by Will Ashworth | September 14, 2012 10:35 am
Once known for insurance, Berkshire Hathaway (NYSE:BRK.A, BRK.B) now generates more than half its profits from non-insurance activities. Short of Berkshire, though — which has the benefit of some guy named “Buffett” — conglomerates tend to get a bad rap because of past failures.
However, like all businesses, in the world of conglomerates, there are good ones and bad ones. Let’s try to be sunny today and look at three worth owning.
Merriam-Webster defines conglomerate as “made up of parts from various sources or of various kinds.” Certainly, Berkshire Hathaway meets this guideline. But another company that fits the description is Trinity Industries (NYSE:TRN), a Dallas-based company with five different operating businesses.
I first came to know Trinity while traveling on one of the outdoor stretches of Toronto’s subway. While stopped, I noticed some commercial railcars with the name “Thrall” forged into the steel sides. Curious, I looked up Thrall when I got home and learned that the manufacturer of railcars merged with Trinity in 2001, making it the biggest in North America. Berkshire’s Burlington Northern is a big customer.
But Trinity does more than make railcars. Its construction products group makes guardrails, crash cushions and other transportation products. In addition, it produces aggregates and operates surface-mining operations in Texas, Arkansas and Louisiana. The inland barge group, as the name suggests, manufactures barges for inland waterways. It has an energy group that manufactures wind towers for energy companies in North America. Lastly, it quite naturally provides railcar fleet management, maintenance, and leasing services to railroads and shippers.
All told, the five businesses generated an operating profit of $425.3 million in 2011 on $3.1 billion in revenue. Trinity’s business suffered greatly in 2009, but second-quarter results suggest it’s made it all the way back and then some. TRN’s railcar backlog (higher than it’s ever been) is $3.2 billion, the consensus EPS estimate for 2013 is $3.51 a share, and enterprise value is just 7.7 times EBITDA. Given a PEG ratio around 1, Trinity provides growth at a reasonable price.
My second recommendation, LVMH Moet Hennessy Louis Vuitton (PINK:LVMUY) — or just LVMH — is a world leader in luxury goods.
CEO Bernard Arnault and his family own 46.5% of its stock and 62.4% of the voting rights. He’s firmly in control, and that’s a good thing. In the 22 years he has been at the helm, business has grown exponentially, with its five different operating units generating $6.8 billion in profit from $30.6 billion in revenue. It’s no wonder Arnault is the richest man in France and the fourth wealthiest person on the planet.
LVMH’s list of brands is second to none: Moët & Chandon, Glenmorangie, Louis Vuitton, Fendi, Christian Dior perfume, Guerlain, TAG Heuer, Bulgari, DFS Group, and Sephora. There’s plenty more where that came from, including a 22% stake in Hermès, which ultimately could lead to the acquisition of the luxury retailer. It’s an embarrassment of riches. In the past 10 years, LVMUY shares have averaged an annual total return of 15.7% — 888 basis points better than the S&P 500.
For those of you that don’t feel comfortable buying over-the-counter, your best bet is either the European Equity Fund (NYSE:EEA), a closed-end fund managed by Deutsche Bank, or the SPDR EURO STOXX 50 ETF (NYSE:FEZ). The ETF has a smaller weighting in LVMH (100 basis points) than the closed-end fund, but is far cheaper in terms of management fees. I’d go with the latter.
My last pick is a mid-cap out of Charlotte, N.C. Carlisle Companies (NYSE:CSL) is a 95-year-old business originally founded in Pennsylvania that operates five business segments with 77 factories and distribution facilities around the world.
In the first six months of 2012, CSL generated $236.5 million in operating income on revenue of $1.9 billion. Its two biggest segments — construction materials and transportation products — account for 67% of its overall revenue and 64% of its profits. Carlisle’s long-term goals include $5 billion in revenue, 15% operating margins, 30% international business, 15% return on invested capital and 15% working capital as a percentage of sales.
In the first half of 2012, Carlisle’s operating margin was 12.6%, 410 basis points higher than in 2011 and only 240 bps away from its objective. It could easily hit that by the end of 2013. Same goes for ROIC. The other three could be achieved by the end of 2015.
During the past five years, CSL stock has outperformed Berkshire by 198 basis points annually. Carlisle is a solid company worth owning.
For whatever reason, I’m fascinated by conglomerates. Perhaps it’s all the moving parts that make them more interesting than a shoe company or a widget manufacturer.
The important thing to remember about conglomerates is that the good ones operate much like winning sports teams in that one area picks up the slack when another isn’t performing — and that produces above-average returns over the long haul.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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