Managing your risk is a big part of investing. Because everyone would like themselves to err on the upside, i.e. you end up making more than you were targeting. But heaven forbid that you err on the downside, i.e. make a loss you were not intending to make (do we ever!) and your gains could quickly melt away.
That’s why investment advising involves offering ways and means of spreading or hedging your risk, including through a dollar-cost-averaging system that balances out your losses over time, or through a diversified portfolio, or ETFs, mutual funds, or simply, conglomerates.
Which of course brings up the question of why we are talking about risk now when the markets are so buoyant with all signs pointing to really strong underlying demand.
The question is simply answered: a pandemic always happens in waves and although we’ve caught this one by the tail, we haven’t quite extinguished it yet. So every time there’s a fresh scare, some business will be lost and the markets could get jittery.
Second, it’s a better idea to prepare for a disaster before it happens. And finally, a conglomerate has diversified operations and is therefore likely to see most of its businesses pick up in a strong demand and growth environment. So it kind of gives you the best of everything.
The common trend among this lot is strong revenue and earnings growth followed by a notable increase in the guidance. And this is generally achieved by growth in the core business as well as a fairly consistent approach to closing accretive acquisitions. That’s why I’m digging into a few today-
Crane Co. CR
Stamford, CT-based Crane Co. offers a diversified product portfolio of engineered industrial products with operations in the Americas, Australia, the Middle East, Europe and Asia. Its products find application in the aerospace, electronics, chemical, power, non-residential construction, automated payment solutions and various general industrial as well as consumer related end markets.
The Process Flow Technologies segment with a 39% revenue share, manufactures and services valves for industrial usage. It also makes pumps and water treatment equipment for a variety of applications. Payment & Merchandising Technologies bring more than 41% of revenue. Crane Payment Innovations (coin accepters and dispensers, coin hoppers, coin recyclers, bill validators, and bill recyclers), Crane Merchandising Systems (vending equipment) and Crane Currency (highly-engineered bank notes for central banks) are housed here.
Nearly a fifth of the business comes from Aerospace & Electronics. The Aerospace group designs, manufactures and supports critical aircraft systems and components. The Electronics group provides high-density, high-reliability electronics for aerospace, space, military, industrial and commercial applications.
Despite the 832% increase in earnings and 24% increase in revenue from the COVID-battered June quarter of 2020, it is a fact that most of the company’s end markets are still in the early stages of recovery. So they are operating well below pre-pandemic levels, which is actually a big positive. Because if you can get in while most of the upside is still left, you stand to make bigger gains. And there’s also significant operating leverage, so earnings will grow faster than revenue.
In fact analysts currently expect this Zacks Rank #2 company to generate 59.6% earnings growth in 2021 on revenue that will grow 6.4%. The 2021 estimate is up 35 cents (6%) in the last 30 days, following stellar June quarter results that saw it topping estimates by 31.7%.
The shares are trading close to their median value over the past year, indicating significant room for further upside.
Danaher Corp. DHR
Washington-based Danaher offers diverse lines of professional, industrial, commercial and consumer products.
With around 52% revenue share, the Life Sciences segment offers research tools to analyze genes, proteins, metabolites, cells, etc to identify causes of diseases, new therapies, and test new drugs and vaccines. Range of industries served includes biopharmaceutical, food and beverage, medical, aerospace, microelectronics, and general industrial.
Diagnostics, with a 32% share offers analytical instruments, reagents, consumables, software and services for use in reference laboratories, hospitals, physicians' offices and other critical care settings. The Environmental & Applied Solutions segment with a 16% revenue share, offers products and services for food and water safety.
Despite its size, the company has is growing revenue at a strong double-digit clip and the momentum is expected to continue through the rest of the year. Given its exposure to the gene therapeutics, drugs and vaccines segment, the company is benefiting from the ongoing pandemic. However, it is also focused on improving its internal operations through product innovation and efficiencies, while acquiring companies to supplement its core competencies.
The Zacks Rank #2 company is expected to grow earnings 49.0% this year on revenue growth of 28.4%. The company beat June quarter estimates by 20.6% and the Zacks Consensus Estimate for 2021 increased 47 cents (5.3%) in response.
On the basis of price to forward earnings for the next twelve months, DHR is also trading relatively close to its median value over the past year, so there could very well be upside from these levels.
Carlisle Companies Inc. CSL
Headquartered in the Scottsdale, AZ, Carlisle Companies Incorporated offers a portfolio of highly engineered high-margin products belonging to niche brands and businesses. The products are sold in the United States, Europe, Asia, Canada, Mexico, Latin America, the Middle East and Africa.
Carlisle Construction Materials is its largest segment comprising nearly 80% of its business. The segment manufactures a comprehensive range of roofing and waterproofing products for commercial and industrial buildings. Through acquisitions in the Netherlands and Germany, it has become the leading manufacturer and supplier of EPDM roofing systems in Europe.
The Carlisle Interconnect Technologies segment, which accounts for most of the rest, designs and manufactures high-performance wire and cable, fiber optic cable, avionics trays, integrated systems and complex cable assemblies for the aerospace industry. Its engineered products for the defense industry are used in radar systems, missiles and electronic warfare systems as well as test and measurement solutions.
Other applications are in surgical, electrosurgical, patient monitoring and wire harness devices. Accounting for around 6% of its revenue, the Carlisle Fluid Technologies segment offers a comprehensive range of finishing equipment for the automotive, refinishing, aerospace, construction, agriculture, marine and rail industries.
The main driver of current strength in results is the unusually strong demand in Construction materials, its most significant business segment at the moment because of Americans’ reroofing projects. While the other two segments contribute a relatively small percentage of revenue (and earnings), they too are on the road to recovery with the vaccine rollout contributing to steady improvement.
This is reflected in the 56% expected earnings growth this year that will come on the back of a 9% increase in revenue. The earnings surprise in the last quarter was small compared to recent history but the subsequent revision to the 2021 estimate was quite substantial at 47 cents (5.4%).
At 19.6X earnings, CSL is trading below its median level over the past year, making the shares cheap at these levels.
The shares carry a Zacks Rank #2 (Buy).
LSB Industries Inc. LXU
Zacks #2 ranked LSB Industries, operates through its manufacturing subsidiaries. It manufactures and sells nitrogen based chemical products in various concentrations, nitrogen solutions, diesel exhaust fluid and various other products. Engineered products include a proprietary line of precision metal working machine tools and industrial performance solutions. LSB's products are sold through distributors and directly to end customers throughout the United States.
There is a single analyst providing estimates for this #2 ranked company and the estimates appear to have been overly optimistic. But that is unfortunate because the company really is doing extremely well. In the June quarter for instance its earnings touched 42 cents, up from a loss of 34 cents in the lockdown-impacted quarter of 2020. This came on revenue of $140.7 million, up 34.0% from last year.
Importantly, management offered encouraging commentary on the demand level this year. Agricultural products in particular are benefiting from strong pricing (ammonia up 133%, UAN up 55% and HDAN up 25%) induced by the strong demand for American corn, which again is because of dry weather in South America.
With farmer incomes being up from last year, the desire to invest is also there. Ammonia prices were also positive for the industrial business (the escalation in the Tampa ammonia price is also positive for prices of other chemicals that are indexed it). The recovery in key end markets like automotive, homebuilding and power generation to above pre-pandemic levels is also an important driver. The company’s business is correlated with U.S. GDP growth, so the overall strength in the economy remains a positive factor driving demand.
On the basis of price to forward sales, the shares are trading between their median value and high point over the past year. So there could be upside from these levels.
3-Month Price Performance
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