The conglomerate business form sounds good in theory -- diversify across industries to minimize volatility and maintain steady growth and margin rates.

One company that has embraced the theory is Tomkins PLC (TKS), a British-based company that produces pedestrian things that rust and wear out: transmission belts, industrial hose and connectors, valve products, bathtubs, whirlpools, taps and faucets, doors and windows, and air conditioning components.

Most consumers know Tomkins through its Trico windshield wiper blades, standard equipment on over half the cars sold in the United States; Lasco, one of the largest manufacturers of bathtub; and Gates Rubber, a leading manufacturer of fan belts.

Tomkins bifurcates its business into two segments – industrial & automotive and building products. The former accounts for 72.2% of revenue and 76.5% of profits while the latter accounts for 27.8% of revenue and 23.5% of profits.

Tomkins' latest quarterly results suggest management is performing well. First quarter 2006 revenue increased 13.2% from $1.55 billion to $1.75 billion from the year-ago period, operating profits increased 6.6% from $140 million to $149.7 million, and EBITDA increased 9.68% from $205.6 million to $225.5 million.

It would seem conglomeration works. Tomkins even promotes its benefits in its 2005 annual report: "The [Tomkins'] businesses operate in a variety of end-markets, and this diversity provides the Group with a natural resilience to a weakness in any one particular market."

It's a nice sentiment. Unfortunately, it's one not entirely true. Sixty-eight percent of Tomkins' revenues are generated in North America; 18% are generated in Europe. What's more, most of Tomkins' businesses are sensitive to changes in both the business cycle and interest-rates.

No one, then, should have been surprised (though many were) when Tomkins issued a profit warning in September, stating it would book a $20 million charge for cutting jobs and closing plants amid a production slump at Ford (F) and General Motors (GM) and falling building-product demand. Those surprised acted accordingly, lopping 14.7% off Tomkins' equity value.

Tomkins' stock has subsequently recovered to trade at the lower end of its two-year range of $19 to $24. The rebound was fueled by a widely circulated rumor that former CEO Greg Hutchings proposed a leveraged buyout. (Hutchings left Tomkins in October 2000 after it was discovered his wife and housekeeper were on the payroll and he kept two company apartments for personal use.)

Hutching' LBO attempt fizzled, but other financiers might relight the fuse (Carl Icahn, are you listening?). Sophisticated investors know the primary conglomerate rational – diversification – is specious. Business diversifications rarely work as well in practice as they do in theory, with the exception of Berkshire Hathaway (BRK.A, BRK.B); management is more effective when its efforts are focused. Sophisticated investors also know they can diversify a portfolio across industries much cheaper than a company can diversify its operations.

Tomkins has been in a funk for over two years; fewer investors aren't buying its business model. Some are losing patience and selling; others are betting on an eventual de-conglomeration. Those betting on de-conglomeration are making a relatively safe bet: Tomkins' parts are conservatively valued at $40 a share in a break up, it is a leader in many of its markets, and its stock is trading at 11 times earning and is providing a 4.5% dividend yield.

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Tickers in this Article: TKS, F, GM, BRK.A, BRK.B

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