Key Conglomerates for Consistent Profits?
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While most companies specialize in one area, that’s not true in all cases. Many top companies are conglomerates, and it is impossible to fit them in only one box. Today, I will hone in on five of these to see if we can find the most important consistency: profit. The five conglomerates are Leucadia National, Loews, Northrop Grumman, Tyco, and Viacom.
Leucadia National (NYSE: LUK) is a $7 billion company that is involved in manufacturing, oil and gas drilling, gaming, real estate, medical product development, and winery operations, both in the United States and abroad. Headquartered in New York City, the company’s varied interests include owning the Hard Rock Hotel & Casino Biloxi, MS, drilling for natural gas in Texas and manufacturing specialty wood products. Leucadia stock trades around $28.50 per share and has a 52-week range of $20.19 - $39.14, while it pays a dividend of $0.25 for a yield of 0.9%.
The stock is undervalued (seen by its price to book ratio of 1.18) and its 8.5% share drop over the past year hides the fact that the company reeled in a 27% year-to-year revenue growth. It’s Leucadia’s reputation as a growth company that makes it appealing. The company has a very low debt to equity ratio of 33 and an excellent 29% return on equity. With its dividend, cash reserves and growth, I believe Leucadia National is a great investment.
Loews (NYSE: L) did not have the best year in 2011. Analysts and investors were disappointed as the company, which owns Loews Hotels and Highmount Exploration and Production, announced its earnings and revenue for the 4th quarter. Expecting an earnings per share of 90 cents, they were not happy to see the reports of $0.67 on revenue of $3.48 billion. These numbers reflect a decline in quarterly revenue of 6.4% and a drop in earnings of 42.5%.
The good news for Loews is that the future looks brighter. After last year’s 10% dip in share price, the lower stock price will likely produce a very nice raise, as indicated by its price to book ratio of 0.81 and a forward price to earnings of 11. With a low debt to equity ratio of around 40, a one-year target of $50 per share and nearly $4 billion in free cash flow, the company could be one of the big surprises in 2012. I recommend buying shares of Loews now.
While Northrop Grumman (NYSE: NOC) is primarily known as a top military contractor, the $15.2 billion conglomerate from Falls Church, VA specializes in a wide variety of applications for both government and business sector customers. Northrop Grumman is a player for the biggest Pentagon contracts, as evidenced by being a finalist for the $200 million medium-range maritime unmanned aerial system considered by Washington. Although the system was shuttled, it was replaced by the company’s MQ-8 Fire Scout drone, meaning that even a loss became a win.
Northrop Grumman’s revenue dropped 4.5% and its share price 10.5% in 2011, but the company’s earnings soared by 46%. Its debt to equity ratio is a healthy 39 and its price to book and price to earnings ratios (1.47 and 7.98, respectively) both suggest that the stock is undervalued. With the on-going military campaign in Afghanistan, the company’s one-year target of $60.20 seems low; since it represents a mere 1% increase over the current price of $59.50. When I see a $2 dividend, a 3.3% yield and growth in its stock, I am convinced that Northrop Grumman Corp will be a strong investment opportunity throughout 2012.
Operating in home security, flow control, wastewater treatment and more, Switzerland-based Tyco (NYSE: TYC) is $23.7 billion giant who is in a bit of a lull. The company share price of $51.50 has been on the rise for the past six months. Although it has a 52-week range of $37.39 - $53.38, the 200-day moving average has only deviated about fifty cents from August, 2011 to February, 2012. While has been on a steady climb, don’t be fooled; the institutional investors who hold 90% of the companies shares are expecting it to make a run.
Even after climbing 15% in the past 12 months, Tyco’s forward price to earnings ratio (at 12.5) and its price to book 1.67 suggest that the stock will challenge the one-year target of $55.25. Although its earnings were down almost 50% in 2011, its debt to equity is only 29 and more than $1 billion in total cash suggests the company can fuel the increase. Tyco’s payout ratio is a low 29%, and the continued interest from hedge funds are positive signs that this will be an investor darling for the foreseeable future. I would recommend Tyco as a solid growth stock that tosses in a solid dividend ($1 for a 2% yield) for good measure.
Recently pushing above its 200-day moving average, media conglomerate Viacom (NASDAQ: VIA) is another potentially solid investment. Producing everything from Nickelodeon to Black Entertainment Television, Viacom is a dominant player in the entertainment industry. Trading for just under $54 per share, the stock is close to the top of its 52-week range of $44.10 to $60.90. Viacom pays a dividend of $1 for a yield of 1.8%, and after gaining over 9% last year, investors can look to it for both growth and dividend in 2012.
Although the company has potential, there is some concern surrounding Viacom. With its television advertising revenue dropping 3% last year, the company’s overall revenue still rose 3.2%, yet its earnings tumbled 65%. The company’s mounting debt is up to $7.8 billion, and its debt to equity is becoming cumbersome at 95. Viacom’s share price has leveled off and 7.6% of its float is held short. There are too many troubling signs to avoid rating Viacom as an underperforming stock at the present time.
Although not all conglomerates are profitable, the product diversification often allows them to more successfully weather bad times in a particular industry. Of our five companies, I recommend buying shares of Leucadia National, Loews, Northrop Grumman, and Tyco. It looks very possible that Viacom will continue to struggle this year, so I expect it to underperform during the months ahead.
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