Are Conglomerates Still a Thing?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I wasn't alive in the 1960s but I hear that conglomerates were a big deal back in those days. So I was cruising through the stock screener and decided to check out whether conglomerates were still a thing. They are, but there aren't many and they're not what they used to be. Basically, a conglomerate is an umbrella company (not necessarily like the one in the Resident Evil games) where there are lots of companies underneath that can literally have nothing to do with each other. Buying a share of a conglomerate is kind of like buying part of a dozen different enterprises.

The Cutting Edge

United Technologies (NYSE: UTX) is all about high tech, handling everything from aircraft engines to escalators. It's also ginormous, with a market cap of more than $75 billion. Normally I wouldn't buy a company that big, but in the case of a conglomerate it goes with the territory. I don't particularly like that United Technologies is only pulling a 7.52% profit margin, but I can give it some slack because that's still a huge amount of cash to be producing. What I really like is:

1. The company is trading for a mere 16.9 times earnings, which is better than the market as a whole when last I checked. That's a reasonable deal.

2. United Technologies has an ROE of 23.88, meaning that the company is producing $.23 on every dollar of equity. For a company that's full of machinery and production capacity, that's a pretty impressive accomplishment.

You've Probably Got Their Products in Your Home

3M (NYSE: MMM) is kind of in a class by itself. Almost as big as United Technologies but trading a bit cheaper at 14.88 times earnings, the ROE of 25.44 is just that much nicer from an efficiency standpoint. Not to mention that 3M is drawing 14.62% profit margins, which is just awesome for its size. Couple that with more innovative consumer products than almost any company on the planet -- including Bondo, Filtrete and O-Cel-O sponges -- this company is awesome. And it's about as stable as you can get since 3M has market share in over 200 countries. I wish I'd asked for a few shares of 3M in my stocking.

I Love Heavy Metal

Caterpillar (NYSE: CAT) is the biggest manufacturer of construction equipment, mining equipment, natural gas and diesel engines and turbines used for industry. And straight out of left field, it also sells insurance and financial products. While I normally only like companies with at least a 10% profit margin, I can deal with Cat's because the company is huge and based on industry, which tends to hold down profits because of having a large amount of inventory on hand much of the time. I'm really blown away by two paradoxical facts, though:

1. Cat has a 40.4 ROE, which means this heavy equipment manufacturer is producing $.40 for every dollar of equity the company has. That's absolutely huge.

2. For some reason the company is still only trading at 9 times its earnings.

I like Caterpillar a lot, and I think it's trading at a steal of a price just because it's big and boring. I'm perfectly okay with that -- bore me all the way to bank.

They Know Something We Don't

Leucadia National (NYSE: LUK) is a classical conglomerate with some seriously diverse interests. They have manufacturing, healthcare, telecommunications, mining, banking, real estate ... and a winery or two. At a $5.8 billion market cap (less than one tenth of the companies above), Leucadia is tiny by conglomerate standards. Minuscule. And that may have played a role in keeping its profit margins in the 2.4% range and its ROE in the abysmal 1.8 range. That's just awful.

But I think there's more to the story here than meets the eye because two of Leucadia's biggest shareholders are also two of its top executives. And each fellow owns 13% of the company, or around $754 million apiece. While I don't know how rich these guys are, having that much money tied up in any one investment has got to either take some guts or some significant knowledge. And since they've both been with Leucadia since 1979, they undoubtedly have a good reason for parking so much wealth inside the company. So they obviously trust that Leucadia has something awesome inside. It might be worth looking into.

Do Your Research

Conglomerates are complicated animals, so don't just plunk down your hard-earned money because some dude online said some nice things about a company. If you don't understand it, don't buy it. And if I left out something important, do let me know -- the comments I generally receive frequently revolve around how ignorant and stupid I am, so I could use your help.


pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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