A little over a year ago I recommended three conglomerates to own — ones that weren’t named Berkshire Hathaway (BRK.B).
The trio’s average total return through October 4 is 33%, 14 percentage points higher than the SPDR S&P 500 (SPY). In an attempt to prove those picks were more than just dumb luck, I’m offering another round of picks. Here are three more conglomerates unrelated to Warren Buffett I think you should own.
This small-cap industrial conglomerate consists of five operating segments, its biggest being its food service equipment group, which contributed $395 million in revenue (56% of overall sales) and $39.5 million in operating profits (47% of overall operating profits) in fiscal 2013.
In terms of growth, its electronics products segment exhibited the biggest year-over-year increase in revenue (more than doubled) thanks to its 2012 acquisition of Meder Electronic, a German manufacturer of magnetic reed switches, which are often used in door sensors for alarm systems. Now the company’s second-largest segment, it’s making a major contribution to Standex International’s (SXI) overall profitability.
So what makes it worth the investment?
Over a seven-year period starting in 2007, the company repositioned itself by selling off eight businesses — responsible for 57% of its overall revenue — whose profits weren’t cutting it. In its place, Standex made 18 bolt-on acquisitions for a total cost of $251 million, returning $275 million to the top line. At its lowest point in fiscal 2009, its earnings had fallen to $1.32 per share. Four years later, they’re up to $3.51 — a 28% compound annual growth rate. It’s an entirely different business from a decade ago.
As I mentioned earlier, its food service equipment group is by far the biggest piece of the company’s business. Its customers include Starbucks (SBUX), 7-Eleven, and Kroger (KR). It manufactures everything required for a food service operation from walk-in coolers to refrigerators to commercial ovens.
While we’re not talking about huge growth in revenues or earnings, Standex is incredibly consistent. Without fail, it’s going to deliver 10% operating margins. That puts an earnings floor on its business.
Its stock is up 13.7% year-to-date through October 3 — 590 basis points less than the S&P 500. Over the past decade, it has achieved a total return of 17.9%, 657 basis points higher than the index. More importantly, over the last 11 years it’s had just one year of negative returns. Consistency is the name of the game for SXI.
One of the most successful value investors in the US is Mason Hawkins, CEO of Southeastern Asset Management, a Memphis-based money manager with $34 billion in assets under management. Hawkins buys stocks that are trading at no more than 60% of their intrinsic value.
While I have a hard time accepting that intrinsic value actually exists, Hawkins uses this arbitrary number to provide a large margin of safety when buying. His track record suggests the strategy works.