There are many ways to skin a cat (Note: The Fool does not condone any form of actual feline flaying). Some companies reach greatness by focusing on the one thing they do best and then driving that one thing to excellence. Motley Fool Hidden Gems selection Middleby (NASDAQ:MIDD) is a good example of this approach, having dumped all other operations in order to zero in on dominating the commercial oven market. That focus has resulted in the stock doubling over the last year.
Fortune Brands (NYSE:FO) follows a very different path. Most of the company's revenues and net income come from its home improvement business, with brands like Moen faucets, Master Lock, and Diamond cabinets, but the wine and spirits division is coming on strong. Fortune recently acquired Pernod Ricard's booze biz, adding Maker's Mark and Sauza tequila to an already strong lineup, with brands like Jim Beam and Courvoisier cognac.
But that's not all. Titleist golf balls and Cobra golf clubs lead the stable of golf products, rounding out the Fortune Brands lineup of brands. The three lines of business seem to have very little in common, except for a certain overlap in the target demographics. There's an affluent, free-spending feel to a crowd of avid golfers, premium spirits enthusiasts, and weekend warrior remodelers.
The beauty of this strategy lies in its diversity. When one product line is down, another can often pick up the slack and balance out the earnings.
In the latest quarter, for example, the expansion of the liquor business kicked in 68% of Fortune's year-over-year sales growth and 82% of the earnings growth, while the hardware and golf departments coasted. Combined, the threesome delivered EPS of $1.06 (excluding one-time charges and gains), beating analyst estimates by $0.04.
That's different from the previous quarter, when home improvement and spirits shared the load, reporting 44% and 47% of the fourth-quarter's earnings growth, respectively. And before you write off the golf brands as laggards, consider that golfing products beat all other business lines in the quarter before that, contributing 36% of the earnings growth in Q3. Fortune Brands has managed to meet or beat estimates each time, on very different strengths.
Next quarter could be a different story, with the company expanding its home improvement business after the purchase of privately owned SBC Windows. The shareholders will take any gains from that acquisition as happily as the recent alcohol boost or golf successes of quarters past.
The diversification method may not produce rocket results like the concentrated approach of Middleby, but what it does provide is stable growth. The stock price has doubled in three years, making for an impressive 25% CAGR.
Fortune Brands, Otter Tail (NASDAQ:OTTR), and 3M (NYSE:MMM) all look like safe holdings for the long term, shielded from disasters in any one business area by extremely diverse operations. Otter Tail habitually turns health services, plastics manufacturing, food ingredients, and public utilities into analyst-stumping results. That's one reason Bill Mann recommended the company as a Hidden Gems selection.
And 3M is much more than Post-it notes and basic materials. This multinational giant draws on everything from high-tech plasma screens and pharmaceuticals to basic materials and security services to deliver just a little bit more every quarter than Wall Street expects.
Yes, you can diversify through mutual funds or a hand-picked basket of stocks. Or you can pick diversified companies like these to begin with.
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3M is a Motley Fool Inside Value selection, while Otter Tail and Middleby are Hidden Gems picks.
Fool contributor Anders Bylund doesn't play golf or drink bourbon, but he knows how to install tile floors and water softeners. He does not hold any position in any stock mentioned.
