Boring Portfolio

Management Matters,
Part II
... the case of Carlisle Companies
By Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (July 14, 1998) -- The Dow, Nasdaq, and S&P 500 all established new all-time highs Tuesday. The S&P 500 rose more than 1% in value, but the Nasdaq retreated from its intraday highs to close up only 0.15%.

The Nasdaq's small gain matched that of the Boring Portfolio, which saw its eight holdings meander up and down fractionally in generally light trading ahead of a slew of quarterly earnings reports later this week. Reporting on Thursday (all in the morning) will be Andrew Corp. (Nasdaq: ANDW), Pentair (NYSE: PNR), and Carlisle Companies (NYSE: CSL). We'll be covering the follow-up conference calls for all three.

Spurred by a suggestion from a Motley Fool participant, I offered a few words in last Friday's recap about a straightforward but often overlooked truth: the long-term success of a company depends critically on the quality of its management. This is obviously of concern to shareholders -- or at least it ought to be -- because their shares are literally their ownership stake in the company.

Newcomers to the world of equities investing sometimes narrow their research to the numbers: sales and earnings figures, ratios of various kinds, and in the heat of the quarterly reporting season, whether or not the company "made its number" -- that is, met or exceeded analysts' per-share earnings expectations.

Those numbers are all important, to be sure. But also important -- perhaps even more so -- is what lies behind those numbers, and foremost among those factors is the quality of a company's management.

On Friday, I offered by way of illustration the case of Cisco Systems (Nasdaq: CSCO), a company that is regarded not only in Silicon Valley but around the world has having one of the most insightful, skilled, supportive, yet grittily resolute and formidable management teams in any industry, anywhere.

Today, I offer a second example, one that is very different from Cisco in many respects -- location, size, industry, celebrity -- but which is very much alike in terms of the quality of its management. That example is Carlisle Companies.

Headquartered in Syracuse, N.Y., Carlisle manufactures and distributes a diverse array of products in three major segments: construction, transportation, and "general industry." The company makes everything from roofing materials and adhesives to truck trailers to golfcart wheels to aircraft wiring to ceramic mugs.

You'd think that a company that appears to be such a mish-mosh of businesses -- and in mature industries, at that -- would have a difficult time achieving steady sales and profit growth. Well, lots of other companies probably would, but not Carlisle.

The company has a stated goal of increasing sales and earnings by 15% annually, and it has consistently exceeded that goal, often by a substantial amount. Last year, for example, sales increased 24% to nearly $1.3 billion and earnings rose 27% to $2.28 per share. This was accomplished through a combination of smart acquisitions and internal growth.

Not coincidentally, Carlisle's stock has proven to be a terrific investment, consistently outperforming the S&P 500. In 1997, Carlisle provided shareholders a 43% total return -- easily exceeding the return generated by stocks of hundreds of more glamorous companies.

To produce such outstanding results -- and to produce them year after year and in mature industries, to boot -- takes an unusually talented management team. Or at least I'd say it does.

Carlisle's folks might disagree. I've listened to Carlisle CEO Stephen Munn and President Dennis Hall address industry analysts in perhaps a dozen conference calls, and I've spoken with Hall and with CFO Robert Ryan at least that many times. Invariably, they have insisted that the company's success has less to do with their ability to devise particularly brilliant plans and more to do with the company's ability to execute fairly straightforward business plans extraordinarily well.

Like Cisco in many ways, Carlisle's management philosophy dictates that decisions be made by those closest to the action. Carlisle differs from Cisco, however, in that the former is a diversified "holding" company. Management sees its role as providing the various operating companies with the resources they need to do the job. Sometimes, the resources are financial; at other times, corporate management simply provides a sounding board for ideas.

Acquisitions of successful businesses that either complement or supplement core businesses are an important avenue for growth at Carlisle. The acquisitions tend to be transactions negotiated with either individual owners of private companies or division management within large public companies.

Acquisition opportunities are usually identified by the management of Carlisle's individual businesses through their day-to-day activity. The potential acquisitions are typically smaller companies with annual revenues from $10 million to $100 million. Much of the necessary analysis and due diligence activity is carried out not by Carlisle's corporate staff, but by the management of the division responsible for the eventual integration of the acquired company.

Carlisle typically seeks businesses with successful management already in place. Frequently, the acquisition candidates simply lack the physical, financial, or human resources that would allow them to reach their potential. By furnishing the missing resources, Carlisle thus provides an environment in which the acquired companies can consistently exceed their historical performance levels.

And after all, isn't that what great management is all about?

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

07/14/98 Close

Stock  Change    Bid 
 ANDW  -  7/16  17.13 
 CGO   -  5/16  36.50 
 BGP   +  3/16  38.31 
 CSL   +  3/4   45.94 
 CSCO  +  5/8   94.81 
 FCH     ---    30.94 
 PNR   -  3/8   41.88 
 TBY   -  1/8   8.94 
                   Day   Month    Year  History 
         BORING   +0.14%   2.30%   6.67%  34.23% 
         S&P:     +1.06%   3.86%  21.35%  89.44% 
         NASDAQ:  +0.15%   3.89%  25.35%  89.10% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     38.31   240.37% 
   6/26/96  150 Cisco Syst    35.93     94.81   163.86% 
   8/13/96  200 Carlisle C    26.32     45.94    74.50% 
    3/5/97  150 Atlas Air     23.06     36.50    58.29% 
   4/14/98  100 Pentair       43.74     41.88    -4.27% 
   5/20/98  400 TCBY Enter    10.05      8.94   -11.03% 
   11/6/97  200 FelCor Sui    37.59     30.94   -17.70% 
   1/21/98  200 Andrew Cor    26.09     17.13   -34.36% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  15325.00 $10822.51 
   6/26/96  150 Cisco Syst  5389.99  14221.88  $8831.89 
   8/13/96  200 Carlisle C  5264.99   9187.50  $3922.51 
    3/5/97  150 Atlas Air   3458.74   5475.00  $2016.26 
   4/14/98  100 Pentair     4374.25   4187.50  -$186.75 
   5/20/98  400 TCBY Enter  4018.00   3575.00  -$443.00 
   11/6/97  200 FelCor Sui  7518.00   6187.50 -$1330.50 
   1/21/98  200 Andrew Cor  5218.00   3425.00 -$1793.00 
                              CASH   $5528.69 
                             TOTAL  $67113.07