Carlisle Companies' Growth Initiatives Continue

By Will Ashworth | March 22, 2012 AAA
Slightly more than a year ago, I highlighted the growth initiatives of Carlisle Companies (NYSE:CSL), a SMid-Cap based in Carlisle, Pennsylvania. The 95 year old company is well on its way to achieving its 5-15-30-15-15 strategy. In today's article I'll get you up to speed about where it's at in the process.

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What Is 5-15-30-15-15?

It's a vision for a better company. The strategy includes five key targets as it continues to grow its five business segments. The targets include $5 billion in sales, 15% earnings before interest and tax margins (EBIT), 30% of revenue outside of the United States, 15% return on invested capital (ROIC) and 15% working capital as a percentage of sales. Using the Carlisle Operating System, it's been able to find $20 million in annualized savings in each of the last three years. It expects to achieve the same in 2012. Combine these savings with strategic acquisitions and you have the makings of a large cap in waiting. For related reading, see A Clear Look At EBITDA.

Getting Closer

Carlisle announced its strategy in February 2008. Four years later, it's made remarkable progress. In terms of revenues, it finished 2011 with $3.22 billion in sales, 25% higher than in 2007. Considering we've been through a major recession, revenue growth is just fine. Next up is 15% EBIT margins, and here it definitely needs improvement. In 2007, they were 12.1%; today, they're 360 basis points lower at 8.5%. Again, it's important to remember that most businesses reset in 2008. Carlisle is no different. It's heading in the right direction. Its third goal, which is to generate 30% of revenue from international markets, is clearly on target. Finishing 2011 with international revenues contributing 20% of overall sales, it's gained 930 basis points in just four years. In another three to four years it will hit this target. Its fourth goal is going to be a tough one to reach because its current ROIC sits at 8.8%, 620 basis points from its target. In order to reach the 15% ROIC, its net operating profit after tax will have to increase from $195 million in 2011 to approximately $340 million, which translates into $472 million in operating profit before tax, something it's never done. Lastly, its working capital finished 2011 at 18.6% of total sales, the first time it's been able to do this since implementing its strategy in early 2008. All five goals are reachable within the next five years. It's made real progress.

Carlisle Companies and Peer Group

Company

EV/EBITDA

Carlisle Companies (NYSE:CSL)

10.07

Crane (NYSE:CR)

7.66

Harsco (NYSE:HSC)

5.34

SPX (NYSE:SPW)

10.36

Teleflex (NYSE:TFX)

8.57

The Trouble Spot

Currently, two segments are holding it back: transportation products and food service products. The two businesses, if you combine revenues, had an EBIT margin of 2.3% in 2011. Meanwhile, its three healthy businesses: construction materials, brake and friction and interconnect technologies, when combining revenues, delivered an EBIT margin of 13.2% on $2.3 billion in revenue. Most notable is the EBIT profit of its brake and friction business. In December 2010, it acquired Hawk Corporation, a maker of disc brake pads and rotors for cars, trucks and motorcycles. Prior to the acquisition, this division was barely making money. In 2011, its EBIT profit was $77.2 million. I have no doubt that it will fix the other two businesses in short order. Otherwise, its business appears in perfect health.

The Bottom Line

Last March I considered its stock price, then trading at $42.50, fairly valued in the short-term, but a deal looking five years into the future. At the time, Morningstar gave it a fair value of $41. Today, its fair value estimate is 15% higher at $47. Meanwhile, Carlisle's share price continues to trade about $2 higher at $49.60. I'll take 20% capital appreciation and 1 to 2% dividend yield every year until something changes. Stable returns are always welcome.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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