A 5-Star Stock That Flies under the Radar

Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

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Carlisle Companies, Inc.
Moat: None | FV Uncertainty: Medium | Price/Fair Value Ratio*: 0.63 | Three-Year Expected Annual Return*: 28.6%

What It Does: Carlisle Companies (CSL) is a diversified manufacturing conglomerate operating in five business segments. Its products include roofing membranes, nonautomotive tires and wheels, truck trailers, off-highway brakes, food-service products, and high-performance wire and cable, among other things. The company derives more than 90% of its revenues from the U.S. market.

What Gives It an Edge: Strong competition within Carlisle's various industries prevents Morningstar analyst Min Ye from crediting the firm with an economic moat. That said, Carlisle is one of only a few firms in the roofing industry (50% of its total sales), as difficult-to-replicate distribution networks keep new firms from entering the market. Also, due to its operational efficiency and well-executed acquisitions, Ye points out that Carlisle has delivered an impressive record of profitability for 15 straight years, in spite of its mostly cyclical markets.

What the Risks Are: A potential investor should be aware that Carlisle bears various execution and integration risks as an acquisitive manufacturing conglomerate. In rebalancing its portfolio for growth opportunities, Carlisle risks buying businesses at cyclical highs and selling at cyclical lows. Moreover, Carlisle's results are dependent on various forces that are outside of the company's control, such as raw-material prices and weather.

What the Market Is Missing: Ye believes Carlisle's stock was punished along with the general slowdown in the commercial and residential construction markets. However, Ye argues that the roofing industry is less cyclical than the construction industry in general because 70% of all roofing projects are for existing homes or buildings. Moreover, Ye has identified a secular growth trend in the adoption of single-ply roofing over traditional asphalt roofing, which is being driven by the demand for increased energy efficiency. Carlisle is a market leader in single-ply roofing, where its heat-reflective TPO product has steadily gained market share. Also, building codes are expected to incorporate even higher energy efficiency requirements for commercial construction in the next few years. Ye thinks this will further increase demand for Carlisle's single-ply roofing membranes. Lastly, Ye points out that Carlisle is covered by only a handful of sell-side stock research firms, so it's likely flying under Wall Street's radar.

* Price/fair value ratios and expected returns calculated using fair value estimates, closing prices, and cost of equity estimates as of Friday, April 25, 2008.