Story updated with GE's first-quarter financial results.
) -- The industrial conglomerate, embodied by
(GE - Get Report)
, achieved prominence in the 1960s as managers and business academics preached the power of "synergy."
When seemingly unrelated businesses are bundled together under the umbrella of a parent company, cost-saving and cross-promotional opportunities arise. That outcome is logical, in theory, but, in practice, most conglomerates are diversified, but unfocused, and difficult to oversee. To purist investors, the conglomerate is anathema, whereas the ideal investment is a specialized company with a moat (some sustainable advantage), such as technical expertise, that keeps competitors at bay.
This sentiment is aptly demonstrated by
recent purchase of
, a firm that makes engine lubricants and additives for oil, gasoline and diesel. Digging into this niche business reveals superlative investment merits. For example, Lubrizol sports a lofty pre-tax profit margin of 18% and a trailing 12-month return on equity of 34%. And, before Buffett offered a 24% premium for outstanding shares, Lubrizol was undervalued. On the opposite end of the spectrum is perennial dog General Electric, which
reported first-quarter results
today, and whose stock has plummeted 51% from a 2007 high and 61% from a 2001 apex.
Today, GE reported that first-quarter operating earnings
climbed 58% to $3.6 billion, or 33 cents a share. It also raised its quarterly dividend by 1 cent a share to 15 cents.
GE has been outshined by many small-cap industrials, whose stocks continue to record new all-time highs. Three small-cap industrial equities that have surged over a three-year span are:
(TRS - Get Report)
, a specialized machinery company, with packaging, energy and aerospace operations;
(MTZ - Get Report)
, which produces, installs and maintains high-tech communications infrastructure; and
(NPK - Get Report)
, a pint-sized conglomerate that makes products ranging from munitions to toasters.
Presto is perhaps the best in the bunch
, and the David to GE's goliath. Though it owns diverse businesses, Presto is focused.
With a $738 million market value, Presto is flying under the radar, manufacturing small appliances, such as toasters and pressure cookers, defense products, including ammunition, and absorbent products, including diapers. This variety of unrelated products has yielded consistency for Presto, whereas for GE, whose business units range from a multi-billion dollar financing arm to a turbine-manufacturing unit, diversification hasn't yielded promised synergy. Presto has propelled revenue and net income 4.4% and 18%, annually, on average, since 2008. In contrast, GE's sales and profit dropped by 4% a year and 19% a year, respectively.