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Indiana stocks for the '90s.

Indiana Stocks for the '90s

The 1990s will not be boring if the first year of the decade is any benchmark. While businessmen and the markets currently are preoccupied with near-term questions involving the federal budget, recession and Iraq, it is important to look down the road to the end of this century.

The stocks listed below have compiled good track records and at press time were priced well below their 1990 highs. Each should benefit from one of several megatrends that will unfold through the 1990s.

* Emphasis on the environment -- Consumers and governments around the world are more aware of the pressing need to protect scarce resources. Michigan City-based Control Resource Industries is likely to profit from this trend.

* Growth in Eastern Europe -- Investment in the countries formerly behind the Iron Curtain will be similar to that of the Marshall Plan following World War II. This trend should prove beneficial to Hurco Companies Inc. of Indianapolis.

* The graying of America -- The postware Baby Boomers will be 50 in this decade. This demographic segment of our population is the most rapidly growing age group and will stimulate growth in medical care and other services targeted to the over-50 consumer. Among those Indiana companies that should reap the benefits are: INB Financial Corp., Eli Lilly & Co. and Bindley Western Industries Inc., all of Indianapolis; Biomet Inc. of Warsaw; and Hillenbrand Industries Inc. of Batesville.

* Higher energy prices are here to stay -- We need a national energy policy that emphasizes domestic resources such as natural gas and encourages conservation. Growth in use of natural gas should benefit NIPSCO Industries Inc. of Hammond and Indiana Energy Inc. of Indianapolis.

The decline in the stock market since the invasion of Kuwait has provided a large supply of cheap stocks. Some stocks have dropped 50 percent of more, as a weak economy and the possibility of war have eroded investor confidence.

It is hard to "bottom fish" when the Arabs are draining the swamp. It is my conviction, nevertheless, that opportunity is borne from adversity, and the intelligent investor is one who steps up to bat at times such as these. There are many other fine companies in Indiana in addition to our picks. The list was selected to appeal to different types of investors. Several stocks, such as INB Financial and NIPSCO, provide current income. Others such as Biomet provide solid long-term growth. Many are in niche markets.

ELI LILLY & CO.

Lilly currently is enjoying growth from its successful antidepressant Prozac. Though the drug is used primarily to treat depression, it also is prescribed as a remedy for obesity and appears to be an effective way to help heavy smokers kick the habit and an aid to those with obsessive-compulsive disorders. In 1989, Lilly, stock responded to strong Prozac sales by catapulting 60.7 percent.

The discovery of Prozac's compound, fluoextine, followed years of research into mental disease and the brain chemical serotonin, and there is hope that Lilly scientists are on the verge of discovering some of the chemically based causes of Alzheimer's and Parkinson's diseases.

BIOMET INC.

Biomet is a high-growth company supplying orthopedic implants, which are used in therapy for, among other things, osteoporosis and joint deterioration, which are part of the aging process. The company has compiled an outstanding track record of superior and stable growth resulting from proprietary technology in the reconstructive device and electrical bond stimulation markets.

The 1990 U.S. market for reconstructive devices is approximately $1.06 billion, and Biomet estimates that its share is only 6 percent to 7 percent. Biomet should continue to capture market share from its larger competitors, most of which are divisions of larger companies. The company benefits from the aging of the general population. The 65-years-and-older segment grew 82 percent between 1960 and 1988, while the general population grew just 36 percent.

HURCO COMPANIES INC.

Hurco is a manufacturer of machine tools and controlling software. It is hard to find a sector that currently is more out of favor with the market. Yet Eastern Europe is expected to boost demand for Hurco's cost-effective computer numerically controlled machines. The products give a small machine shop the capability of generating just-int-time shipments of custom-machined parts at low cost. Payback on the automated machines can be realized in just two to three years, because the user-friendly devices can be operated by a medium-skilled employee rather than a machinist.

Sales of lower-priced CNC machines, such as Hurco's, are not as cyclical as those of large custom milling machines that companies in the defense and auto industries buy for hundreds of thousands of dollars. That factor, plus steady U.S. demand, potential in Eastern Europe and innovative new products planned in 1991, make Hurco an attractive investment with relatively low risk.

HILLENBRAND INDUSTRIES INC.

Hillenbrand, which is highlighted in this issue's cover story, manufactures caskets and hospital beds as well as security locks and luggage. Its fastest-growing business segment is the Forethought division, which sells burial insurance through funeral homes. While these are slow growth markets, demographic shifts will lead to unit volume gains in the 1990s. The company broke into the billion-dollar sales arena last year.

INDIANA ENERGY INC.

Indiana Energy is a large supplier of natural gas in the Indiana market. Though industry experts continue to forecast the end of the "gas bubble," an oversupply continues to keep gas prices low. They have not risen much since the Iraqi invasion of Kuwait, which increases the relative value differential between natural gas and other fossil fuels.

Indiana Energy has increased its dividend for 18 consecutive years. The growth for the past decade has been 7.3 percent per annum, and if dividends can grow at 5.5 percent over the next decade, it is projected that in 1997 dividend income on an IEI common stock investment could exceed coupon income on a 10-year U.S. Treasury note. This solid dividend growth potential makes this stock attractive for retired individuals and institutions desiring income growth.

IEI offers conservative investors solid growth potential in a recessionary environment. Utility stocks typically perform best in a period of declining interest rates, which is foreseen. And new clean-air legislation could help those in the natural gas industry by prompting some utilities to add gas turbine-driven capacity rather than spend millions on a scrubber for a typical high-sulfur boiler.

NIPSCO INDUSTRIES INC.

Like Indiana Energy, NIPSCO is a large supplier of natural gas in the Indiana market. Natural gas is a cheap and clean-burning fuel that is provided from domestic wells. Demand for gas is expected to grow in the 1990s, not just for home heating but for commercial and industrial use, including fueling trucks and buses and company fleets. Natural gas will play an important role in energy self-sufficiency and cleaner air.

NIPSCO has recovered from the 1985 write-off of $148 million associated with the Bailly nuclear plant, and is poised to benefit from the continued health of the steel industry in northwestern Indiana. The company also has essentially completed its generating construction, and is nearing compliance with federal and state clean-air and acid-rain standards.

INB FINANCIAL CORP.

INB Financial, formerly Indiana National Corp., is the largest bank holding corporation headquartered in Indiana, with assets of $6 billion. Earnings are down in 1990, reflecting national trends in banking, but the dividend appears to be secure. Founded in 1834, this banks has survived two World Wars, a Civil War and a Depression. It has no foreign loan exposure, and a recently completed audits shows third-quarter earnings were off only a few cents from 1989.

We look for earnings in 1990 of $2.40 to $2.45, down from $3.36 in 1989. Selling at 66 percent of book value, with a strong consumer franchise, INB would seem to be a sound value.

BINDLEY WESTERN INDUSTRIES INC.

Bindley Western is the fifth-largest drug wholesaler in the United States with sales approaching $2 billion. Bindley ships a larger percentage of its sales to drug chains than its competitors, and in 1989 two large customers accounted for 46 percent of revenues. This can be viewed as a positive because the retail drug business is consolidating rapidly. Earlier this year, Bindley announced that a new chain-warehouse customer would generate $200 million in sales for the 1991 fiscal year.

Revenues should increase 15 percent in 1991, which is lower growth than the company achieved in recent years but impressive in a weak economic environment. Most important, demand in this industry is relatively unaffected by recession.

CONTROL RESOURCE INDUSTRIES

Control Resource is a small company that specializes in providing supplies to contractors engaged in asbestos removal in public and commercial buildings. Its products include filtration systems, glove bags and respirators. This market at present is suffering from the credit crunch that has affected New England nd other markets, which has had a negative impact on earnings.

The Environmental Protection Agency, however, estimates that 20 percent of all buildings in the United States contain asbestos, which makes the removal business a growth industry well into the 21st century. Asbestos removal is a $3.5 billion industry, and equipment and supplies used by abatement contractors is a $350 million industry. There is no sign of slowing demand for the equipment Control Resource supplies, and such demand should be highly recession resistant.

Raymond H. Diggle Jr. is director of research for Raffensperger, Hughes & Co. in Indianapolis and keeps track of virtually every public corporation in Indiana.
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Title Annotation:Investments
Author:Diggle, Raymond H., Jr.
Publication:Indiana Business Magazine
Date:Dec 1, 1990
Words:1577
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