Course 408: Cyclical Stocks
Is the Firm Diversified Geographically and by Product Line?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

The reason cyclicals such as DuPont DD and Emerson Electric EMR can post rising earnings even in a recession is that they are diversified: Not all the cyclical businesses in their portfolios move in sync. United Technologies is diversified by product line, but all its businesses (aerospace equipment, heating and air-conditioning, and elevators) are both cyclical and dependent on the same economic factors. Of course, that's not so bad, even if it does spawn big swings in earnings. Cyclicals constantly face the temptation to diversify into new businesses to reduce risk, but their records at such diversification are often horrendous. They are generally best off sticking with what they know. A more appealing type of diversification is geographic, and United Technologies does better in that regard. About 40% of the company's revenues come from outside the United States. This diversification not only gives the company some cushion when the U.S. economy turns sour but it also means United Technologies has exposure to developing parts of the world, which are growing much more rapidly than the U.S.

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