Boring Portfolio

In Praise of Diversity
Thursday, March 26, 1998
by Greg Markus (TMF Boring)

ROMULUS, Mich. (March 26, 1998) -- So-called "conglomerates" fell out of favor in the 1980s, often for good reasons. Conglomerate tycoons promised to create "synergies" across disparate business lines and grow profits ad infinitum for shareholders via a perpetual motion scheme of mergers and acquisitions. Far more often than not, they failed to deliver the goods. So after a brief romance with Wall Street, "diworsification" (to use Peter Lynch's apt descriptor) was out, and spin-offs of nonessential business lines and a laser-like focus on "core competencies" was in.

As fund managers turned up their noses at boring, diversified industrial companies, it left an opening for sharp-eyed, value-oriented investors to uncover some real bargains among the few well-run, solidly growing diversifieds. Diversified companies don't fit neatly into the niches that industry analysts typically follow, and because they can span several industries, diversifieds require above-average effort and study to understand. This further tilts the odds in favor of the diligent individual investor.

The Borefolio's Carlisle Companies (NYSE: CSL) is exactly the kind of overlooked gem that I have in mind, and I sang Carlisle's praises here earlier this week. For that matter, when viewed as an operating company rather than as a kind of mutual fund, Berkshire Hathaway (NYSE: BRK.A) -- which does everything from making shoes to writing insurance to selling soft-serve treats -- is a gloriously profitable diversified business.

Other diversified companies that Mark Weaver and I have on our list of possible Borefolio investments (once their stock prices have shed some excessive exuberance) include Newell Co. (NYSE: NWL) and Danaher (NYSE: DHR). These are companies with histories of consistent growth in sales and profits, good-to-excellent balance sheets, and -- not coincidentally -- outstanding management.

After traveling to the "Silicon Tundra" area near Minneapolis earlier this week, I'm en route to California's Silicon Valley today. To pass the time in the air (and at the airport, where my plane has been delayed for more than an hour... so far), I loaded my laptop with recent SEC filings, press releases, and a slew of other information on yet another diversified company that looks like it might belong in the esteemed company of Carlisle, Newell, and Danaher.

Its name is Crane Company (NYSE: CR), or "Crane Co.," as they answer the phone at company headquarters in Stamford, Connecticut.

Founded in 1855, Crane Co. is a diversified manufacturer of engineered industrial products and the largest distributor of doors, windows, and millwork in the U.S. Altogether, Crane employs more than 10,000 people on four continents.

Crane operates no fewer than seven divisions: Fluid Handling, Aerospace, Engineered Materials, Crane Controls, Merchandising Systems, Wholesale Distribution, and (whew!) a small "Other" segment. Consolidated sales topped $2 billion last year, a 10.2% increase over 1996, and operating profit increased 18.3% to $197 million. Diluted EPS of $2.44 in 1997 represented an impressive 21.4% increase over 1996's $2.01.

Surely you'd fall asleep if I listed all the products Crane makes and markets, so I'll just hit a few highlights. If you suffer from insomnia, I prescribe Crane Co.'s 10-K.

Crane's Fluid Handling segment sells a variety of valves and fluid control products under perhaps a dozen brand names. Principal customers are companies involved in chemical and hydrocarbon processing, power generation, and marine and commercial construction industries.

The Aerospace segment brought in the largest chunk of Crane's operating profits last year, with sales up 39% (to $344 million) and profits up 37% (to $90 million). This segment makes everything from the position indicators and controls in the cockpit to antiskid braking systems and fuel pumps for Boeing, McDonnell Douglas, and Airbus. (Hmmm, there must be some Crane parts on the plane I'll be flying in... eventually.)

Among other things, Crane's Engineered Materials segment manufactures fiberglass-reinforced plastic panels used in truck trailers and recreational vehicles and plastic-lined steel pipes and fittings used primarily by the pharmaceutical, chemical processing, pulp and paper, petroleum distribution, ultra pure water, and waste management industries.

The Merchandising Systems segment has two operating units: National Vendors, the industry leader in the design and manufacture of food, beverage, and merchandise vending machines, and NRI, which makes electronic coin validators for the vending machine and "gambling/amusement" markets in Europe.

Finally, Crane Co. distributes doors, windows, moldings, and related building products through its wholly owned subsidiary, Huttig Sash & Door Company.

Crane stock hit an all-time high during the day Wednesday before closing down fractionally at $51 5/8. According to First Call, analysts are looking for 1998 earnings per share to increase 16% this year, to $2.84. Projected 1999 EPS is $3.32. The stock also yields a small annual dividend of around 1%.

At current prices, Crane stock trades at a multiple of around 18-times this year's projected earnings -- basically in line with the company's estimated long-term earnings growth rate plus dividend yield. That's a handsome discount to the S&P 500's forward P/E of around 22.

Crane Co.'s return on equity has averaged in the low 20% range in recent years, aided to some degree by a moderately leveraged balance sheet, with debt to assets at slightly above 50%.

I want to study Crane Co. some more. But so far, it looks like it's got a good chance of making the grade.

FoolWatch -- It's what's going on at the Fool today.

Stock  Change    Bid 
 ANDW  -  1/16  19.94 
 CGO     ---    33.00 
 BGP   -  5/8   33.69 
 CSL   -  3/8   47.81 
 CSCO  -  1/8   69.31 
 FCH   +  13/16 36.69 
                   Day   Month    Year  History 
         BORING   -0.30%   0.15%   0.67%  26.67% 
         S&P:     -0.10%   4.90%  13.43%  77.09% 
         NASDAQ:  +0.22%   3.28%  16.44%  75.66% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     33.69   199.28% 
   6/26/96  150 Cisco Syst    35.93     69.31    92.89% 
   8/13/96  200 Carlisle C    26.32     47.81    81.62% 
    3/5/97  150 Atlas Air     23.06     33.00    43.12% 
   11/6/97  200 FelCor Sui    37.59     36.69    -2.40% 
   1/21/98  200 Andrew Cor    26.09     19.94   -23.58% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13475.00  $8972.51 
   6/26/96  150 Cisco Syst  5389.99  10396.88  $5006.89 
   8/13/96  200 Carlisle C  5264.99   9562.50  $4297.51 
    3/5/97  150 Atlas Air   3458.74   4950.00  $1491.26 
   11/6/97  200 FelCor Sui  7518.00   7337.50  -$180.50 
   1/21/98  200 Andrew Cor  5218.00   3987.50 -$1230.50 
                              CASH  $13625.51 
                             TOTAL  $63334.89