Boring Portfolio

<THE BORING PORTFOLIO>
News Flash!
Carlisle continues to be... really Boring

by Alex Schay (AlexWS@fool.com)

ALEXANDRIA, VA (Feb. 5, 1999) -- Carlisle Companies (NYSE: CSL) conducted a conference call with investors yesterday and as expected, "the rock" held steady. The following is a rough summary of the call for your reading pleasure. Note that any errors are mine, and that Wettlaufer/Schay & Associates cannot be held responsible for any bad investment decisions that you make as a result of misinformation we might provide.

Carlisle reported 1999 earnings of $2.77 per share, which was up 20% over last year's $2.28 per share. Sales for 1998 were just over $1.5 billion, which also represented about a 20% increase over the prior year. In the fourth quarter, earnings were $0.62 per share, an increase of 15% over last year's fourth quarter ($0.54 per share). Fourth quarter sales were up 19% to $380.8 million, compared with $319.7 million last year. The company noted that most of the increases in 1998 were internally generated, with the acquisition activity in 1997 and 1998 consisting of several small "bolt on" companies -- primarily in the tire and wheel business and the wire and cable assembly segment. The impact of these acquisitions on 1998 activity was not significant according to the firm.

Carlisle "realigned" its segment reporting -- the result of a substantial compromise among the various actors involved -- and now will report revenues broken down according to three operating segments and one aptly named "All Other" segment. The three segments now consist of Construction Materials, which is essentially like the old Construction Materials segment; Industrial Components, consisting of the old tire and wheel operations (which formerly were part of General Industries), the wire and cable manufacturing operations (that were both in General Industries and Transportation Products), and the heavy duty friction and braking business (also a former member of the Transportation Products group). The "Other" category consists of all the smaller business segments.

So to summarize:

  • The All Other segment experienced a year-over-year sales increase of 21% and net income grew 26% (full year 1998 was almost the same). The group consists of the Walker Business, Trail King, Food Service, and the cargo business, or stated another way, in-plant processing equipment, institutional plastic and foodservice items, and specialty truck trailers (now).
  • The Automotive Components Group is primarily the operations that supply plastic and rubber molded products to auto suppliers. In this group Q4 sales were up 20%, but operating income fell thanks to the effects of the GM strike, which harshed everyone's mellow for the year.
  • Industrial Components, outlined above, came in with a 15% gain in sales, but experienced a decline in operating margins from 9.9% to 9.3% thanks to ongoing digestion of a number of wheel and tire acquisitions.
  • Construction Materials saw a 22% gain in sales for the quarter and a 17% gain for the year, which translated into a 8% bottom line improvement for the year. The firm stated that it expects to see further margin gains on into 1999 (detailed below).

Overall, Carlisle reported that the fourth quarter was a good one, but on the construction materials side the margins were a little soft relative to the growth in revenue. Carlisle expected this and stated it was predominantly driven by a couple items: (1) the firm is going into the insulation business, so revenues are in the process of moving up nicely but margins are not quite there yet; and (2) the firm introduced two new products, and both are ratcheting up on a double digit basis. The tire and wheel business had a very strong year, and Q4 proved "interesting" -- partly due to a fire in one of the major distribution centers at Carlisle tire and wheel -- and a pretty sizable loss in the double-digit millions of dollars. In spite of this, the firm kept its customers satisfied and solidified its image in terms of the ability to serve their needs. Interestingly, the bad weather mushroomed the demand for snow blower tires, and Carlisle was out of product at the end of the fourth quarter.

The food service business went through a tremendous amount of change in 1998. The relatively high value of the dollar affected international sales somewhat, but a strong Q4 brought it back nicely. The earnings, though a little under plan (Carlisle targets 15%), exceeded 1998 by 8-9% across the board, which was nice considering all the turmoil (including closing a plant in Wisconsin and spreading those operations among China, Oklahoma City, and Mexico). Carlisle is also building a new warehouse in Charlotte, N.C., which will boost its East Coast distribution focus.

In 1998 the Automotive Components group was affected by the GM strike, and the lingering effects dragged down the results. Barring a labor strike in 1999, Carlisle expects this element of the business to have a good year. Friction and brake lining saw some softening in the late third and fourth quarter, and overall 1999 is looking like a flat year for this business segment. On February 2nd, Carlisle made an announcement about the sale of "a major portion of its interest in a refrigerated container business to a partner for an undisclosed sum." The Carlisle Container sale was a function of the changing manufacturing environment for containers -- with production getting ramped up in China -- and Carlisle concluded that it would no longer get the kind of returns on capital that it enjoyed in the past. The firm is still actively evaluating alternative uses for the facility.

Walker Stainless had a disappointing 1998, but it is set to rock in 1999. Carlisle had a spectacular fourth quarter in terms of bookings -- it basically booked all of 1999 for that side of the business. With the ongoing implementation of lean manufacturing systems, Carlisle thinks the company will do well in 1999. Trail King introduced a lot of new products during the year, and the underlying construction market continues to look good on into 1999 -- even with some weakness on the commercial side, Carlisle expects another solid year of double-digit growth in sales and earnings.

Q&A Session

For the company, on a macro basis, the second half of the year is probably going to be slower than the first half of the year. "Slow" meaning results that jibe with average GDP on the order of 1.8% to 2.2%. The Construction Material business is looking very strong and should turn in an excellent year in terms of establishing marketing and sales programs for products. The tire and wheel business should see nice growth in the gardening segment, and the fact that Carlisle lags the housing build rate on the residential side by about 6-7 months should give the firm a boost well into the second half of the year. Costs are in "great shape" for 1999, and the firm is going to spend about half the capital that it spent in 1998.

Build rates in automotive are supposed to be "reasonable." Carlisle sees double digit (15%) revenue and earnings growth, and the firm has "opportunities" internationally in 1999. Keep in mind that in 1998 earnings were up 41% in Q1. Carlisle is much more knowledgeable about Asia (thanks to sourcing) than it was in the past, and it also sees opportunities in both Eastern and Western Europe.

Operating cash flow in the fourth quarter was pretty substantial:


Twelve Months                       1998         1997 
Operating Activities net earnings   $84,866    $70,666
Reconciliation of net
earnings to cash flows:
Depreciation and amortization        45,221     38,755
Working capital                     (30,406)   (27,366)
Other                                (2,070)       931
                                     97,611     82,986 
Carlisle expects about $45 million in capital spending in 1999 and 2000 on the core business -- which is roughy half of that made in 1998 at $95.9 million.

The acquisition pipeline is "routine or normal" in terms of the number of deals and the available opportunities. There are three or four transactions that could happen in the next month, but in terms of pricing, Carlisle hasn't seen anybody giving anything away yet. The requests and the enthusiasm are still high as a seller, and pretty challenging on the side of a buyer. Carlisle doesn't think it needs to identify another leg to replace the leasing and manufacturing company. We don't have a fourth leg in mind. A lot of these opportunities come from the operating presidents themselves

Less than 10% of the 1998 growth was from acquisitions, and roughly 40% of its business was in aftermarket products and services. The insulation business that the firm entered as a joint venture is going to have a negative impact on the margin level compared to the previous two or three years because it is in start-up mode. Carlisle's game plan is to have the negative influence on margins offset by growth in "lower end" markets as well as new geographical markets. The insulation business gives Carlisle a significant opportunity against Firestone that it didn't have before. Carlisle can influence the cost and price components of the business way beyond what it could in the past. In the "All Other" segment (in response to a question asking whether or not all the businesses in this group were slated for divestiture), there are some good groups that stand a chance of growing into a leg of their own -- but not in 1999.

Carlisle reaffirmed that it is constantly engaged in the kind of analysis that led to the container sale. It is always looking at the cost of funds and resources that are tied up -- even though the time horizon may not be Stern Stewart's time horizon. The question management continues to ask is, "What is the positive probablility of receiving a return that exceeds what we are putting into these businesses?" That's what we like to hear.

Around 90% of Carlisle's business is domestic. Container sales were virtually all international and generated $70 million in revenue, so that ultimately needs to be replaced. Carlisle has many opportunities, and just opened the Walker Stainless joint venture in China for multi-national producers in the Chinese market. The firms' Mexican operations in Chihuahua are designed for 3 segments of the business, and the British joint venture has performed beyond expectations. While none of these are going to boost Carlisle up to 20-25% topline growth over the next 12-24 months, that growth rate is "a longer-term goal" that the firm would like to see.

That's what we like to see as well. Intelligently managed growth with a focus on blocking and tackling. Until next week, see you on the boards.

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02/05/99 Close
Stock  Change    Bid
BRKb  -7       2376.00
CSL   -  15/16 44.81
CSCO  -4       101.25
PNR   +  1/2   38.38
                   Day    Month   Year  History
        BORING   -1.65%  -1.28%  -2.91%  30.37%
        S&P:     -0.73%  -3.14%   1.15% 106.73%
        NASDAQ:  -1.51%  -5.28%   8.25% 128.02%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    101.25   322.66%
  8/13/96  200 Carlisle C    26.32     44.81    70.23%
 12/31/98    8 Berkshire   2244.00   2376.00     5.88%
  4/14/98  100 Pentair       43.74     38.38   -12.27%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  22781.25 $17391.26
  8/13/96  200 Carlisle C  5264.99   8962.50  $3697.51
 12/31/98    8 Berkshire  17952.00  19008.00  $1056.00

  4/14/98  100 Pentair     4374.25   3837.50  -$536.75


                             CASH  $10594.54
                            TOTAL  $65183.79

</THE BORING PORTFOLIO>