These 3 Small Stocks Could be GE's Next Takeover Target

Okay, I had to stretch my imagination reading this article, but then that’s not always a bad thing to do…  The OPEESA Editor

September 27 -- When he was head of General Electric Jack Welch had one rule for his company: Be the top player in the field, or don't even bother. The numbers backed him up. Business school professors repeatedly teach that an industry leader can have up to twice the net profit margins of the second-leading player (which in turn has twice the profit margins of the third-leading player).

So whenever GE enters into a new niche, it likes to make a rapid push to establish industry leadership.

That's why mining-equipment firms are buzzing right now. GE has stated plans to become a $5 billion player in the industry within a few years. A few acquisitions in the space -- including a May $466 million purchase of Australia's Industrea Ltd. and an August deal for Fairchild International for an undisclosed sum -- have already gotten GE to a $2 billion run rate in the mining-equipment industry.

But there's no way GE can go from $2 billion to $5 billion in just a few years through good old-fashioned organic growth. In fact, the company readily concedes that it will need to make more deals to hit its ambitious target.

This should come as welcome news to investors who are already eyeing the mining sector.

The move comes at a curious time. Leading mining equipment players such as Caterpillar are already warning of a slowdown.  Why would GE want to invest in an industry that might be cooling off?

It's because the company thinks long-term and is well aware of the fact that many large mines around the world have already given up their most accessible bounty, so future mining efforts will have to dig deeper to get at the good stuff. That's why GE wants to become a leading player in the niche of helping miners work more efficiently, in ever-more challenging environments.

So which company is GE targeting in order to become a key player in this space? Well, industry rumors have been focused on Joy Global which may seem like a bargain for GE after its stock has slid from $96 in early 2012 to a recent $54. Indeed, on a fundamental basis, this is likely a solid entry point, as Joy Global's earnings per share power could exceed $10 by mid-decade thanks to a series of recent acquisitions. It's the near-term mining industry pressures that keep investors from taking that long view.

But here's the real reason the rumors of a GE/Joy Global are likely incorrect. Joy Global is simply too big. The company's current market value is $5.8 billion, and GE would likely need to offer $8 billion or more to snap up the company. GE rarely makes a deal of that size, and has instead been hinting at smaller tuck-in deals.

Instead, three other companies do look like a nice fit for GE. And while you shouldn't buy a stock solely based on takeover rumors, any deal that transpires would make an investment in any of these stocks just that much sweeter...

1. Generac Holdings

Mining industry watchers may be overlooking this choice because it's not really a mining play. Instead, Generac has made clear inroads into the consumer and industrial spaces with its wide range of generators and back-up power plants. Yet as GE notes, the next wave of investments for mining firms is for equipment that helps them work more efficiently in remote locations.

Climbing deeper into mines, or venturing farther away from key power grid sources, makes the supply of steady power more challenging. Generac's gear is perfectly suited to this task and nicely complements GE's other offerings in this sphere. GE could likely acquire this company for less than $2.5 billion (implying a solid 50% premium for Generac's shareholders) and add $1 billion in sales to the GE mining division -- before GE uses its sales network to boost Generac's revenue streams even higher.

2. Actuant

This is another company that isn't involved in mining per se, but is perfectly suited for the industry. Actuant makes a wide range of products used in complex construction environments, such as hydraulic lifts, machining equipment, electrical products and power transmission. GE continues to stress a goal of helping miners work in more complex environments, and Actuant has 100 years of experience in helping customers do just that.

The current $2.15 billion market value implies GE could have this business for less than $3 billion and layer in Actuant's current $1.6 billion run rate into its own mining division.

3. Columbus McKinnon

This company's product line consists of hoists, jibs, cranes, shackles, winches and many more goods that are used to establish platforms in unstable environments.  Although ship building, logging and transportation have been its core markets, it's starting to build a presence in mining as well. The current $300 million current market value would make this an especially digestible acquisition for GE.

Risks to Consider:  Stocks should never be bought solely on the basis of a possible buyout, and should pass muster from a research perspective, so use these ideas as a starting point for further analysis.

  David Sterman     www.streetauthority.com  

Hilliard Corporation Powers Elmira and the World

107-Year-Old Company Makes Parts and Differentials Used In The OPE Industry

There are a few important items one needs to know about the Hilliard Corp., a family-owned manufacturing company located at 100 W. Fourth St. and 1400-1700 College Ave. in Elmira.

The first is there is no longer anyone named Hilliard involved with the 107-year-old company. The founder William Hilliard left the business in 1912 -- seven years after he established the Hilliard Clutch & Machinery Co. in a small brick building near the Erie-Lackawanna railroad tracks on West Fourth Street. The company is now run by the third generation of the van den Blink family.

The patented front-end differentials the company now makes, which transfer power from a vehicle's drive shaft to its wheels, are found on every four-wheel-drive utility and all-terrain vehicle made by the Polaris Company of Minnesota. Hilliard-made differentials are also used on products made by Toro, Ariens, Briggs and Stratton and MTD. Its clutches are used in refrigeration units made by Thermo King, also of Minnesota.

And finally, Hilliard industrial filtration systems, designed to clean the fluids that lubricate factory machinery, are used on the power-generating turbines made by General Electric, Siemens and Dresser-Rand. The filters are also used on the specialized machinery used by natural gas transmission companies.

"Anytime you flick a light switch or turn on the gas, it usually involves our products," said Jon Williams, a Hilliard vice president and director of its Hilco filtration division. "Our stuff goes worldwide; it's shipped to 50 to 60 different countries."

An Array Of Products

Hilliard's product menu, which includes a diverse selection of clutches, brake systems and fluid contamination control systems, is a very long way from the single product the company made in its early days. From 1905 to 1925, Hilliard's bread and butter was a device called a disconnect clutch, used to start and stop production equipment in the early days of the machine tool industry.

But by the mid-1920s, factory machines were built with their own individual motors. They no longer needed Hilliard's clutches to connect them to the centralized motor-and-belt system used to power all of the machinery in a particular factory.

With its lone product now outdated, Hilliard was about to go belly-up until it ventured into a new manufacturing activity -- building oil reclamation systems for General Electric.

The systems removed particles and liquid contaminants from the lubricating fluids that ran through GE's power turbines, allowing the fluids to be reused many times over.

Hilliard engineers eventually began designing their own line of industrial filtration products, which were tested and built in-house by the company's metal fabricators and machinists. The product line now includes a variety of portable and fixed industrial filters, vent mist eliminators which remove oil mist from the air and machine tool coolant recyclers. It's also commonplace to see many Hilliard filtration units hooked up to the machine tools the company uses to make its products.

All Hilliard filtration products are grouped in its Hilco division and account for about half of the company's business. The other half comes from motion control products, which are all designed by the company's engineers and used in a variety of applications.

For example, Hilliard clutches are used to control the large ventilation fans that circulate the air in the Lincoln Tunnel. A reconditioned version of its disconnect clutch is used on the merry-go-round at Eldridge Park.

A Growing Business

The Hilliard Corp. still operates out of its original building on West Fourth Street. But its metal fabrication and machining shops have grown to incorporate the area bordered by West Fourth and West Fifth streets, the Erie-Lackawanna Railroad tracks and North Main Street.

The former Moore business form building, at West Fourth and Magee streets, is where Hilliard industrial clutches are assembled and where its research and development work takes place. The company has also built a new addition, across the parking lot from the original building, where its filter cartridges are manufactured.

In early 2004, Hilliard purchased the former Hardinge property at 1400-1700 College Ave., which now houses its drive-train operations.

"In the 1980s, Polaris came to us for help in designing a clutch," said Jan van den Blink, Hilliard's chairman and CEO. "We did the clutch for them and it was used in their front drive ATV. Now, we provide Polaris with all of their front-end differentials."

In all, said van den Blink, Hilliard now incorporates about 353,000 square feet of manufacturing space, more that 75,000 square feet of office space and about 76,000 square feet of storage space. The company employs about 600 people -- 400 at its main campus and 200 at the drive-train facility on College Avenue.

Close to 80 people have been hired over the past two years, said Executive Vice President Steven Chesebro, and there are between 60 and 65 skilled job classifications, including welders, engineers, shippers and machinists, within the company. But like many other local manufacturers, it's getting harder for the company to find qualified employees.

"So we stay close to Corning Community College and (the Pennsylvania College of Technology) to develop a pipeline," Chesebro said.

Made From Scratch

In an era when many manufacturers assemble components provided by outside suppliers and sell the finished product, Hilliard designs and makes almost all of the components for its products from scratch. The exception is the external housings for the company's clutches, which are cast by an outside vendor but based on Hilliard's designs.

Otherwise, the raw material -- carbon steel, stainless steel and engineered paper for the filter cartridges -- comes into Hilliard's West Fourth Street campus, where it is cut, rolled, bent and welded into its final shapes. The company has recently purchased machinery that allows it to handle parts of its manufacturing processes that were completed by outside companies.

Hilliard is also in the midst of installing a second robotic assembly line at the College Avenue facility that will increase the efficiency and capacity of its Polaris product production. The project's targeted completion date is March.

"Doing as much as we can ourselves allows us to keep our costs down and give us a higher measure of quality control," said van den Blink. "We can design, test and build our own products and there aren't many manufacturers left who can do that."

  www.stargazette.com