April 27, 2005
Research Associate: Soumik Dutta, MBA
Editor: Ian Madsen, MBA,CFA 1-800-767-3771, x 417
North Wacker Drive Chicago, IL 60606
Carlisle Companies Inc / CSL-NYSE / $71.48UPDATE: 1QFY2005 Results
Overview
North Carolina-based Carlisle Companies Incorporated (CSL) is a holding company for Carlisle Corporation and its wholly owned subsidiaries. It is a diversified manufacturing company focused on providing above-average returns to its shareholders through profitable growth. The company allocates its resources carefully to its businesses that have or can obtain leadership in their markets. CSL strives to consistently grow its businesses by increasing market share, improving manufacturing processes and targeting new markets with expanded product lines. The company markets its products both as a component supplier to original equipment manufacturers (OEMs) as well as directly to end-users. Carlisle's diverse product lines serve the construction materials, commercial roofing, specialty tire and wheel, power transmission, heavy-duty brake andfriction, foodservice, data transmission, process systems, and automotive industries. More information about the Company is available on its website:
Analysts have identified the following factors for evaluating investment merits of CSL.
Key Positive Arguments / Key Negative ArgumentsCarlisle has demonstrated a consistent track record of sales, earnings and cash flow growth in recent non-recession years. The company currently has an impressive streak in place of increasing its dividend for 28 consecutive years. / Cost of rubber and steel is still a major concern as it represents 65% of cost of goods sold. Availability of raw materials for insulation and synthetic rubber for the roof business is a matter of concern.
CSL enjoys leading market positions in most of its product lines. Approximately 65% of its revenues come from products enjoying a No. 1 or No. 2 position. / The company has overpaid for certain acquisitions that have failed to meet expectations, and are likely to impact margins in the near-to-intermediate term.
Construction materials, Specialty Tires and Wheels, Power Transmission Products, and Foodservice Equipment are CSL’s key growth engines. These businesses comprise over 60% of sales and over 85% of operating income, are well above average organic growers, and have double-digit EBIT margins. / The company has been implementing restructuring actions in several non-core divisions to improve profitability. The restructuring cost is expected to remain high in 2005.
The Roofing division has the potential to expand through organic means as well as through acquisitions as it builds out its capabilities on a nationwide basis. / With over 70 subsidiaries organized along 13 operating divisions and six reporting segments, the company is overly diversified for its size.
FY2005 is expected to be a productive year for portfolio updates and acquisitions. / Cyclicality: Q2 and Q3 are typically the most profitable quarters due to warmer spring and summer months.
The company expects to retain its high margins by trying to retain its leading position in the various sectors. As a result, it has disposed of the underperforming Automotive business that was considered too small to have pricing power and leverage in the OEM market but big enough to weigh on the company’s earnings and ROIC.
Revenues
Expected Sales
SALES / 2004A / 2005E / 2006E / 2Q05E / PROJ. GR '03-'06Industrial Components / $727 / $808 / $850 / $219 / 10.94%
Construction Materials / $722 / $885 / $959 / $237 / 18.30%
Automotive Components / $152 / $0 / $0 / $0 / N/A
Transportation Products / $150 / $169 / $174 / $45 / 12.68%
Specialty Products / $134 / $148 / $153 / $41 / 5.81%
General Industry / $495 / $496 / $516 / $130 / 5.84%
TOTAL REVENUE / $2,228 / $2,501 / $2,661 / $668 / 12.13%
Net sales rose 18% to $592.3 million in the first three months of 2005 in comparison with net sales of $503.2 million recognized in the first three months of 2004. Organic sales contributed $79.1 million, or 16%, to growth over the prior year, of which $2.3 million was related to the favorable impact of changes in foreign exchange rates. Organic growth was primarily attributable to the Construction Materials and Industrial Components segments. Acquisitions contributed $10.0 million to the year-over-year increase in net sales.
Segment Results:
Industrial Components: Net sales in Q105 increased 16% to $222.0 M over $192.2 M reported in the same period of 2004. Most of the increase was attributed to growth in the tire and wheel business in the commercial power equipment and lawn care, ATV, and replacement supply chains.
Construction Materials: Net sales of $171.5 M in the first quarter were 40% above first quarter 2004 net sales of $122.8 M, driven by a combination of strong demand across most product lines and higher pricing implemented to offset corresponding increases in raw material costs. First quarter 2005 EBIT of $14.6 M was significantly higher than first quarter 2004 EBIT of $6.6 M primarily due to the increase in sales volume and favorable product mix. Earnings in this segment also reflected a pre-tax loss of $4.2 M in Q105 ($4.1 M in Q104) related to the Company’s equity share in the European roofing joint venture, Icopal.
Transportation Products: Net sales rose 23% to $40.2 M in Q105 in comparison with net sales of $32.6 M in Q104. Q105 EBIT of $3.9 M was significantly above $0.9 M from Q104. The improvement in net sales was the result of higher shipments of large construction trailers, pneumatic bulk tanks and construction live bottom trailers. The increase in earnings reflects strong demand, favorable product mix, selling price increases and improved absorption of fixed overhead costs.
Specialty Products: Net sales rose 18% to $37.6 M in comparison with $31.8 M in the first quarter of 2004, due to higher sales of braking systems for off-highway, and industrial equipment as well as increased demand for on-highway heavy friction and relined brake shoes. First quarter 2005 EBIT of $3.9 M was 63% higher than first quarter 2004 EBIT of $2.4 M, primarily due to improved demand, selling price increases and manufacturing efficiencies.
General Industry: Net sales of $121.0 M in the first quarter were below net sales of $123.8 M posted in the first quarter 2004. Segment EBIT of $8.6 M for the first three months of 2005 was 11% below $9.7 M in 2004. A slight increase in net sales at Tensolite was offset by declines at Carlisle FoodService and Johnson Truck Bodies. The decline at Carlisle FoodService reflects lower sanitary maintenance product sales. Johnson Truck Bodies net sales fell below the 2004 level due to reduced demand for insulated temperature-controlled truck bodies and trailers.
One analyst (Wachovia) feels that if the company can control its rising raw material costs and benefit from previous restructuring activities, the EPS is expected to exceed the guidance.
Please refer to the Zacks Research Digest spreadsheet for specific revenue estimates.
Margins
Please refer to the Zacks Research Digest spreadsheet for more details on margin estimates.
MarginsOp'g, by unit / 2004A / 2005E / 2006E / 2Q05E / Trend Q/Q / Trend Y/Y / Trend '03-'06
Industrial Components / 8.4% / 9.0% / 10.0% / 11.0% / down / down / up
Construction Materials / 13.1% / 13.4% / 14.0% / 14.8% / down / stable / up
Automotive Components / -0.3% / 0.0% / 0.0% / 0.0% / up / stable / down
Transportation Products / 5.3% / 7.3% / 7.5% / 6.9% / up / up / up
Specialty Products / 3.9% / 8.1% / 8.4% / 9.2% / down / down / up
General Industry / 7.8% / 7.0% / 8.6% / 6.9% / down / up / up
TOTAL: Gross / 19.0% / 19.5% / 19.5% / 20.3% / down / down / up
TOTAL: Op'g / 8.3% / 9.6% / 10.3% / 11.0% / down / down / up
TOTAL: Pre-Tax / 7.6% / 8.4% / 9.2% / 10.1% / down / down / up
TOTAL: Net / 5.3% / 5.7% / 6.2% / 6.9% / down / down / up
Earnings Per Share
EPS / 2004A / 2005E / 2006E / 2Q05EZacks Digest Model Max. / $3.77 / $4.60 / $5.25 / $1.52
Zacks Digest Model Min. / $3.77 / $4.35 / $4.85 / $1.40
Zacks Digest Model Avg. / $3.77 / $4.47 / $5.12 / $1.46
The Zacks Digest Consensus model projects EPS will be $4.47 for 2005 and $5.12 for 2006. The EPS estimates for the whole year shows a Y-o-Y growth of 18.5%.
Management reaffirmed its forecast for 2005 EPS from continuing operations of $4.10 to $4.25 with the currently volatile raw material pricing environment and significant seasonality (mainly in the roofing business which is 2Q/3Q dependent) precluding a more robust forecast.
Please refer to the Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Our digest average target price is $32.03.
The target price for CSL varies from a low of $73.00 (Wachovia) to a high of $84.0 (Baird). The estimated highest target price of $80.00 (R W. Baird) is based on a16.0x multiple to FY06E EPS of $5.25 estimates. The lowest estimated target price of $73.00 (Wachovia) is based on 14x & 8x multiple on peak earnings/share and EBITDA est. of $5.50 & $11.00.
Rating DistributionPositive / 33.3%
Neutral / 66.7%
Negative / 0.0%
Avg. Target Price / $78.50
The valuations are primarily based on EV/EBITDA multiple and P/E multiple.
Please refer to the Zacks Research Digest Spreadsheet for further details on valuation.
Cash Flow
Cash flow used in continuing operations was $39.6 million for the first three months of 2005 in comparison with $4.9 million for the same period in 2004. Decreased utilization of the securitization program in 2005 reduced operating cash by $10.0 million in comparison with a contribution of $23.0 million resulting from increased utilization of the securitization program in 2004. Increased working capital was primarily the result of a planned build of inventory levels to meet the projected sales demand in the second quarter of 2005. Cash used in investing activities was $23.4 million in 2005 compared to $6.2 million in 2004. Capital expenditures of $23.8 million were 41% above $16.8 million in 2004. The increase in capital expenditures was attributed to new production plants for the Construction Materials segment and a new distribution center for Carlisle FoodService. Proceeds from the sale of investments, property and equipment in 2004 included the sale of properties acquired with the acquisition of Flo-Pac. Cash flow of $63.8 million from financing activities in the first quarter 2005 increased over $2.6 million in 2004 as a result of increased short-term borrowings required to fund organic growth.
One analyst (Wachovia) estimates Free Cash Flow will be $42 M. Capital spending is expected to be $400M on transactions and maintain a total debt to capitalization of around 50%.
Long-Term Growth
The highest projected long-term growth rate is 20% (KeyBanc) and the lowest projected growth rate is 9% (Wachovia).
The management expects FY2005 will be a productive year for portfolio updates and acquisitions.
The company is expected to be a very aggressive acquirer and is expected to devote lot of resources towards acquisitions. CSL is targeting a long-term goal of achieving more than 10% operating margins across all business segments. Raw material headwinds are expected to be under control by mid 2005. One analyst(R W. Baird) believes that the company will continue to improve inventories in Roofing and Industrial components to meet customer demand.
Individual Analyst Opinions
POSITIVE RATINGS
R W. Baird (updated 04/15/2005) – The stock is rated OUTPERFORM with a target price of $84. The analyst expects incremental profitability will accelerate in 2H05. The analyst estimates (excluding price realizations) year over year incremental operating margin will be 25% with particular strength noted outside the belt, roofing, and tire business.
NEUTRAL RATINGS
Goldman Sachs (updated 02/03/2005) – The stock is rated IN-LINE with no specific target price. The analyst believes the stock to be attractive because he feels the company has the ability to fully offset raw material related issues.
Wachovia (updated 04/14/2005) – The stock is rated MARKET PERFORM with target price of $72-$74. The analyst believes that the management will wait until mid-year to revise its outlook upward.
Analyst Recommendations and Revisions of ‘Carlisle Companies Inc.’1-5 Linear Scale / Current
(04/22/2005) / 1 Month / 2 Months / 1 Year
Ago / Ago / Ago
(1)BUY / 1 / 1 / 1 / 2
(2)OUTPERFORM / 2 / 2 / 2 / 1
(3)HOLD / 2 / 2 / 2 / 2
(4)UNDERPERFORM / 0 / 0 / 0 / 0
(5)SELL / 0 / 0 / 0 / 0
No Opinion / 0 / 0 / 0 / 0
Mean Rating / 2.20 / 2.20 / 2.20 / 2.00
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