Industrial conglomerate ESCO (NYSE:ESE) strikes me as another investment Rorschach test, as how you arbitrate between ESCO's high-potential collection of businesses and its uninspiring historical performance says a lot about whether you trust past performance as a good predictor of future results or whether you believe businesses should be valued based upon what they can do in the future.
ESCO's track record in terms of margins, free cash flow generation, returns on invested capital, and tangible book value growth doesn't inspire much confidence, and I don't think that the performance issues of the smart meter business (Aclara divested years ago) fully excuse it. On the other hand, it's hard not to like a good filtration/fluid control business and a collection of other business with good market shares and the potential for improved growth and margins. Today's valuation isn't absurd on the basis of what ESCO could become, but for my own personal investment approach, I demand a wider margin of safety unless/until management shows this "new and improved" ESCO really is here to stay.
ESCO Technologies A Tough Mix Of Potential And Past Performance