whether being an electrician, a plumber, a roofer, or a builder. Which is a great skill which this country desperately needs where there’s a huge gap and it is very high pay. In the companies we profiled, I don’t remember the exact number, but there were multiple folks who didn’t go to college and have done very well for themselves and moved up the career and were EVP of operations, EVP of supply chain, EVP of Marketing, and even CEOs. This is again, what we wanted to say is look, you want to go to college, absolutely do it, that’s a great thing. You don’t want to college, it’s not the end of the world, there is a lot of great job opportunities in trade, they can do very well for both for yourself and for the community you are in which ends up being a great thing.

Ricky Mulvey: One advantage you highlight for a lot of these companies is that they are family owned, like Casella Waste Systems. One might think, I’m guilty, honest, I’m biased toward this because I watch succession, have you seen that on HBO? Yeah, that’s a family owned business and that’s why I think that would be a disadvantage for a lot of these companies is because then you have businesses managing family dynamics. There’s infighting, you could have a cousin who comes in, skips his or her way to a leadership role and yet in your book, you’re claiming that family owned business for a lot of these titanium economy companies is an advantage, so what got you to that?

Nick Santhanam: Two things, you bring up a very good point. We can be just positive, we should also highlight the deficiencies or negative. To your point, I would say a lot of these companies, like Casella’s publicly traded. It is standard by the founder, he is still the CEO, there are two brothers. I’m going to go with the plastic, they know the company, it is their idea, they make decisions fast. Nothing against Corporate America, but if you just look around, Ricky, think about how many companies have just been destroyed, had been run to the ground because, I don’t know, I just made my job and nobody can make a decision and everybody watches it like a freight train in slow motion of freight train accidents, slow motion and yet two years goes by, three years goes by in the company dies and you’re like, I knew it and you are like why didn’t anybody do anything about it? It’s like, well, it’s not my job and I think having a strong leader, and I want to be very careful, not a founder, having a strong leader who can make decisions makes a big difference.

Companies which are founder started or founder-driven, that makes a big difference. That’s your advantage. But to your point about watching HBO succession, you’re absolutely right. In a family owned company, what can happen is nepotism can kick in. That has happened, but also, I’ll tell you on the bright side, we can’t really talk to a lot of these family owned companies, they are the first one to admit. My son or my daughter or my cousin is not the right guy to take over this company. I want to professionalize my company and they’re very open. I think it is awareness, Ricky, that’s what I think makes a difference. I mean, by no means are they perfect and obviously, a lot of companies go down the trap. But what we found is an industrial space. You had generation, regeneration for running a company and for me that gave me hope that these guys have found a formula, at least to avoid the debt trap. I’m not saying they’re going to do it forever, I don’t have the secret formula, but at least they found a way to continue it and having the dismissive leader has made a big difference.

Ricky Mulvey: Well, I guess to your point, that’s the biggest thing is that these companies are able to think of in terms of generations rather than quarters and that would be if you’re a long-term investor. That’s the advantage of some of these family run businesses. You got a little bit of criticism for the book that I want to give you a chance to respond to and I think you’re smiling, I think you know what I might be talking about as Jeffrey Cains Wall Street Journal review. “The authors write that the Chinese government is dedicated to taking the lead by providing state funds for critical industries, but they never mentioned that the country which imports more chips than ever remains generations behind the American semiconductor industry and it’s far from its vision of self-sufficiency.” Two parts to that question is China generations behind America in the semiconductor war and what say you to Mr. Cain?

Nick Santhanam: Look, ocean on an average is four feet deep and both of us know it’s wrong. I mean, it’s neither four feet deep, I mean, there’s shallow beaches and there’s a minor trench. I think Cain is right in that criticism. Let me start with that. China is behind, but you got to be careful and say, what are you behind on? This is what I love about our industrial sector, they are behind on the manufacturing equipment side. If you look companies like Applied Materials, Lam Research, KLA, TenCore, they are here in the US you really don’t have an analogy in China, check.

But then when you look at the actual chip manufacturing itself and again, I don’t want to get into the political discussion because unfortunately or fortunately, I know very little about politics, but if you see what is currently happening in the sanctions being put on so on, you’re actually saying, hey, look, you can’t chip-making equipment. We’re going to control that, but there is already semiconductor manufacturing companies out there like YMTC, Yangtze memory chip company. I wouldn’t say there are generations behind. You might be a generation behind. Then to his point, you’re absolutely right, the question is whether they are one generation behind or three generations behind is a good question, but the question is, can they catch up to us and if you want to maintain your technology lead, what are we going to do about it? I think that’s what we talk about the book is, we really need to be not looking backwards, but looking forward and saying how do we continue to maintain our lead on this?

Ricky Mulvey: I don’t want to just end with someone in the Wall Street Journal criticizing your book. Let’s end on a bit more of an optimistic note. You write that one of your points is that you think American can be a place where you have 1,000 Teslas. How can investors identify these companies? How can they find companies with good-quality revenue in these skilled niches? Why do you think we can ultimately see America build 1,000 Teslas because that’s a lot of trillion-dollar companies?

Nick Santhanam: Let me start with the second point you’re making with the good news. There might not be thousand Teslas and market gap, but there are thousand Teslas already with great products, great customer satisfaction, filling in a niche. The good news is they’re out there, you just have to look. Now how do you identify? I think this is the best part in the industrial sector, unlike the tech sector where you need to place a bet, you play if it was a $71 or $81 million, you bet on Microsoft you want if you didn’t bet on or whatever, you bet on article, you won a bet on Sybase you lost. In the industrial space a good thing is if this is a sector of live and let live. There are a lot of companies and as we’ve talked about in the book, there are more than 35 companies, we profile there more than 55 companies we looked at.

There were multiple companies which has done better than S&P 500, which has done better than thanks, so as an investor guess what? The proof is in the pudding, they’ve already done it. This is what the sectors have to do a great job, it’s a two-way street, I think that companies have to do the job communicating, getting to the investor, letting them know what they’re good at. But I think as an investor, really, it is finding out companies with the point you made with very strong moats, where they have a very good operational performance, they have a very good management team, they have a very good product line and you’ll identify the next HEICO, you’ll identify the next Graco, you’ll identify the next Trex. The beautiful part is, you’re not looking for a needle-in-a-haystack, you’re really shooting fish in a barrel, which means you look, you’re going to find.

Ricky Mulvey: We didn’t have time for Trex anyway. Nick Santhanam, he is the co-author of the titanium economy, how industrial technology can create a better, faster, stronger America. Thank you so much for spending some time with the Fools, I really enjoyed the conversation and I think your book is a great resource for investors looking to find some ideas in the industrial sector.

Nick Santhanam: Thank you Ricky, you thank you for having us really appreciate it.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don’t buy yourselves stocks based solely on what you hear. I’m Chris Hill, thanks for listening, we’ll see you tomorrow.



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Are Investors Missing the Opportunity in Industrials?

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