"Boring" Companies Can Deliver

Eighteen months ago we looked at a few companies in industries that are way, way outside of the glamor industries -- things such as baking soda, uranium enrichment, and surfactors. This time we're looking at a few more companies that operate from the outer limits of the investing world: fitness centers, postage meters, and database management.

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By Bill Mann (TMF Otter)
January 25, 2002

About 18 months ago I took a look at some intriguing companies in out-of-the-way industries, ones that do not tend to get mentioned on CNBC, Wall Street Week, or the Fox Money Block all that often. By "not tend to," I mean "never."

I have a new list of companies, and we can review those old picks and see how they've done. But first, let's catch up with Enron (NYSE: ENE) again, shall we?

Stunner of stunners, it was announced yesterday that shortly after a bankruptcy board began proceedings to effect his removal, Ken Lay, Chairman and Chief Executive Officer of Enron, resigned. This leaves the bankrupt company with none of the three executives (Lay, Jeff Skilling, and Andrew Fastow) who presided over the company when it decided to use American accounting rules as "nice best case suggestions."

This means that the bankruptcy board will now have to go out and recruit a new CEO for the embattled company as well as a Chief Restructuring Officer. This is going to cost the trustees and creditors a pretty penny, because, honestly speaking, who in their right mind would come into the rat's nest that is Enron and try to run it and restructure the mess that the old guys left behind? Shareholders are going to howl when they see how much the people who take these jobs are going to get paid, much as they did recently when Polaroid executives negotiated a package worth $19 million to stay on during bankruptcy.

How's this for a job listing:

Wanted: Chief Executive Officer to run the "greatest company in the world." OK, we used to be the "greatest company in the world;" now we're the "largest bankruptcy in the history of man!" This position requires political contacts, particularly with the current or upcoming administrations, financial creativity, a love for Star Wars, and the ability to tell people nothing is wrong when quite clearly very much is wrong. Loose moral compass is not a negative. Being Texan is a plus.

Perks include an empty executive suite, country club membership where no one will play golf with you, and luxury suites at a temporarily eponymous professional baseball stadium. Salary is negotiable, success options will be lavish. Failure options will also be lavish, just not quite as lavish as success options. Best of all, we encourage "success" to be defined as "getting away with it."

OK, enough fun. Let's look at some companies that tend to fall so far beneath the radar screen that the very existence of radar may be but a rumor to them. In a market that is fairly efficient, down deep in the pits of obscurity is a great place to find a few undiscovered gems.

In August 2000, I put together the first such list. It contained four companies -- well three, really. One I just really like because it's stated business model is SO pie in the sky. Here are the returns of each (plus the S&P 500 and the FOOL 50) for the intervening time:

               8/2/00   1/24/02          Ann. Div.
                Close    Close   Change    Yield
Church & Dwight $17.62   $29.33   66.5%    1.05%
Stepan          $22      $24.73   12.4%    2.95%
USEC            $4.18    $ 7.06   68.8%    7.58%
SpaceDev        $1.12    $ 0.60  -60%.0    0.00%

S&P 500         1438.70  1128.1  -21.1%    1.02%
FOOL 50         1977.53  1401.5  -29.1%     n/a

I'm not going to take too much of a bullet for SpaceDev (OTCBB: SPDV), because I did note that its business was essentially unanalyzable due to the fact that they are trying to be low-cost commercial space mission providers, a business that hardly exists today. I just thought (and think) that was pretty cool. Each of the others has trounced the returns of the S&P 500 and the FOOL 50 (including Stepan (NYSE: SCL) with a 12.4% gain -- the smallest of the three, but still whomping the indices), and one, USEC (NYSE: USU), still retains an enormous dividend yield.

I can't promise the same returns for this new list. I didn't even promise the returns for the last list, and of them I have held only one company, Church & Dwight (NYSE: CHD), which I recently sold but will buy again. But I can say that these new ones were lovingly chosen based on some pretty intriguing factors in their respective businesses, and they offer pretty attractive prices at current levels.

1. Bally Total Fitness (NYSE: BFT). Yep, the company that makes you feel guilty at least once a day with those hard-body commercials exhorting you to get off your duff and start feeling great. Well, Bally may not have gotten you in there, but they've certainly attracted huge numbers of members: 4 million paying customers use Bally's 285 clubs in the United States and Canada, with revenues over the last five years increasing by more than 10% per year. Bally is the unquestioned leader in this market. No other health club chain has the same branding or reach. One of the nice things about Bally's business model is that its cash conversion cycle is negative: it collects money for services before ever providing those services on an either prepaid monthly or annual basis. In addition, members contract with the company for services on a one-year or more basis, and as such the company's future business is quite reliable. This is a company that destroyed shareholder value for years, but seems to have turned things around. This year they retired a net of $110 million in debt, nearly 16% of the total.

2. Pitney Bowes (NYSE: PBI). Pitney Bowes' growth rate is minuscule, less than 2% per year. You know this company: they produce those automatic postage metering machines that sit in nearly every office of any size in the country. Pitney Bowes was hit by the Internet craze in the late 1990s, when e-postage companies were threatening to break its hold on corporate postage solutions. Well, it didn't happen, and Pitney Bowes has reconfigured its business, spinning off its facsimile and copier divisions into Imagistics (NYSE: IGI) in November 2001. Pitney Bowes is poised to take advantage of business security concerns with its mail room management products and is currently priced at just 15 times free cash flow -- this for a company that has net profit margins for the last five years in excess of 13%. Finally, Pitney Bowes' dividend yield is in excess of 3% per year.

3. Harte-Hanks (NYSE: HHS). While the majority of Harte-Hanks business is derived from customer relationship data and consulting services, at a minimum people living in California and South Florida will instantly recognize this company as the one that provides them with "The PennySaver" and "The Flyer," respectively. Harte-Hanks has shown rapidly growing free cash flows over the last five years, with the exception of 1998 when it had a massive $267 million writedown for discontinued operations. The company collects and analyzes data for consumer use and differentiation, including the National Change of Address database for the U.S. Postal Service. Ever wonder how the post office kept track of all those change of address forms? Me too. Harte-Hanks, priced at 16-times current free cash flow, is not as cheap as the other companies profiled here, but it also has negligible debt (just over $40 million) and a generally sparkling balance sheet.

Do you know some other good "under the radar" companies? Be sure to share them with us on the Fool on the Hill Discussion Board!

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Lather. Rinse. Repeat. Bill Mann does not own any companies mentioned in this article. The Motley Fool is investors writing for investors.