| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
Old? Yes. Stodgy? Yes. Cash-Rich? You Bet Take a look at the Rust Belt's newly polished gems To see why some investors have abandoned old-line companies for dot.coms, consider the bad week Goodyear Tire & Rubber Co. (GT) had in late October. On Oct. 26, Goodyear was one of four older companies kicked out of the Dow Jones industrial average club to make way for stars of the New Economy, including Microsoft Corp. (MSFT) and Intel Corp. (INTC) Topping off the week, on Oct. 29, a Goodyear blimp crashed at its base near Akron. Just another gloomy day in the Rust Belt, right? Certainly, many old-line companies have been beaten up over the past two decades--mainly because they can't match the growth rates of Internet startups and other techie highfliers. Says Mark Koznarek, a partner at Midwest Research in Cleveland: ''Investors view the industrial market as still a 'show me' market, but they'll believe anything about an Internet stock.'' Look again. Turns out there are plenty of old-line industrial gems ready to serve as reliable hedges against bad times (table). Some have remade themselves for fast growth in niche markets. And they actually make real things that earn real cash, which is more than can be said for many Net hotshots. CAR TALK. In fact, products made by old-line companies are major pluses often overlooked by investors. Sales of everything from valves to pumps to locomotives are being buoyed by the strong economy. And old-line companies are awash with free cash. Take a mundane sector such as auto parts. Competition is fierce, and margins are razor-thin. Still, demand for cars this year is almost 17 million vehicles, all needing parts. When Net stocks overextend themselves, ''investors will shift back into value'' and reap the rewards of old-line companies, predicts Kenneth Blaschke, an auto-industry analyst at Deutschebank Alex. Brown in San Francisco. His best bets for auto-parts companies are Johnson Controls (JCI), Delphi Automotive Systems (DPH), Dana (DCN), and perhaps Visteon Automotive Systems after its spin-off from Ford Motor Co. (F) is completed. Many of these blue chips have learned how to remake themselves and increase revenues in mature markets. Procter & Gamble Co. (PG), for example, has long been considered a valuable blue chip, but in recent years it has been calcifying with lackluster sales. So two years ago, P&G execs announced a massive corporate redo to kill bureaucracy and turn P&G's stodgy corporate culture on its head. The goal: Get new products to market faster. So far, the scheme has worked. P&G, with sales of $38 billion and net income of $3.7 billion for the year ended in June, has introduced new brands, including a mop and home dry cleaner. Its stock has jumped from about 86 a year ago to about 113. ''They really are a great buy,'' says Andrew Shore, an analyst at Paine-Webber Inc. Indeed, a number of old-line companies are finding new life by concentrating on the Net, using it to revolutionize how they buy and sell products. General Motors Corp. (GM) and Ford are going for pricing advantage with plans to do most supply purchasing on the Web. Pump and compressor maker Ingersoll-Rand Co. (IR) is developing such niche products as special refrigerated trucks for future e-grocers selling food over the Web. And it is focusing on major projects as paving equipment, hoping to cash in on big increases in federal spending for highways. Ingersoll-Rand's stock is selling at only 13.2 times earnings this year. Midwest's Koznarek is especially high on the company. Its rich free-cash rate is $3.50 per share and could be even more next year, he says. Still, old-line companies don't get much respect. ''Will people go back to the Procter & Gambles of the world?'' asks Mark L. Parr, a senior analyst at McDonald & Co. Investments in Cleveland. ''It's not an issue of if but when.'' If the Internet bubble bursts, the old reliables will be waiting as safe havens. By PETER GALUSZKA _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Old? Yes. Stodgy? Yes. Cash-Rich? You Bet TABLE: Old Line Picks Best Bet: Big but Spry INTERACT E-Mail to Business Week Online | |||
