Operating leverage can be a great thing. It can turn an otherwise lackluster sales growth performance into pretty impressive earnings and cash flow growth. What's more, it's often a hallmark of solid management and a well-run business.
So while filtration company CLARCOR
In the engine and mobile filtration business, total sales rose 8%, and operating margins expanded nicely. In industrial and environmental, though, sales rose only 2%, in part because of weak HVAC product sales, while operating margins were basically flat with the year-ago period (falling short of the company's initial hopes for margin improvement). Finally, packaging sales were up 4%, and a nice improvement in margins led to 20% operating profit growth, though this is a very small part of the overall business.
I'm still a believer in the idea that the filtration business is a good place to be. Mechanical and technical systems are increasingly complex and require increasingly pure air, water, and other input to run properly. Likewise, countries and municipalities around the world are increasingly focused on trying to reduce -- or at least slow the growth of -- pollution and emissions in the air and water. So, in a very real sense, then, there's a growing opportunity for filtration both coming and going.
With many investors expecting further merger and acquisition activity in the filtration space, multiples have remained pretty high across the board. Be that as it may, I'm getting more comfortable with CLARCOR's valuation relative to the likes of Donaldson
Good return on assets, improving margins, and a growing overall market opportunity don't guarantee success, but they are generally considered to be three signs of an above-average opportunity.
For more on filtration, sift through these:
- Will Donaldson Breathe Easier?
- A Shadow on Pall
- 3M: Great at the Little Things
- Water, Water, Everywhere. Forever?
- Clean Air for CLARCOR
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).