We recently compiled a list of the 8 Best Conglomerate Stocks to Buy Now. In this article, we are going to take a look at where NN, Inc. (NASDAQ:NNBR) stands against the other conglomerate stocks.
What are conglomerate stocks? These stocks are the ones that have their ownerships in diverse businesses, spanning different sectors like finance, energy, technology, healthcare, etc. To be precise, a conglomerate is a business model where many companies are collected into a single large corporation that is owned by the parent company.
A conglomerate can consist of many businesses in the same industry or from different industries to diversify business and navigate risks. Some conglomerates tend to own a series of companies that make up the entire labor and supply chain for a single end product.
In a conglomerate, a parent company has the controlling stakes of all the smaller and unrelated businesses that operate independently. At times, conglomeration gets enacted by holding companies specializing in M&As. These companies are formed specifically to acquire smaller companies and collect business interests.
Investing in Conglomerate Stocks
There are several benefits of investing in conglomerates, some of which include diversification into several sectors, stability in revenues, synergistic opportunities, and many more. Conglomerates tend to provide greater stability and resilience at the time of market fluctuations as compared to pure-play companies.
Conglomerates have internal capital markets. This means that if one business of the conglomerate performs poorly, its loss can be offset by the other businesses performing relatively better. These businesses benefit by establishing synergies as the costs of operating a series of businesses can be reduced via consolidation. Conglomerates are capable of moving significant sums of money from businesses having limited opportunities for incremental investment to other areas possessing greater potential. These businesses have the potential to scale far larger in size as compared to the businesses constrained by the limited potential of that particular industry in which they are present.
Therefore, venturing into different industries can result in synergistic benefits, which can lead to significant cost savings along with improved cost efficiency. When a series of businesses in a conglomerate combine their resources, the conglomerate CEO can negotiate better deals with suppliers and manage procurement costs. This will ultimately lead to the optimization of production processes. Conglomerates can leverage a diverse portfolio of businesses, leading to cross-selling and cross-promotion opportunities. Through the promotion of complementary products, conglomerates can drive revenue growth.
2024 has been quite volatile for the broader market as a result of sticky inflation, high interest rates, and recession fears. Investing in conglomerates might help investors steer through these uncertain times. S&P 500 Industrial Conglomerates Sub-Industry Index saw a return of over ~35% over the past year, while the broader index (Dow Jones Industrial Average) went up by ~12%.
While investing in conglomerates has benefited investors most of the time, some may find these investments challenging. There can be a loss of efficiency, including a divergence from the core businesses. Moreover, the resources that get divided over numerous businesses might not be synergistic. There can be a lack of transparency in conglomerates, impacting their brand name and market share.
For investors, it is of utmost importance to know the company’s true picture. Only then will an investor be able to generate strong and stable returns. Conglomerate CEOs can sometimes resort to dubious accounting methods to show inflated EPS numbers. Warren Buffett exposed this trend in a letter and explained how conglomerate CEOs, in the late 1960s, used to drive their conglomerate’s stock to 20 times earnings only to issue shares at a higher price and then deploy the proceeds to buy out other cheaper companies. At some point, a conglomerate becomes a collection of poor underlying businesses, with little or no growth prospects.
Later on, through the application of different accounting methods, they show increased per-share earnings. This process ultimately led to the redistribution of wealth, rather than the creation of wealth.
Wealth creation comes from investing in stable and sound businesses, having efficient accounting practices, and strong management. Therefore, investors should be wary of bad management and financial shenanigans while investing in conglomerate businesses.
That being said, if the conglomerate form is used effectively and transparently, it can act as an ideal structure for creating generational wealth.
Our Methodology:
We screened for conglomerate stocks on the Finviz stock screener. We compiled an initial list of 15 large conglomerates by market cap and checked their average price targets. We then selected and ranked the 8 stocks that analysts saw the most upside to, as of 6th August 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A manager signing off on a precision stamping for a flight control component.
NN, Inc. (NASDAQ:NNBR)
Average Upside Potential: 79.49%
NN, Inc. (NASDAQ:NNBR) is a diversified industrial company, combining advanced engineering and production capabilities with in-depth materials science expertise to enable the designing and manufacturing of high-precision solutions and components.
The company released its 1Q 2024 earnings print, wherein, its net sales declined 4.6% YoY to come at $121.2 million. This decline was mainly because of non-recurring end-of-life pricing received in 1Q 2023, rationalized volume at plants undergoing turnarounds, and higher organic volume at profitable plants.
Operating loss came in at ($4.8) million against an operating loss of ($7.1) million in the prior-year period. This improvement was mainly because of items related to 2023 facility closures that included sublease income on closed facilities, and one-off losses that took place during 1Q 2023 on sales of machinery and equipment related to these closures.
The leverage ratio of NN, Inc. (NASDAQ:NNBR) as on March 31, 2024 came in at 3.1x, reflecting an improvement from 3.2x at 2023 end. The company expects the leverage ratio to fall below 3.00x by 2024 end.
NN, Inc. (NASDAQ:NNBR) focuses on correcting and improving its balance sheet position. In a bid to achieve this, it sold its lone plastics products plant known as Industrial Molding Corporation (IMC) to Davalor Mold Company, which is a wholly-owned portfolio company of Blackford Capital. With the proceeds, which amount to ~$16 million, NN, Inc. (NASDAQ:NNBR) plans to pay down debt and will continue to advance its balance sheet initiatives.
On 15th April 2024, Noble Financial assumed coverage on shares of NN, Inc. (NASDAQ:NNBR). They gave an “Outperform” rating, and a price target of $6.00 on the stock. According to Insider Monkey’s first-quarter database, 19 hedge funds expressed bullish sentiments towards NN, Inc. (NASDAQ:NNBR), up from 11 in the preceding quarter.
Greystone Capital Management, an investment management firm, released its 1Q 2024 investor letter and mentioned NN, Inc. (NASDAQ:NNBR). Here is what the fund said:
“In keeping with our theme of investing in companies that cease doing dumb things, two new positions that made their way into the portfolio this quarter include Innovative Food Holdings and NN, Inc. (NASDAQ:NNBR). Each business possesses the criteria of being a better business than currently being given credit for, has undergone significant changes in the C-Suite, and has many common-sense items to address that will help reveal each company’s core business quality over time. In other words, plenty of one-foot bars.
For readers in the habit of using quantitative screens to identify investment ideas, NN will likely cause you to turn the other cheek. At first glance, this business does not look pretty. Under the hood, there is a lot to like. The fact patterns here along with management efforts are very similar to our investment in Bel Fuse. Like Bel Fuse, NNBR possesses strong technical expertise, a large manufacturing footprint, and long-dated customer relationships. Also, like Bel Fuse, NN was historically mismanaged, which shows up in the areas of pricing, manufacturing overhead, and new business wins. (Click here to read the full text)”
Overall NNBR ranks 4th on our list of the best conglomerate stocks to buy. You can visit 8 Best Conglomerate Stocks to Buy Now to see the other conglomerate stocks that are on hedge funds’ radar. While we acknowledge the potential of NNBR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NNBR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
