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5 Firms With Bizarre Business Combinations

Some businesses defy categorization. For example, an ice cream shop is a type of restaurant, while an ice cream shop that sells lawn furniture under the same roof is part of a broader group — retailers. Add a movie theater and you can still call the whole thing a seller of “consumer discretionary” items, or goods and services that shoppers want but don’t need. But what if Dudley’s Sundae & Deck Chair Cineplex also makes military satellites?

Then you have a conglomerate.

Such Franken-businesses usually arise from mergers and acquisitions. Conglomerate mergers were wildly popular during the late 1960s. But they fell out of favor after a string of studies beginning in 1974 showed that returns for highly-diversified businesses are generally poor. Many hodge-podge businesses still exist, of course, including giants like General Electric (GE), which makes Christmas tree lights and mammography machines, and much else. GE stock ticker today trades at its 1995 price.

Conglomerates in general got a reputation boost when a 2004 study in the Academy of Strategic Management Journal showed that they performed better during the 1990s than the 1960s. However, the past year’s credit crisis battered firms like GE and Textron (TXT), a maker of helicopters and golf carts, because both companies have big financial units.

It’s difficult to make a blanket statement about whether investors should shun or embrace conglomerates, for two reasons. First, it’s not quite clear at what point a diversified business becomes one. Fortune Brands (FO) is sometimes called a conglomerate but its management might argue, sensibly, that it takes the same consumer-product savvy to sell faucets as to sell golf balls and bourbon, and that the businesses are therefore aligned. Second, not all conglomerates are run with the same motivations. Some serve the empire-building desires of managers, whose pay, studies show, is much more closely correlated with company size than with returns. Some are run like true investment portfolios. Berkshire Hathaway (BRK.B) is undeniably a conglomerate, selling both catastrophic insurance and ice cream cones. From 1965 to the end of last year the book value of its shares increased 362,319%, or about 84 times the return of the broad-market S&P 500 index.

Below are listed four companies with truly bizarre business combinations. Their past returns are vastly different, but their prospects for future ones seem bright.

Crane’s (CR) products include airplane landing gear and snack vending machines. Its shares have lost 43% in three years, vs. a 27% drop for the S&P 500 index. Weak construction and automotive markets have especially hurt sales of the company’s engineered panels. Management has been trimming workers and costs, which might result in better profit margins once demand improves. The stock ticker seems suitably cheap. It sells for less than 11 times earnings and pays a 3.8% dividend, and the company is only modestly indebted.

National Presto (NPK) seems a bit like Acme from the Road Runner cartoons. It makes waffle makers, shoe polishers, military fuses and ammunition, adult diapers and plenty more (but not rocket-powered roller skates). The assortment might seem perplexing, but shareholders aren’t complaining. Presto has conjured a 51% stock ticker gain over the past three years. The company owes nothing and, at $79 a share, holds more than $21 a share in cash. Sales and profits are rising, shares cost less than 11 times earnings and there’s even a dinky dividend — about 1.5%.

Leucadia National (LUK) sells carpet padding and prepaid phone cards; owns casinos, mines and a company that makes blood transfusion products; and has stock ticker interests in AmeriCredit (ACF), a car financer, and Jefferies (JEF), an investment bank. In other words, , it’s a mini Berkshire Hathaway, run by Nos. 377 and 355 on Forbes’s list of the richest 400 Americans, Ian Cumming and Joseph Steinberg, instead of by No. 2 Warren Buffett. Cumming and Steinberg resemble Buffett in more than occupation. They formed Leucadia decades ago from the shell of a broken-down company. They maintain a comically spartan web site for a $5 billion investment vehicle, with little more than links to financial filings. And they’ve stomped the S&P 500, increasing their stock ticker price by an average of 28.8% a year from 1978 through 2008, vs. 7.8% for the index. Leucadia’s stock ticker returns seem more volatile than Berkshire’s, for better or worse. Over the past 10 years shares gained 167% compared with Berkshire’s 29%, but over the past year they lost 52% vs. Berkshire’s loss of 23%.

Have a look if you like at details on all three companies in the table below.

Screen Survivors
Company Ticker Some of Its Businesses Share
Price
Price
Change
3 years
(%)
P/E Dividend
Yield
(%)
Data as of July 15, 2009
Source: Thomson Reuters
* Loss posted last year. No estimates available for 2009.
Crane CR Mars rovers, implantable defibrillators, snack
vending machines, landing gear, gas alarms
$22.06 -41 11 3.6
Leucadia National LUK Carpet padding, phone cards,
copper, casinos, investment banking
20.40 -25 n/a* No dividend
National Presto NPK Waffle irons, knife sharpeners,
ammunition, military fuses
79.90 54 11 1.3

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