Superior Strategies

Standard & Poor’s ranks over 7,800 publicly held companies for compound growth in total return. Some of the best-performing companies highlighted here offer insight into how firms deliver superior performance over the long term.

Delivering Diversity Oshkosh Trucks Inc., based in its namesake town in Wisconsin is a truck and heavy equipment maker that continues to haul in profits. The firm, founded in May 1917, has concentrated on building trucks, with a reputation for making rugged earthmovers, military vehicles, aircraft fire and rescue trucks, cement mixers and garbage-collecting equipment.

Its growth began to accelerate in 1996 with the start of an acquisition spree that has broadened both its product line and geographic reach. Over the last 19 years, Oshkosh made 15 acquisitions.

Oshkosh’s open-ended strategy is exemplified in the field of fire vehicles and related machinery. With the purchase of Pierce Manufacturing in the late 1990s, Oshkosh got deeper into the manufacture of fire apparatus. Though Oshkosh’s own line of airport fire and rescue trucks were definite leaders in their segments, the company moved into a new market – municipal fire apparatus – with the purchase of Pierce. Since the acquisition, Pierce has become one of the top-selling fire trucks. But, Oshkosh was not satisfied with selling just in the North American market. In the first half of this decade it bought purchased BAI, an Italian fire apparatus maker.

And with its $3.1 billion purchase of JLG Industries in late 2006, Oshkosh Trucks made a move into a new market segment while further expanding its reach in the field of fire-related vehicles. McConnellsburg, Pa.-based JLG makes access equipment – motorized equipment used to lift workers and materials.

It was a natural fit for Oshkosh, notes Charlie Szews, Oshkosh president and chief operating officer. “They look and feel like Oshkosh,” he said. And it has given Oshkosh a single global product. “We bought them … to push us more globally,” Szews adds.

With the JLG purchase, Oshkosh saw a huge shift in the sources of income. In 2006, defense sales made up 61 percent of income; fire and emergency vehicles 22 percent and commercial vehicles 17 percent. After the JLG purchase, access equipment sales accounted for 40 to 45 percent of income, defense 20 to 30 percent, fire and emergency 15 to 20 percent and commercial 15 to 20 percent.

Furthermore, Oshkosh expects military sales to be robust over time, as the defense sector replaces worn-out equipment. “Our funding for defense base is in place for fiscal year 2008 and 2009,” Szews said. He looks for defense vehicle sales to remain strong for another three to five year, at least.

Plus, Oshkosh is entering the competition to design and build the replacement for the military’s Humvee.

Steady Stream Another total-return leader is Aqua America Inc. of Bryn Mawr, Pa., the 120-year-old water utility that provides water and wastewater services to 2.8 million residents in 13 states from Maine to Illinois and from Texas to Florida.

The barriers to entry in this field are quite high, notes Nicholas DeBendictis, the company’s chairman and CEO.

As DeBenedictis notes electric utilities, private equity investors and energy companies have dismal records of attempting to break into this field. Their failures don’t mean that this industry is limited. A ripe acquisition field of 50,000 private-water system awaits those firms able to consolidate it.

Aqua America’s strategy is straight forward. It purchases small private water systems, such as those built by suburbs, small towns or even development home owners associations. The company then invests the money needed to improve the systems and gains regulatory approval to raise rates to cover the investment — and make a reasonable profit. Over the last 10 years, the firm has made nearly 200 acquisitions or embarked upon growth projects.

“We make our investment one year and get back our profits from the regulator in the next year,” DeBenedictis explains. Indeed, he likes being the head of one of only 12 publicly traded regulated water utilities. The regulation actually helps provide assurance of Aqua America’s profitability. As Aqua America requests rate increases (typically 3 to 4 percent a year) to cover investments, the regulators also ensure that the firm and its shareholders benefit from its activities. The firm typically delivers water to residential customers at less than a penny a gallon.

Those investments, though, require substantial capital outlays (generally about $250 million a year. Since Aqua America is a regulated utility, it can tap the credit markets at better rates than the rest of corporate America. Borrowers know that the rate payers will be there, and thus creditors are willing to lend to Aqua American at favorable rates. DeBenedictis estimates that the firm pays less than 5 percent on many of its loans.

The firm has earnings growth of about 10 percent a year, he says.

The water industry isn’t ripe for the next Google, but it is the right environment for reliable performance. “We have a monopoly, and there’s a sleep-at-night attitude” that goes with it, concludes DeBenedictis.

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Clifton Linton is a Bay Area-based writer specializing in energy markets and investing.