One of my favorite restaurants is a place called De Lorenzo's, tucked away in the Trenton, N.J., Italian district. De Lorenzo's serves up one thing, and one thing only -- tomato pies. (That means pizza, for you non-Jersey types.) And they're pretty darn good pies -- fortunately for the owners. Not far from there, in Bordentown, N.J., is a famous diner called Mastoris, which, in sharp contrast, serves up a massive assortment of food. If we carry the comparison over to the world of stocks, you'll find a lot of companies like De Lorenzo's that specialize in one product. Then you have Fortune Brands
Last Friday, Fortune released its third-quarter earnings report. Revenues rose 19% to $1.8 billion. Even excluding acquisitions, sales from continuing operations increased 8% compared with last year.
The stock market has recently demonstrated that investing in one-trick-pony enterprises can carry some substantial risk -- witness the recent difficulties at factory measurement specialist FARO Technologies
But the company hasn't been resting on past success. Earlier this year, it decided to spin off its office products division. And as it moved away from one market, it began expanding into another. Fortune already had a major footprint in the liquor industry with its Jim Beam line. However, the company greatly expanded its stable of spirits products with a recent acquisition that brought Sauza and Courvoisier into the Fortune fold.
Operating margins will often feel short-term pressures when businesses go through the growing pains of integrating a major acquisition. And, sure enough, Fortune took an $83 million charge in the third quarter to account for the Sauza/Courvoisier acquisition. That caused earnings to fall 59% from year-ago levels. Nevertheless, Fortune appears to be doing a solid job of keeping profitability stable: Its operating margins experienced only a marginal decline, from 16.53% to 16.35%.
Strong growth and stable margins should mean good things going forward. Fortune's leadership certainly believes so. CEO Norm Wesley stated that positive momentum from the acquisition will likely increase the company's fiscal 2006 earnings per share "at or above" the high end of its original estimate of $0.25 to $0.35.
The market shrugged off the lower earnings and has responded positively to Fortune's forward-looking message, with the stock having risen more than 3% since the report. But one concern remains: a balance sheet with $207.3 million in cash and equivalents compared to $5.4 billion in debt. As long as economic spirits remain high, this cash-versus-debt disparity shouldn't pose any problems, but a downturn could result in a wicked hangover for the company.
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FARO Technologies is a Motley Fool Hidden Gems recommendation.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
