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Finding gems in Ohio
In Ohio, the blend of hard work, good business sense, independent thinking and the ability to take risks when appropriate, has delivered a group of companies that are well worth stopping for.
We don’t target short-term gains at the expense of long-term value. Instead, we focus on what’s the right thing to do1.
It’s a common ethos employed by companies in the US Midwest. Don’t cut corners, focus on the long run, do the right thing. We see it frequently on our travels from Ohio to Missouri. Also prevalent is the drive to constantly improve processes, systems, goods services as this is a region built on engineering excellence. Ohio, the “Heart of it All” is within a one-day drive of 50% of North America’s population and 70% of its manufacturing capacity.2
The Midwest is known for is its Germanic heritage. Germans were among the first settlers as they moved westwards from Pennsylvania. This heritage shows up in a love of cheese, the second largest Oktoberfest in the world and a reputation for a strong work ethic. Germany is also known for the mittelstand, small and medium sized businesses which are at the heart of the German economy and often providing engineering excellence. It’s this combination of location and heritage that has produced some excellent companies which have built success by dominating niches and delivering much needed goods and services over decades. While the markets remain obsessed by Artificial Intelligence and semiconductor companies, it’s worth reflecting on the successful businesses throughout the economy that enjoy dominant positions.
Nestled on the border of Ohio and Kentucky is Cincinnati, home of Cintas. Cintas was founded in 1929 by Doc and Amelia Farmer after the circus they were performing in was closed down during the Great Depression. They started collecting rags, washing them and selling them back to local businesses.
In the century since those humble beginnings, the family focussed on doing the right thing, exceeding expectations of customers, and “positive discontent”, or what has become known as continuous improvement. But they also focussed on the long term and the need for company evolution. They expanded into similar adjacencies along the service route. Companies not only needed clean uniforms, but first aid kits replenished, janitorial supplies, kitchen supplies, washrooms re-stocking, fire alarms, extinguishers, training, and the list goes on. Cintas operates within highly profitable niches, with recurring loyal customers (97% customer retention rate)3 and has the capability to build a national footprint. With almost $10 billion in annual revenue producing mid-to-high-teen free cash flow margins, it now stands with a market capitalisation of over $70bn.4
With only 6 CEOs in the last 100 years, they have been able to focus on long-term growth and are by no means finished. Cintas has 1 million customers already but estimate that there are 15 million more businesses in North America, needing something that they offer.5
90 minutes north along I-71 is the Ohio state capital of Columbus, named a “hidden gem in plain sight” by Forbes magazine6 and the home of Advanced Drainage Systems (ADS) with a market capitalisation of $12bn4.
ADS designs, manufactures, and sells innovative stormwater management systems. Its pipes are made from high density plastics, which makes them lighter to transport and easier, cheaper and safer to install than the incumbent technology, concrete pipes. They are also made from 60% recycled plastics, making ADS the second largest recycler of plastics in North America.
From its base in Ohio, ADS has expanded to be the preferred stormwater solution in key northern states such as New York and is making inroads into large southern states such as Florida and Texas. These states are expected to bear the brunt of more extreme weather driven by the changing climate; therefore the installation of stormwater management systems is of vital importance. As well as being recognised as one of America’s Most Responsible Companies in 20247, it has also grown its earnings by 40% per annum over the last 5 years4. Impressive growth rates for a company a long way from software or computer chips .
Continuing northeast on I-71 is Cleveland, on the shores of Lake Erie. Contrasting with the south-western cities of Ohio, Cleveland has a definite New England feel, with a legacy of economic development driven by ethnic immigrant cultures and a long history as an American manufacturing centre. This is evident in two of the companies that call Cleveland home, Nordson and Lincoln Electric.
Nordson is an innovative precision technology company that can trace its roots back to 1909 and the emerging automotive industry. Today, with a market capitalisation of over $13bn4, it designs and manufacturers machines that dispense fluids such as adhesives and coatings; machines that are used across over 30 major industries8. Its products are designed to solve problems for its customers from cereal packaging to life saving medical procedures as well as electronics, renewable energy, and electric vehicles.
At Nordson, helping their customers solve difficult problems is a profitable business. It has Gross Profit Margins of 55% and EBIT Margins of 26%, maintained year on year thanks to innovation funded by strong underlying cashflows which see free cash flow margins into the 20 percents9. Nordson recently acquired an Italian company10 that specialises in precision agriculture, an area that will become increasingly important in the future due to the need to increase food production while using less water, fertilizer and pesticides.
Lincoln Electric is the world’s leading maker of welding equipment with a market capitalisation of $10.5bn4. It was founded by John Lincoln in 1895 with an investment of $20011. Over 125 years later it has a market capitalisation of over $10 billion and its loyal following has even encouraged a merchandise shop to capitalise on the strong brand recognition of its red and black logo.
Over that time, it has never stopped innovating to meet the needs of customers, and that remains true today. With a lack of skilled welders becoming a growing issue for customers, Lincoln Electric is building out their range of Automation solutions. These robotic welding systems, robotic laser systems, automated cutting systems and Cobots (collaborative robots) are designed to complement the skills of human welders. With plenty of product applications in growth areas such as wind turbines and electric vehicle chargers, the company has more than doubled free cash flow since 20184, and we believe it is well positioned to grow into the next decade if not the next 125 years.
As well as great companies, Ohio also hosts the rollercoaster capital of the world at Cedar Point on Lake Erie, evidence that a certain amount of risk taking is in their DNA. Ohio also shows a penchant for independent thinking, flying the only non-rectangular state flag in the 50 state Union. The Midwest states are sometimes called the “flyover” states, with the perception that the only areas of interest are to be found on the east and west coasts of America. In Ohio, the blend of hard work, good business sense, independent thinking and the ability to take risks when appropriate, has delivered a group of companies that are well worth stopping for. As Cintas say, if it’s worth doing, it deserves thorough attention, so it’s done right.
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