Boring Portfolio

Efficient Market??
...More thoughts on Pentair, Carlisle
by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (June 19, 1998) -- The Dow suffered a triple-digit loss and the S&P 500 lost 0.52% on this triple-witching Friday, but the Nasdaq managed to buck the trend to post a 0.48% gain. The Boring Portfolio matched that, with daily winners topping losers five to three.

Leading the charge was Pentair (NYSE: PNR), which rebounded $2 1/8 on heavy volume. That gain erased the loss Pentair suffered the day before after the company announced that it had obtained the services of consulting firm McKinsey & Co. to assist in Pentair's efforts to cut costs.

Apparently, some investors initially interpreted that news as a sign that Pentair's earnings growth was in jeopardy, or perhaps that the costs for McKinsey's services would cut into earnings.

According to Pentair's CFO, Richard Ingman, neither could be further from the truth. Ingman returned my phone call last night from Germany, where he was traveling.

Ingman pointed out that in the conference call following Pentair's quarterly earnings release in April (of which we provided a summary), management said that they were negotiating to secure the assistance of an outside consulting firm to achieve the company's stated goal of reducing costs by $60 million over the next two years.

Furthermore, the costs of such assistance are already baked into the company's financial plans, business remains strong, and Pentair is entirely comfortable with analysts' earnings estimates of $0.55 per share for the June quarter and $2.44 to $2.45 for the full year.

A story in last Friday's Wall Street Journal is consistent with Ingman's upbeat attitude. Journal reporter Ken Bensinger wrote about the growing interest in high-end -- and high-priced -- power tools by weekend hobbyists and DIYers.

According to Bensinger, the trend for "overeager do-it-yourselfers and status-conscious yuppies" to buy professional-grade tools began a few years ago, when mass retailers such as Home Depot (NYSE: HD) began stocking such brands as Porter-Cable, Makita, and Milwaukee in an effort to lure contractors away from lumber yards.

Porter-Cable, as Borefolio cognoscenti may know, is a Pentair subsidiary.

The Journal story includes an interview with photographer William Waldron, "leaning over the Delta table saw in the tool shed adjoining his post-and-beam farmhouse in upstate New York."

You guessed it: Delta is another Pentair subsidiary.

Pentair's PTE segment accounts for about 40% of the company's total revenues. Segment sales increased 28% last year, to $747 million. In the fiscal first quarter of this year, PTE sales grew 15% over the year-ago period, while operating income increased 33%, owing to increased profit margins... due, in turn, to growing demand from folks like Mr. Waldron.

If the rebounding of Pentair's stock provides an example of how "the market" can sometimes get the story wrong, the saga of the Borefolio's other diversified manufacturer, Carlisle Companies (NYSE: CSL) nails the case shut.

Carlisle's stock has sunk more than 15% in value since the work stoppage affecting General Motors (NYSE: GM) facilities began on June 5. CSL fell another $5/16 today, to $40 15/16.

True enough, one of Carlisle's divisions supplies parts to GM. But as we've pointed out on a number of occasions over the past week -- and as Carlisle management has reiterated -- GM accounts for less than 5% of Carlisle's revenues, and the strike will have "no material affect" on the company, according to Carlisle President Dennis Hall.

All I can say at this point is that if you're in the market for shares of two companies that have consistently outperformed the S&P 500 yet trade at a steep discount to the market -- and if you can manage to stay awake while reading about their wonderfully Boring businesses -- I recommend the Pentair and Carlisle annual reports to you for your summer reading pleasure.

Do have a great weekend, folks. See you back here on Monday.

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

06/19/98 Close

Stock  Change    Bid 
 ANDW  -  1/4   18.00 
 CGO   +  3/8   33.81 
 BGP   -  1/4   34.63 
 CSL   -  5/16  40.94 
 CSCO  +  15/16 83.06 
 FCH   +  1/8   32.81 
 PNR   +2 1/8   39.38 
 TBY   +  3/16  8.81 
                   Day   Month    Year  History 
         BORING   +0.48%  -1.52%  -0.33%  25.41% 
         S&P:     -0.52%   0.90%  13.42%  77.06% 
         NASDAQ:  +0.48%   0.14%  13.43%  71.12% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     34.63   207.61% 
   6/26/96  150 Cisco Syst    35.93     83.06   131.16% 
   8/13/96  200 Carlisle C    26.32     40.94    55.51% 
    3/5/97  150 Atlas Air     23.06     33.81    46.64% 
   4/14/98  100 Pentair       43.74     39.38    -9.98% 
   5/20/98  400 TCBY Enter    10.05      8.81   -12.27% 
   11/6/97  200 FelCor Sui    37.59     32.81   -12.71% 
   1/21/98  200 Andrew Cor    26.09     18.00   -31.01% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13850.00  $9347.51 
   6/26/96  150 Cisco Syst  5389.99  12459.38  $7069.39 
   8/13/96  200 Carlisle C  5264.99   8187.50  $2922.51 
    3/5/97  150 Atlas Air   3458.74   5071.88  $1613.14 
   4/14/98  100 Pentair     4374.25   3937.50  -$436.75 
   5/20/98  400 TCBY Enter  4018.00   3525.00  -$493.00 
   11/6/97  200 FelCor Sui  7518.00   6562.50  -$955.50 
   1/21/98  200 Andrew Cor  5218.00   3600.00 -$1618.00 
                              CASH   $5511.82 
                             TOTAL  $62705.57