The Investment Column: The virtues in a conglomerate

Fund managers may hate conglomerates, but Tomkins yesterday put up a pretty good argument in favour of diversification. Forget chairman Greg Hutchings' argument that because all the businesses are manufacturers they can all be run the same way. No, the real reason for being a conglomerate is that when some of your businesses have a bad year others do well.

Which is precisely what happened to Tomkins. Performance from fluid controls and building products, as well as its professional division - which includes struggling bicycle manufacturer Murray and Smith & Wesson, the handgun maker - was pedestrian. But by virtue of storming results from the food and newly created automotive polymers divisions, Tomkins was able to maintain its famously unbroken record of profit growth. Adjusting for the fact that the previous half year lasted a week longer than this time, earnings per share rose by a fifth.

On other financial criteria, too, the group can hardly be faulted. It is particularly good at turning profits into cash, churning out 17.7p of free cash per share in the six month period. This still easily covers the interim dividend, which was bumped up by a healthy 14.4 per cent to 3.50p.

Can Tomkins keep this up? The City clearly thinks not. A similar record for a company in, say, the media sector would produce a sky-high share price rating. But now that Tomkins has been forced to give up its search for large, underperforming companies in unrelated areas the belief is that the growth will dry up.

Tomkins maintains that it can continue to expand by bolting businesses on to its existing operations. It says it has identified several opportunities which, when combined with the remaining pounds 40m worth of shares it still has to buy back, would take its balance sheet from a net cash position of pounds 188m to the 15 per cent gearing target it has set for itself. If the deals don't come off, Tomkins will simply buy back more shares.

Given the City's growing attraction to debt, that position is still far too conservative. Tomkins, however, won't be shifted. And as long as it continues to deliver growth, investors cannot afford to be too critical. Analysts are looking for full-year profits of about pounds 495m putting the shares, down 10p yesterday to 300p, on a pitifully low forward p/e ratio of just 11. Fashion can be taken too far: Tomkins deserves better.