Wednesday, August 27, 2008

Durable Goods Will Stay Strong

The durable goods sector continues to confound the gloom and doomers. July's growth for the sector was 2%, with year over year growth at nearly 7%. While the sector's string of good numbers seems to surprise investors every time new data are reported, it shouldn't, the major players are all companies that are benefiting from five powerful forces:
  1. They are prime beneficiaries of globalization.
  2. They are net exporters, thus, they have benefited from the fall in the dollar over the last several years.
  3. As a result of many years of consolidation, they are a much more focused industry with far few players than just a few years ago.
  4. They are getting a tail wind from companies in the US who are using these softer economic times to upgrade their operating efficiencies through the purchase of new capital equipment.
  5. These companies are not the old metal bending companies that come to mind when many people first think of the group. The companies, in many cases, have converted themselves into technology companies that bend metal around some sort of a computer application.

Yet, while this group has continued to put up good numbers, many of the best companies in the group have languished, including United Technologies (UTX). Its price is down 11.8% over the last year, even though its earnings have risen in mid-double digits.

Indeed, looking at UTX from an historical perspective is very revealing: Over the last 20 years, UTX's earnings and dividends have grown at about 10% per annum. During this same time, its P/E has averaged about 20x. Based on projected earnings for 2008, with earnings growth projected to be up nearly 12.5%, UTX's P/E is running at about 13.5x earnings. This doesn't make much sense. Earnings growth will be up nearly 25% over UTX's long-term average, yet it's price to earnings multiple will be down nearly 30%. The same kinds of relationships hold for its 10 and 5 year ratios, as well.

UTX, along with many other durable goods companies, have gotten very cheap, and we don't believe the forces that have driven their successful operating results are going away anytime soon. Thus, we believe they are significantly undervalued.

This means we are not in the camp that believes that the dollar is starting a secular upward march, neither do we believe that the forces of globalization are at and end.

Our Dividend Valuation Model above shows that UTX has sunk deep into an undervalued condition. Our model is projecting that 2009's fair value for UTX is near $82. With the stock selling around $65, that leaves room for a nice potential gain in the coming year.

As we say often, our model is not foolproof, but we believe it has done a good job of uncovering relative value over the years. We think UTX is a great company and a good value. We own the stock and have been buying it. If you would like more information on the services Donaldson Capital Management offers, please see our website:

My email address is

This site should not be used for investment decisions. It is for information purposes only.

Tuesday, August 12, 2008

lllinois Tool Works: Works

Illinois Tool Works (ITW) is the epitome of a capital goods or industrial company. They make products that manufacturers the world over use to make finished goods. Indeed, many investors watch ITW as a barometer of the whole economy because their product line is so diverse and their business so geographically broad.
The company recently posted 17% growth in earnings vs. a year ago and increased their dividend 11%, both slightly higher than market expectations.
ITW serves customers in 50 nations through 800 companies, all engaged in industrial products. About 50% of their earnings come from outside the US. Their presence in Asia and the Far East is growing rapidly.
The Dividend Valuation Model above shows that ITW's price is buried in its value bar. According to our models, that is a sign of undervaluation. Indeed, you have to go back to the early 1990s to find a time when the stock was as cheap as it is today on a relative basis.
Based on the current fiscal year's projected earnings, ITW is selling for under 14X. That is well under its 20-year average PE of nearly 20X. We can find no reason for this cheapening of the stock, and we believe as the market finds its footing and begins to move higher that ITW has a lot of catching up to do.
We own the stock and have for the last couple of years.
For more information on Donaldson Capital Management, please see our website

Saturday, August 02, 2008

About Donaldson Capital Managent And Living Income

Donaldson Capital Management serves clients in 30 states and a few foreign countries representing nearly $360 in assets. How is is that a firm from a modest sized town in the Midwest serves so many people is such a wide geographic area? We believe there are two reasons. One of our New York clients said 20 years ago, "Remember I do business with you because you are from the Midwest and not from New York." I asked him what he meant by that statement. He said, "You know that old line in the song, 'if you can make it here, you can make it anywhere, New York, New York?' Everybody in New York is trying to make it. Make it big, make a name for himself or herself. I believe one could say I'm trying to do the same thing, but I don't want someone trying to make it on my money. I look into these money mangers eyes and I don't see me anywhere. I see them and their agendas. On the other hand, when I look into your eyes I see me. I'm important to you. I figure if I am important to you will will do your best. that's all I ask. But remember one thing. I don't need you to make me rich. I'll do that or not do that for myself. I want you to hang on to what I've got and make it grow. If you do that I will never leave. Now I am leaving my New York money manager because his game is clear to me -- I have become a part of him making it. I don't like the feeling and it is completely clear to me that is what is going on." We have served that man for nearly 20 years. Since he is still with us, I'm guessing that we still make him feel like we are more interested in "him" making it than us making it. One reason for our success in attracting clients from areas outside Indiana and the Midwest, is that we don't take a cavalier approach to client relations. In fact, that's what we are all about. We believe our clients are a blessing to us, and hopefully we to them. The second thing that Donaldson Capital Management has to offer, in my estimation, that makes us very rare among investment managers, is our ability to provide "living income" out of people's assets. People come to us with 35 mutual funds headed in umpteen different directions, trying to live off of the "capital gains" the darn things produce. We show them that retirement is a lot easier if you invest in dividend paying stocks and income producing securities that actually produce the income you need. Most people are shocked to learn that it is possible to produce 5%-6% in income from a portfolio of investment grade stocks and fixed income with a strong probability that the income and capital will increase in the future. You don't need to do Monte Carlo simulations or other tests if you only take the income the portfolio actually generates. If you do that you won't be tapping the principle, thus the tough markets we have been going through lately are much more tolerable. Indeed, almost all of our clients' portfolios will produce more income this year than last, even though the values of their portfolios may have fallen in value. We own what we think are the best companies on earth; why in the world would we want to sell these great companies for today's lousy prices. We'll just wait out this latest tizzy that the markets are going through. Our feeling is if the greatest companies on earth aren't worth anything, then what is? Is the US government, or China, or, France more important than Johnson and Johnson (JNJ) or Wells Fargo (WFC) or Proctor and Gamble (PG)? Most of these companies have been around for a hundred years. They have taken on all comers and every stripe of politician, and they have not only made it, they have prospered. Why would we want to bail out of them to go into T-bills yielding 1.8%, when all of these companies have probably produced an average annual return in excess of 10%. There are thousands of you who read this and I know most of you are interested in dividends in some way. As you know, we think they are the heart and soul of investing and the key to an abundant retirement. If you have grown weary of CNBC's crisis-a-day hype, wary of Wall Street and their programs that are supposed to be good at zigging and zagging at the right time, you might find our long-term income-oriented approach a blessing. Our particular strategy is dealing with people who are in or nearing retirement. Our minimum account is $500,000, with the average near $1.5. We are fee only, so their are no hidden charges. I am talking in this blog about Donaldson Capital because I see a crisis forming in investment management in this country. It seems the whole industry has gone to some form of Modern Portfolio Theory where you spread your money across the whole globe and then try to live off capital gains. We think in the years to come this kind of approach will be increasing discarded because there is no attention to income -- the thing you live on. Increasingly people are going to realize that 4 times in the last 8 years there were no capital gains, thus their living income came from principal. No one wants to live that way, if they can help it. If you have an interest in finding out more about Donaldson Capital Management, email me at I also encourage you to check out our website at I like to say that our company has a head and a heart, and both of them are very good. The stakes are high, we think there is a better way for most people to harvest their retirement assets.