Investing in conglomerate stocks presents a very different and unique risk/reward opportunity. They maintain a diversified portfolio of companies that provide a good mix of growth and return, while at the same time they mitigate the risk of overall failure.
Continuous acquisition, diversification, disinvestment, and joint ventures are traits of big conglomerates. In this article, I have discussed three large conglomerates that have, recently, either completed an acquisition, or have entered into a joint venture. Let’s analyze these stocks in detail and figure out if there exists an investing opportunity.
Eaton Corporation, PLC (NYSE:ETN)
With the completion of the acquisition of Cooper Industries in December 2012, Eaton’s stock has maintained its momentum in the market. The acquisition of Cooper Industries has brought the company to a stage where 60% of its revenue will be derived from its electrical section, and has transformed the company into a prominent electrical equipment manufacturer.
The acquisition was completed earlier-than-expected, and therefore, in 2013 it should result in an accretion of $0.15 to the EPS. This is because of better earnings, quicker synergy realization, and lower interest expenses and inventory step-up charges. Going forward, the company will re-segment its electrical, trucks, and automotive line of operations, and will replace them with electrical products, systems, services, and vehicles segment.
The company’s fourth-quarter 2012 results were positive, but recorded low growth as compared to last year (4.1% v/s 9%) because of high acquisition and transaction charges ($13 billion) incurred for acquiring Cooper Industries.
The results were mainly driven by its electrical equipment section, despite low revenue from its hydraulics and automotive segments. Electrical Americas was among the top operations of the company, reporting sales of $1.154 billion, up 3% and benefiting from a strong recovery in the U.S. construction market. Electrical NA orders reported a robust growth of 11%, nurturing the overall quarter’s profit. This growth was achieved from local as well as international markets, and it is estimated to increase in 2013 too.
3M Co. (NYSE:MMM)
3M successfully invested $900 million in acquisitions in 2012 with the completion of the acquisition of Ceradyne. The company paid about $670 million for Ceradyne. It deals in ceramics used in defense, aerospace, and energy industries. The acquisition allows 3M to prepare customized ceramic solutions. It will join the advanced materials division, which specializes in solutions and materials used in tough manufacturing conditions.
3M Co. (NYSE:MMM) also plans to make further acquisitions in 2013. Although, according to the indications given, the investments should be less in number but more in value. According to the guidance, it expects to invest about $1.5 billion in acquisitions in 2013.
The company’s newly declared share buyback plan of $7.5 billion shows its commitment towards repaying investors. Two-thirds of this plan represents incremental buyback authorization. The new buyback plan indicates a potentially higher pace of buybacks at around $3 billion/year. Capital allocation was one of the key concerns for 3M Co. (NYSE:MMM) investors, and incremental buyback is clearly a good step in this direction.Additionally, 3M has also increased its quarterly dividend 7.6% year-over-year, which gives a boost to the company’s commitment towards returning cash to investors.
The acquisition capability and plans, along with a robust buyback plan, should help the company improve its profitability in the future, and should increase returns to investors.
Caterpillar Inc. (NYSE:CAT)
Caterpillar Inc. (NYSE:CAT) reported a soft start for the year 2013, as its January machines retail sales and power system shipments were down 4% and 7%, respectively. The weaker performance of these segments followed weak December 2012 sales. It didn’t come as a surprise to investors when the company guided for a weak first quarter, with sales down about 13% year-over-year.
Weakness in guidance was mainly because of the inventory reduction by dealers due to the slowdown in retail sales. Although, growth in every region of the company declined, the North American and Asia-Pacific regions particularly saw steep decline in retail sales at 11% and 12%, respectively. This, coupled with some disinvestments, has led to a decline in the stock price by around 20% in the last one year.
On the other side, I see some tailwinds from its joint venture with Ariel Corporation. The company entered into a joint venture last December to provide pressure pumping solutions to oil and gas drillers. The venture has already acquired ProSource, which specializes in reciprocating pressure pumps. This will augment both Caterpillar’s and Ariel’s existing portfolio and should help provide their customers with better solutions.
Apart from the joint venture, I also see some upside from Caterpillar Inc. (NYSE:CAT)’s LNG locomotive initiative in the long run. Three of the country’s biggest rail-carriers have entered into an agreement with the company to manufacture train locomotives, that use gas as an alternative to traditional fuels.
Natural gas has a lot of potential for reducing the overall cost of the rail-carriers. An added advantage of such trains will be realized at the time of the implementation of tougher emission regulations in 2015. If successfully materialized, it will be the biggest shift in fuel consumption of the industry since the time when it started to use diesel instead of steam.
The investing opportunity
The acquisitions by these conglomerates seem strong, and should help steer the future of these companies. Eaton Corporation, PLC (NYSE:ETN)’s acquisition of Cooper Industries, and 3M Co. (NYSE:MMM)’s acquisition of Ceradyne should help boost sales and profitability of these companies. Apart from this, the strong capital allocation by 3M strengthens my faith in it.
As for Caterpillar Inc. (NYSE:CAT), the company has seen some tough times of late, and volatility is expected to continue in the near future as well. But its joint venture, and the LNG initiative, assures me of its decent future. I remain bullish about this conglomerate, too, despite the near-term volatility.
The article Conglomerate Stocks That Will Drive Your Returns in 2013 originally appeared on Fool.com and is written by Madhu Dube.
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