Flyover Stock: Simpson Manufacturing (SSD)

This month's company survived a moat attack from a well-financed customer-turned-competitor who has since given up and restocked the company's products

• Simpson Manufacturing sells mission-critical products and services in the global construction market.

• Founded over 60 years ago by a WWII vet, the company's culture remains influenced by the founder's legacy, which includes an emphasis on long-term thinking and innovative risk-taking.

• With consistent gross margins above 40%, Simpson shows that it has consistent pricing power despite selling into cyclical end markets.

On a podcast with the CEO of Simpson Manufacturing, the interviewer quipped to the audience after the interview ended that he didn't think the company's 45% gross margins were a "customer-friendly deal."

I can understand his thinking. The company sells what appears to be a simple product, so a 45% markup doesn't seem reasonable. How can it charge such a premium for its products?

The answer is that the company provides both a product and a service, and the margins are in the service.

It's like the old fable of the homeowner who called a carpenter about a squeaky floorboard. The carpenter examines the floorboard, quickly hammers a nail, and charges $50. "Why so expensive?" the customer asks. The carpenter replies, "$2 for the hammering, $48 for knowing where to hammer."

$2 for the product, $48 for the service.

If you just read Simpson's business description, you'd likely pass on doing further research as it sells what appears to be an undifferentiated or replicable product. Only when you see the margins would you sit up and notice that there's more to the story.

Let’s take a closer look.