General Electric, which makes everything except kitchen sinks, got in trouble when its diversification went awry, and the 124-year-old company posted billion-dollar losses in financial services, which was far from its area of expertise. But don't write off all conglomerates because of GE's empire-building fetish.
recorded big gains over the past year as the stock market rallied. Danaher rose 56%, and 3M increased 97%, each with low volatility compared with broader equity indices.
While 3M and Danaher have "buy" ratings from the
model, both are bested by
in terms of overall score. All three come in far ahead of General Electric, which has a "hold" rating.
United Technologies enjoys the diversification of a conglomerate, while protecting itself from wildly disparate industries such as entertainment and financial services, which contributed to GE's downfall. United's subsidiaries include Pratt & Whitney engines, Otis elevators, Carrier air conditioners, aircraft-systems maker Hamilton Sundstrand and Sikorsky helicopters.
Those industries allow for diversification benefits, but their core abilities are similar enough to enable management to focus on one primary concern: engineering superiority. After all, adding disparate industries to a business plan makes every decision difficult, since the outcomes multiply.
United Technologies' focus on the military, a segment of the budget the government is unwilling to cut, and major systems like heat, ventilation and air conditioning, which many companies are upgrading and improving to boost energy efficiency, makes it an exceedingly attractive investment. In addition to its strategic alignment, United Technologies also sports strong financials, making it clearly superior to GE.
Investing in any of the three conglomerates over GE would have been a wise decision over the past three years. United Technologies and 3M gained about 20%, while Danaher climbed 7%. In contrast, GE lost 47% of its value, dragged down by the finance unit, a business that should never have gotten so big.
Conglomerates carry unique strategic risks, as overzealous executives build empires and, thus, take on too much. United Technologies has remained within its abilities, so it offers investors exposure to equity markets with more stable prospects.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.