Lean, Mean Companies Ready for the Rebound

For the frugal investor, this is the best of times, the sweet spot in the economic cycle. It's not just because plenty of companies are "on sale," but because nearly every company is getting lean and mean in a difficult business environment.

In tough times like these, companies loathe wasting anything. Every cost is scrutinized, and each capital expenditure is weighed and assessed against need. When an economic upturn occurs -- and it will -- profit-margin leverage will be the highest of any point in the economic cycle.

The flip side of this coin, when companies are fat and happy, is the worst of times for the frugal investor. Like Wall Street, many companies indulge in the sin of linear thinking when business is flourishing. Companies wrongly assume that the good times will roll on for the foreseeable future, and wasteful, undisciplined hiring and spending practices inevitably ensue.

I have highlighted 23 stocks for RealMoney.com readers so far; year-end picks are up 41%, and this year's picks are up 9%. Of those 23, here are my top lean and mean companies, specifically selected because they are driving costs to the bone and because they'll enjoy maximum margin leverage once the economy improves.

Getting Lean and Mean These four companies are driving costs down and should enjoy maximum margin leverage once the economy improves
Stock	Date of Column	Price at Pick	Aug. 21 Close	Gain
Whirlpool (WHR:NYSE)	12/19/00	$40	$67.40	68.50%
Office Depot (ODP:NYSE)	12/28/00	6.94	13.01	87.46
Textron (TXT:NYSE)	6/5/01	58.97	54.98	-6.77
Toro (TTC:NYSE)	7/24/01	43.26	48.26	11.56
Source: Alsin Capital Management

Whirlpool (WHR)

Just because Cisco (CSCO) stock, now at about $16, is down nearly 80% off its 52-week high doesn't mean it's a bargain. And just because Whirlpool is up 68% since December doesn't mean it is not a bargain. Ignore the rise in Whirlpool stock, and focus on the cost structure overhaul currently in process. If the jump in Whirlpool stock seems excessive, note that eight years ago the stock traded higher than the current quote!

Whirlpool is trimming its headcount by about 10% as it gets lean. Some of the workforce reduction is made up through increased efficiencies, while some work has been outsourced. The objective is to take Whirlpool's net margins to a new level.

With a spate of hot products, increasing market share and margin expansion that can take earnings to about $10 a share in the next cycle, Whirlpool still qualifies as a bargain.

Office Depot (ODP)

At Office Depot, one of the best management teams in retail has been relentless in taking costs out of its expense structure. Some of its actions have included closing stores that have underperformed, streamlining warehouses and better-managing inventory.

Office Depot's most important asset is not carried on the books, of course: its customer base. Every one of a variety of customer service metrics is up, with many up dramatically, and complaints are down.

Textron (TXT)

Textron is shaving costs aggressively in the current slowdown. Every division is feeling the cost squeeze, from Cessna to Bell Helicopter to all of the other divisions of this conglomerate. Expect at least $150 million in annual cost savings from the effort. (Textron's earnings this year should amount to about $550 million total.)

The recently announced sale of Textron's automotive plastics business is impressive. For a low-margin, cyclical business with $1.8 billion in sales, the $1.2 billion price tag was beyond my expectations. The increase in capital will give Textron management substantial flexibility to buy back stock or pay off debt, and it will also allow Textron's overall margins to increase.

Toro (TTC)

Toro's stated goal is to achieve 5% net profit margins by the end of 2003, which translates into an earnings run rate of roughly $6 a share. (According to the current consensus estimate, Toro is expected to earn $3.91 a share for the fiscal year ending in October.) Already margins are improving, costs are being squeezed, and assets, like working capital and inventory, are showing marked improvement in utilization.

Wednesday's strong earnings announcement -- in the face of a weak economy with sales depressed by poor weather conditions -- is more evidence that the new, revamped Toro is well-positioned for an economic upturn.

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