Are These Conglomerates Great Deals or Value Traps?

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

Conglomerates are a crazy thing. They can dabble in everything and make tremendous profits, or be little more than an expression of egomania (see almost every main James Bond villain). But sometimes a conglomerate looks like it might be doing well upon first glance.

Looks Can Be Deceiving

At a $63.8 billion market cap, Caterpillar (NYSE: CAT) looks like it's doing just fine. Paying a 2% dividend and earning a respectable 9.7% profit margin, the basics look all right to start with. And I like how CAT manufactures its engines and heavy equipment in Brazil, Russia and China, because I love diversification. Unfortunately, I am a little skeptical about Caterpillar's environmental record. It purposely sold engines that were designed to meet emission standards during testing, but that could then reach higher efficiency through violating the standards during practical use. CAT is trading for only ten times its earnings, and I think now would be a pretty good time to buy, but I find it hard to trust a company that does shady things like putting defeat devices into its engines.

Too Hot to Handle

Harbinger (NYSE: HRG) might just be a hot mess. With only a 2% profit margin, the fact that this holding company is only trading for 90% of its book value is still not enough to save it. On top of that, Harbinger's founder Philip Falcone is under investigation by the SEC for misappropriating funds for his own use and borrowing shareholder money without their knowledge or consent. Considering how much value so many people lost through the hijinks of Bernie Madoff and his ilk, trusting companies where the major players don't have halos just isn't worth the risk to me. I see very little to indicate that Harbinger is worth a lot more additional research at this time.

Almost But Not Quite

Leucadia National (NYSE: LUK) rocks a fair 7.4% profit margin. Also, the company trades for 11.43 times earnings and right at its book value. So far so good. The issue I'm running into here is that even though Leucadia has been called a "mini Berkshire Hathaway" and has racked up some very impressive gains for the shareholders, I still don't see there being enough of a margin of safety here. While Leucadia seems reasonably priced, I need a deal to really get excited. So I'll keep my eye on this holding company and hope that its successes continue but that it falls out of favor enough to create a more solid margin of safety.

Kind of a Dud

United Technologies (NYSE: UTX) produces just about anything and everything high tech, and I can respect that. While I'm not personally up on all of the latest technologies, I do know that military contracts tend to be strong, steady, and beautifully well funded. At a $79 billion market cap, United Technologies certainly has a long row to go if it wants to seriously grow its market cap. And considering it's a manufacturing and development company with a lot of patents and production facilities, the fact that United Technologies trades at 3.2 times its book value really doesn't make me interested at all. Also, the fact that we recently elected a Democrat to the White House doesn't bode particularly well for the next few years of military contracts. Beyond those two rather compelling factors, UTX is also one of the more heavily polluting companies in the country. Trading at a luke-warm 17.87 P/E, I'd leave this one on the shelf for now. I'm not seeing anything that compelling here.


pongun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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