Revenge Of The Conglomerates: GE, HON, UTX and 3M Primed For Emerging Markets Growth

Includes: GE, HON, MMM, UTX
by: Brett Korsgaard

The name conglomerate harkens to a bygone era that for some has come to mean lumbering enterprises whose dynamism is blunted by divergent interests of multiple business units that rarely seem to add up to the sum of the parts. Today, ample dynamism is in evidence as they have evolved to become leaner well managed outfits with market beating products and services in a variety of industries and applications. Certainly the largest of these diversified enterprises have taken their hits as they digest a world of less reliant on financial engineering and more on making stuff and none more than GE which for all intents and purposes remains the bellwether of the group. There are several factors which tilt in favor of these diversified businesses however, most important of which is unabated industrial growth that emanates from the developing world. They need developed world expertise and the advanced technology that comes with it to provide this infrastructure, equipment and/or services to advance on the world stage. It is the large US conglomerates that are filling this niche and doing it well.

Old Companies for Growing Emerging Markets:

Company Price Market Cap PE Ratio Dividend Yield
General Electric (NYSE:GE) $15.56 $164 Billion 12 3.8%
United Technologies (NYSE:UTX) $71.56 $65 Billion 13 2.7%
Honeywell (NYSE:HON) 45.48 $35 Billion 14 3%
3M (NYSE:MMM) $80.01 $56 Billion 13 2.7%

All the companies on this list have market leading businesses positioned to serve industrial markets in the BRIC countries and should more than offset increasing commodity costs and a reduction in stimulus spending in the west. Each has marquee businesses that shine brighter than others- but that is the point of a conglomerate- they smooth out the earnings with the offsetting cyclical nature of their portfolio of businesses. Another factor in favor of conglomerates is their expanding employee footprint in low wage markets.

These companies will continue to shift production in such markets until there becomes an incentive to do otherwise. Since 2002 GE has cut about one fifth of its US workforce and most of those jobs have been replaced overseas. Such moves are accretive to earnings but hugely unpopular in the developed world where jobs are scarce and tempers short. Perhaps there is some legislative risk at hand in the current economic environment, but more likely any jobs bill is going to use the carrot approach rather than the stick.

That these companies are becoming “US” companies in name only is a trend that will only gather steam as the US becomes a smaller piece of the pie vis-à-vis global growth. All of these companies now book most of their revenues outside of the US. With so many surprises in the financial markets this past decade and with yields at an all time low in traditional saving instruments it makes sense to invest in companies with substantial predictable cash flows, growing dividend yields and a transparent reporting structure.

They provide ample exposure to emerging markets without question marks on the true quality of reported earnings. These “old school” conglomerates are positioned to sate the growing markets for much of the world. They have the pedigree and experience to deliver solutions to customers and substantial returns on equity and capital should serve to support share prices in an investing climate that is anything but certain.

Disclosure: I am long GE.