Conglomerates rekindle investors' interest
An old bit of investment wisdom advises against "putting all your eggs in one basket"; in other words, diversify so your portfolio won't be at the mercy of cycles or singular events.
In the 1960s that chestnut was put into practice by a new breed of corporation known as the conglomerate.
Conglomerates are multimarket companies that can tie together a variety of unrelated businesses under a single corporate umbrella.
Conglomerates took their lumps with two recessions and the "stagflation" of the 1970s. Some went under, some merged or were acquired, and others still are working out the kinks of over-extension. But there are those that have recovered nicely and are beginning to win renewed investor interest.
Paul Plaettner, investment analyst with Bateman Eichler, Hill Richards in Los Angeles and Steven Slawson of Bear, Stearns & Co. in New York find favor with selected survivors.
From a peak of 90 to 95 conglomerates in the heydays of the 1960s, Mr. Plaettner estimates there are approximately 50 conglomerates still in business as multimarket companies. Mr. Plaettner picks five favorites from that roster while Mr. Slawson follows a list of 23.
Interest in conglomerates was reawakened about two years ago, and recently that interest has become broader. Mr. Plaettner suggests it's time for investors to take another look while the more attractive conglomerates still are selling at favorable, and in some cases, bargain prices.
What are the characteristics of a conglomerate? One thing they have in common is a lack of similarity. They share neither common markets nor similar management philosophies. But they do share a commitment to participating in diverse markets, a common feature of the 1980 models that differentiate them from their 1960s counterparts.
Mr. Plaettner focuses on five multimarket companies: Lear Siegler Inc.; Republic Corporation; Tiger International Inc.; Transamerica Corporation, and Criton Corporation.
Negative feelings attached to the word "conglomerate" pushed down valuations on the earnings of these companies. The high leverage and unmanageable growth of conglomerates in the 1960s led to disappointments in 1970 and 1974.
The quintet Mr. Plaettner focuses on not only are survivors but have managements experienced in making it through recessions. "They have organized asset management to survive double-digit inflation and credit crunches," he says. "Multimarket diversity has been a liability in the sense of investors not having a single neat label for one of these companies. Yet, this diversity has made possible above-average earnings growth."
"The conglomerate games that made the headlines were the incredible leverage and borrowing money at the bank to buy out other companies, paying the bank off with the cash inside the acquired companies, then having no money to cope with corporate problems," he says. "That's not going on any more. Conglomerates aren't playing that kind of game now."
Although their rates of earnings growth may have fluctuated over the past five years, profits for the five companies he follows have been up every year.
"Couple that with the fact you have financially sound companies now, with balance sheets that are credible for the kinds of businesses they're in, and I believe you have some things worth paying for," says Mr. Plaett ner.