Boring Portfolio

Quiet Carlisle
... has been a rip-roaring stock

by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Sept. 14, 1998) -- The Boring Portfolio rose 1.56% Monday, with six of eight holdings advancing. That compared with gains of 2.05% and 1.47% for the S&P 500 and Nasdaq, respectively.

We continue our review of current Borefolio holdings tonight by focusing on Carlisle Companies (NYSE: CSL). Last week, we reviewed Atlas Air (NYSE: CGO), Borders Group (NYSE: BGP), FelCor Lodging Trust (NYSE: FCH), and TCBY (NYSE: TBY). Later this week, we plan to round out the series by covering Pentair (NYSE: PNR), Andrew (Nasdaq: ANDW) and, last but hardly least, Cisco Systems (Nasdaq: CSCO).

If you can't quite recall what Carlisle does -- or indeed if you've never even heard of the firm -- you're hardly alone. Even though Carlisle has been in business for more than 80 years, it's not exactly a household word.

Headquartered in Syracuse, NY, Carlisle is a diversified manufacturer and distributor that operates in three segments: construction materials, transportation products, and general industry. The first segment includes roofing materials used principally for nonresidential flat roofs: rubber roofing, adhesives, flashing ... stuff like that. The second segment makes braking systems for trucks and off-road equipment, rubber and plastic automotive components, high-end aerospace wire and electronic cable, truck trailers, dump bodies, and refrigerated shipping containers. "General Industry" includes everything from lawn tractor and golf-cart tires and wheels to stainless steel dairy equipment to ceramic dinnerware. Boring to the core.

What's not at all boring, though, is Carlisle's unwavering focus on making quality products through cost-efficient processes, its ability to manage a steady string of sensible acquisitions (there's no "diworseification" at Carlisle), and its execution of low-key but effective strategies to generate internal growth. That combination has yielded an impressive 24.9% compound annual growth rate (CAGR) in per-share earnings over the past six years on a 16.6% CAGR in sales. Carlisle's stated goal is to increase sales and earnings at an average annual rate of 15%, and it has unwaveringly achieved those targets. Return on equity topped 20% in 1997, while return on assets approached 14%.

With that record, it should come as no surprise that Carlisle's stock has been one terrific investment over the years. CSL's price appreciation has consistently surpassed that of the S&P 500 over the course of the 1990s, and CAPM notwithstanding, it has done so with below-market volatility. Carlisle shareholders even receive a decent dividend to sweeten the deal. The stock regularly shows up on Value Line's screens for stocks that combine reliable growth with low risk, and it is a component of VL's portfolio "for long-term growth."

Carlisle's stock closed last Friday at $37 13/16. That's nicely above the split-adjusted purchase price of $26 1/8 per share at which the Borefolio purchased its interest in Carlisle a little more than two years ago, but it's down by almost 30% from the $53 1/8 record high CSL attained in mid-May.

Why the sharp drop?

The answer, as I see it, has almost nothing to do with Carlisle specifically and almost everything to do with the recent market meltdown and the beating that smaller stocks have experienced this year in particular. Toss in the FUD factor -- fear, uncertainty, and doubt -- about the impact of the General Motors (NYSE: GM) strike on automotive parts suppliers (GM accounts for about 5% of Carlisle's total revenues) and the prevailing perception that industrial growth may be slowing down, and you've probably accounted for the lion's share of the recent weakness in Carlisle's stock.

If you're fairly certain that a recession will occur soon in the U.S. and if you're an expert at timing the bottom just right, then you might consider holding off on CSL. In the 1991 recession, the stock's P/E dropped to around 11. Based on projected earnings of $2.73 this year (according to First Call), the bear's scenario could see the stock touching $30 at some point.

The Upside

I see at least two problems with the bearish case, though. First, Carlisle is substantially more diversified than it was at the beginning of the decade; I believe it would take a severe and prolonged recession domestically to stagger all of the company's operations simultaneously. Second, unlike companies in, say, the semiconductor, financial, or energy-related industries, Carlisle has seen nary a hint of a slowdown in its businesses -- partly because Carlisle has very little international exposure and partly because of continuing strength in a number of key markets, including construction, aerospace, and cargo containers. Through the first six months of 1998, Carlisle's sales rose 21% as compared with the first half of 1997 (to $759 million), and EPS jumped 28% to $1.42.

Since reporting its second-quarter results, Carlisle has acquired Quality Microwave Interconnects Inc., a privately held manufacturer of microwave coaxial cable connectors and assemblies for the telecommunications, computer, and test, measurement and instrumentation industries. QMI should fit nicely with Carlisle's Tensolite subsidiary, which has been operating at or beyond capacity all year.

When I spoke with a Carlisle spokesman two weeks ago, he reiterated that the company remains comfortable with analysts' earnings projections. The 1999 consensus EPS forecast, by the way, is $3.08, according to First Call. (Estimates are available, along with an array of other information, at If CSL can recapture even the modest P/E multiple it had in 1997 of 16.3, we're back to a $50 share price in perhaps the next six months or so.

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

09/14/98 Close

Stock  Change    Bid 
 ANDW    ---    14.25 
 CGO   +  1/16  21.69 
 BGP   +1 1/16  26.94 
 CSL   +  7/8   38.69 
 CSCO  +  15/16 93.69 
 FCH   +  1/16  20.06 
 PNR   +  11/16 30.75 
 TBY     ---     6.69 
                   Day   Month    Year  History 
         BORING   +1.56%  10.82% -13.88%   8.36% 
         S&P:     +2.05%   7.54%   6.11%  65.65% 
         NASDAQ:  +1.47%  11.11%   6.07%  60.02% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     93.69   160.73% 
   2/28/96  400 Borders Gr    11.26     26.94   139.31% 
   8/13/96  200 Carlisle C    26.32     38.69    46.96% 
    3/5/97  150 Atlas Air     23.06     21.69    -5.94% 
   4/14/98  100 Pentair       43.74     30.75   -29.70% 
   5/20/98  400 TCBY Enter    10.05      6.69   -33.42% 
   1/21/98  200 Andrew Cor    26.09     14.25   -45.38% 
   11/6/97  200 FelCor Sui    37.59     20.06   -46.63% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14053.13  $8663.14 
   2/28/96  400 Borders Gr  4502.49  10775.00  $6272.51 
   8/13/96  200 Carlisle C  5264.99   7737.50  $2472.51 
    3/5/97  150 Atlas Air   3458.74   3253.13  -$205.62 
   4/14/98  100 Pentair     4374.25   3075.00 -$1299.25 
   5/20/98  400 TCBY Enter  4018.00   2675.00 -$1343.00 
   1/21/98  200 Andrew Cor  5218.00   2850.00 -$2368.00 
   11/6/97  200 FelCor Sui  7518.00   4012.50 -$3505.50 
                              CASH   $5750.59 
                             TOTAL  $54181.84