This article is part of our Rising Star Portfolios series.

Often the best companies are ones you've never heard of yet provide essential functions to society. I've profiled Landauer (NYSE: LDR), which provides radiation monitoring, and am excited to introduce you to another great company, CLARCOR (NYSE: CLC). This company filters out the goo and pollutants from truck engines, industrial machines, and even the water you drink. Rewards have been plenty: Back in 2000, shares of CLARCOR traded hands at $10, and they now trade at $43 -- a four-fold increase over a time when the broader market was flat. That wonderful performance might be hard to replicate, but the future for CLARCOR is still bright.

The business
Headquartered in Franklin, Tenn., CLARCOR's business is filtering fluids and gases for truck engines, locomotives, mining equipment, buildings, factories, airplanes, and many other applications. Its filters help expensive machines run more smoothly, efficiently, and cleaner. At the company's core is its Baldwin Filters business, a leader in heavy-duty truck engine filters. This is a high return business, but even better is that since filters are consumed and regularly replaced, it is very predictable. All told, engine and mobile filtration accounts for just less than 50% of revenue. The other half is filtration for industrial and environmental uses, which span the gamut from factory filtration to home air filters. Finally, there is a small packaging business, which makes cases for batteries and other small goods.

Leadership and competition
Competition in the filtration business is strong, but CLARCOR is fortunate to have strong market positions. For example, in the heavy-duty truck business CLARCOR competes with Cummins (NYSE: CMI), Donaldson (NYSE: DCI), and Pall (NYSE: PLL), and the four companies have the lion's share of the market. Another plus for CLARCOR is its wide product portfolio; it supplies perhaps the industry's widest range of filtration equipment, giving customers a one-stop shop for all their filtration needs. There's always the threat of lower-quality, cheaper filtration products overhanging this space, but at the high end, customers demand the best, and CLARCOR fits that bill.

Financials and outlook
CLARCOR has delivered steady results over the past five years, with strong margins and returns on assets. But growth is really expected to pick up this year. CLARCOR expects 10% to 12% sales growth in 2011 at a 14.5% to 16% operating margin. Clearly, the recovery and cost-cutting during the downturn are beginning to bear fruit on the bottom line, but another contributor is China as the rapidly growing country demands high-quality air filters.


FY 2010

FY 2009

FY 2008

FY 2007

FY 2006

Revenue $1.01 billion $908 million $1.06 billion $921 million $904 million
Revenue Growth 11.4% (14.3%) 15.0% 1.9% 3.5%
EBIT Margin 14.3% 11.8% 14.1% 14.1% 13.9%
Return on Assets 9.0% 6.9% 11.0% 11.1% 11.2%

Source: Capital IQ, a division of Standard & Poor's.

Foolish bottom line
This is a fine company, one that will grow steadily and won't spring many surprises. CLARCOR makes the world cleaner and run more efficiently, saving energy. Plus, it has industry-leading capabilities and expertise in filtration. Combined with solid market positions, a wide product lineup, and management focused on economic value added, CLARCOR should perform well.

The value hunter in me would have liked to own CLARCOR in 2000 when it traded for about 13 times earnings, but I feel unfashionably late to this party as CLARCOR now fetches 21 times earnings. Given my bearishness on the economy and stock market, I'm going to hold off buying CLARCOR, but I'll be watching intently for a better opportunity to own this pleasant company.

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