Monday, September 29, 2014

Why Danaher Corporation Could Fall

There is no doubt that Danaher Corporation (NYSE: DHR  ) is one of the highest-quality names in the industrial sector, but with the stock underperforming the S&P 500 by around 7.7% year to date, there is a sense that the market is losing a little patience with Danaher. In addition, the company is facing a significant amount of unpredictability about its future prospects -- an unusual situation for Danaher. It's time to look at three reasons Danaher could fall in 2014.

Temporary or structural weakness?
Danaher's second-quarter results disappointed the market, and Fools already know that it was mainly due to softness in two product lines. Communications (the test and measurement segment) and dental consumables both disappointed in the quarter, and Danaher CEO Larry Culp said he expected "negative growth" for the communications platform for the rest of the year. Fools can read about the other main conclusions from the conference call here.

While there's a case to be made for a bounce-back in both of these product lines in future quarters, the following chart of segmental sales reveals that these problems may be something structural.

Source: Danaher Corporation presentations.

Clearly, the dental and test and measurement segments haven't grown over the past three years, and it's not clear whether the current weakness is merely part of a deteriorating end market.


Saturday, September 27, 2014

UPS Conference Call Review

t's been a difficult year for United Parcel Service (NYSE: UPS  ) investors, as the stock has notably underperformed the S&P 500 and its main rival, FedEx (NYSE: FDX  ) . After a winter beset with difficulties for the logistics companies because of a combination of poor weather, unexpectedly strong e-commerce delivery demand, and a Christmas shopping season with fewer than average days, many investors thought UPS might be over the worst by now. Unfortunately, that wasn't the case, and the second-quarter results proved to be a disappointment. Here's what management wants you to know about its performance.

United Parcel Service delivers.

Investing in long-term growth

After the winter debacle, during which many customers saw delayed delivery and UPS suffered a ramp-up in costs associated with unexpectedly high peak demand, UPS management committed itself to investing in ways to deal with any future problems. Unfortunately, the costs associated with these investments, in areas such as technological and operational expansion, are going to be more than initially expected. According to CFO Kurt Kuehn:


Wednesday, September 24, 2014

Is Deere a Stock to Buy?

Agricultural and construction machinery manufacturer Deere  represents one of the most compelling investment ideas in the industrial sector right now. However, it's not going to be an easy decision for you. The long-term demand for food (more than 80% of Deere's sales are in its agriculture and turf segment) remains in place, but the company also faces significant near-term risks from declining food prices. What's an investor to do?

Source: Motley Fool Flickr.

Deere's upside and downside drivers
Before focusing on answering this question, readers may be interested in referencing other articles in this series. For example, a review of the recent results here highlights the deterioration in the company's agricultural sales; a review of the five key takeaways from the earnings conference call can be found here; and articles making the making the bullish and bearish cases for the stock can be found here and here.

Turning back to question in my lead, the answer is "no" and "yes." No one said buying and selling stocks was easy!


Sunday, September 14, 2014

Danaher Corporation Bullish Article

After an underwhelming set of second-quarter results and some cautious management guidance, investors in Danaher Corporation must have felt the stock was likely to be range-bound for a while. However, a good quality company is rarely without upside potential, and there are three key reasons for optimism over the stock, ranging from the near term to the long term -- suggesting that investors have a significant time frame in which to expect some upside.

Communications and dental consumables to bounce back?
Starting with the near term, Fools already know that Danaher's second-quarter results were adversely affected by the underperformance of two businesses with high variable margin. Communications-based revenue in the test and measurement segment was weak because of spending delays by wireless carriers, and dental consumables in the dental segment were weak, too. You can see the effect on profits and margins in this article.

Danaher's management candidly said that it doesn't expect conditions to get better anytime soon with communications, but the reality is that wireless carrier spending is notoriously lumpy.


Thursday, September 11, 2014

Danaher Corporation Conference Call Review

Investors in Danaher Corporation (NYSE: DHR  ) saw the company deliver a disappointing set of second-quarter results that caused the stock to drop notably. In fact, as of today, it's pretty much flat on a six-month basis. In truth, the results weren't that bad: The midpoint of full-year generally accepted accounting principles earnings per share guidance was actually raised by a couple cents as management narrowed its guidance to $3.67-$3.72 from $3.60-$3.75.

However, the market obviously expected more, and certain elements of the company's performance surprised on the downside. Danaher reports out of five segments: industrial technologies, environmental (mainly water quality), dental, life sciences and diagnostics, and test and measurement. This kind of diversification normally means that the company is broadly exposed to the industrial economy, and management's commentary certainly reflected a moderately growing environment. With that said, here are five things management wants you to know about the quarter.

Weakness limited to two areas, profits and margins hit

First, Danaher's management was keen to point out that the weakness was limited to two specific areas. Communications revenue within its test and measurement segment was down at a "low double-digit" rate, which the company linked to delays in spending by wireless carriers. Indeed, rival Agilent (NYSE: A  ) also reported a 6% fall in its communications revenue. The other difficult area came in the dental segment, which recorded "weak consumable sales," possibly due to bad weather earlier in the year. Unfortunately, according to Danaher CEO Larry Culp, both products tend to be "high-margin variables", and their underperformance hit operating profits within the test and measurement and dental segments.

Source: Danaher Presentations

Second, the impact...


Wednesday, September 10, 2014

How to Invest in the Industrial Equipment Sector

If you have wondered how to play the anticipated resurgence in manufacturing in the U.S., the industrial equipment industry could be the place to look for stocks to buy. The logic behind this view is simple: If the economy is flourishing, manufacturing companies will look to expand capacity and spending on capital machinery will increase. At this stage general industrial equipment companies such as Siemens, ABB (NYSE: ABB  ) , Parker-Hannifin (NYSE: PH  ) , Honeywell International (NYSE: HON  ) , and Emerson Electric (NYSE: EMR  )  start to look attractive. Investors should also consider more niche market players such as vision machine company Cognex (NASDAQ: CGNX  ) or Roper Industries (NYSE: ROP  ) . It's time to look closer at the industry.

Source: Motley Fool Flickr Account.

What is the industrial equipment industry?

In essence, the industry represents any item of capital machinery that is sold to an industrial company in order to enable its manufacturing or processing activity. While this traditionally means hardware, investors should recognize that software and information technology are becoming an increasing part of the industry.


Saturday, September 6, 2014

3 Reasons Why Deere Could Rise

Deere's  (NYSE: DE  ) share price has struggled in the last couple years and is now almost flat from where it was in 2011. Essentially, Deere hasn't participated in the broader market rally because investors have been pricing in the effect of declining crop prices on demand for its agricultural equipment. In issuing its third-quarter results, Deere management downgraded expectations for equipment sales and net income for the full year. With that said, there are three key reasons why the stock could outperform going forward.

Deere faces challenges

This article will focus on outlining the upside potential for Deere. For some background, Fools can find out more about Deere's recent results here, and read about the five key takeaways from the company's earnings conference call here.

Conditions are likely to get tougher in the near term for Deere, as the company and the U.S. Department of Agriculture have both lowered expectations for future key crop prices. Lower crop prices (principally for goods such as soybeans, cotton, corn, and wheat) affect farmers' income and therefore their willingness to pay for agricultural machinery.


Wednesday, September 3, 2014

Why Deere's Stock Could Fall

Having recently disappointed the market with its guidance, investors will be wondering if Deere's (NYSE: DE  ) fortunes have now hit a trough and are about to turn up, or whether the stock has further to fall? The purpose of this article is to look at the three downside risks, so investors can make an informed decision as to whether they want to buy, hold, or sell the stock.

Deere equity research
This article is part of an ongoing series on the company, intended to give readers a balanced viewpoint. Fools have already read a summary of Deere's recent earnings linked here. Essentially, full-year expectations for net income and equipment sales were reduced in the earnings report, as the Deere's agricultural machinery sales are taking a hit from weak crop prices. There is a summary of the five key takeaways from the conference call linked here, and a look at potential upside drivers linked here.


Saturday, August 30, 2014

What Deere's Management Wants You to Know

After a disappointing earnings report that saw the company lowering its full-year income and equipment sales expectations, Deere & Company's (NYSE: DE  ) management was obliged to outline how it would deal with weaker conditions. Current conditions are difficult in the farming machinery industry; but what is Deere doing about it? It's time to look at the five key takeaways from its third-quarter conference call.

Deere's end markets getting weaker

As Fools can read about here, Deere's latest earnings report produced a downgrade to sales expectations in its core agriculture and turf segment -- 81% of sales year to date. Essentially, the problem is that weak crop prices are lowering farmers' profits and encouraging them to hold back on purchasing farming equipment.

While lower crop prices are likely to impact farmers everywhere, the first takeaway relates to some specific commentary on China in both agriculture and construction. This is something that investors in Caterpillar  should follow closely, too.


Friday, August 29, 2014

Deere Earnings Analysis

Deere & Company (NYSE: DE  ) delivered an acceptable set of third quarter results, but its guidance was disappointing and, on balance, the earnings report was a net negative. In common with many of its peers, Deere is seeing an ongoing divergence in prospects between its agricultural and construction based operations. The former is suffering due to falling agricultural prices, while the latter is gaining traction with an improving construction outlook.

Unfortunately, Deere's revenue and profit is heavily skewed toward the agricultural sector. For example, more than 81% of its equipment sales came from its agricultural and turf segment, with the remaining 19% coming from its construction and forestry segment. It's time to look more closely.

Source: Motley Fool Flickr Account

Deere's third quarter results

A quick summary of the key numbers in the earnings report:


Thursday, August 28, 2014

Where Next for the US Housing Market?

Followers of the housing market got spooked a couple weeks ago by some data suggesting the market was in trouble. First, the recent pending home sales data from the National Association of Realtors showed a 1.1% decline, when economists had forecast a 0.5% increase. Second, the S&P Case-Shiller 20-city house price index declined 0.3% on a monthly basis, when economists had predicted a 0.4% increase. Is it game over for the U.S. housing market?

U.S. housing affordability and homeowner vacancy rates

There's no doubt that the housing market has slowed from the strong growth it saw in 2013, but that doesn't mean it's about to crash. On the contrary, there are four key reasons the market is likely to improve.

First, despite the talk that rising mortgage rates will choke off demand, housing still remains relatively affordable. Take a look at the National Association of Home Builders/Wells Fargo housing opportunity index -- the higher the number, the more affordable housing is.

Source: NAHB/Wells Fargo.

Affordability fell in the second half of 2013, but on a historical basis, it's still supportive of good growth in the housing market. Readers can see that, according to the index, housing is more affordable than it was for most of the 1992-2009 period.


Wednesday, August 27, 2014

How to invest in the Industrial Metals and Minerals Industry

Industrial metals and minerals lie at the heart of the global construction and manufacturing industries. For that reason alone, it's always going to be a cyclical industry -- investment jargon for an industry whose prospects are tied to economic growth. The key question investors need to think about now, with regard the current cycle, is: Where is China's demand for industrial metals and minerals heading? Will it be sufficient to create marginal demand to take industrial metals and minerals prices higher?

If you're an investor in one of the large diversified miners, such as Vale (NYSE: VALE  ) , Rio Tinto (NYSE: RIO  ) , or BHP Billiton (NYSE: BHP  ) , or metals producers such as Alcoa (NYSE: AA  ) (aluminum) or Nucor (NYSE: NUE  ) (steel), then the question will be of crucial importance. I'll return to it later, but first, a closer look at the industry.

What is the industrial metals and minerals industry?


Sunday, August 24, 2014

Investing in the Building Products Industry

At first glance, the building products industry looks like one of easiest investment sectors to analyze. It's usually seen as a highly cyclical industry whose fortunes are tied to construction activity and the economy in general. That's generally true, but investment in construction projects isn't always going to align perfectly with economic growth. Furthermore, the industry is subdivided between residential and non-residential construction, private and public investment, and new-build and remodeling activity. Growth rates can fluctuate across these divisions, so it's essential to know what kind of exposure a stock has.

For example, large companies with building products divisions, such as United Technologies (NYSE: UTX  ) , Ingersoll-Rand (NYSE: IR  ) , and Johnson Controls (NYSE: JCI  ) , have broad-based exposure to construction activity. Meanwhile, smaller companies, such as Masco (NYSE: MAS  ) (cabinets and home products), Lennox International (NYSE: LII  ) (heating and ventilation and air conditioning, or HVAC), and Armstrong World Industries (NYSE: AWI  ) (flooring and ceilings) will be more exposed to specific industry drivers. It's time to look more closely at this multilayered industry.


Tuesday, August 19, 2014

Time to Buy Fortinet?

The IT security market has always been highly competitive and the competitive dynamics in the industry are constantly changing. If Check Point Software Technologies  is the established pure play in the sector, and Palo Alto Networks  is the up and coming competitor, then sits somewhere in the middle. With that said, how is it best to look at the investment proposition with Fortinet? In addition, what do its recent, and well received, results really mean to the company?

Check Point Software, Fortinet and Palo Alto Networks, getting to know you

When looking at the three together, I can't help feeling that they could almost be the same company, just at different stages of their development. Indeed, there are some close relationships between them. Palo Alto Networks founder and CTO, Nir Zuk, used to be principal engineer at Check Point, but there is little love lost between the self appointed "Check Point Killer" and the company these days. In addition, Fortinet's VP of services, Michael Anderson, was formerly at Check Point, as was Michelle Spolver, Fortinet's VP of corporate communications.

These links -- although not uncommon in a niche IT industry -- serve to highlight the competitive nature of the industry. It's no secret that Palo Alto Network's is growing revenue in the 30%-40% range by trying to displace incumbents like Check Point, Cisco, and Juniper in the firewall market. But what is less understood is how Check Point and Fortinet are generating growth by competing in smaller and larger deal sizes respectively. They are increasingly encroaching on each others markets.


Sunday, August 17, 2014

Is 3M Company a Buy?

It's no secret that 3M Company  is a very well run company, but is it a great investment right now? Aside from some weaker conditions in Latin America, 3M Company delivered on almost every front in the quarter. Moreover, the commentary around the results made for good news for the industrial sector, and specifically, for Pall Corporation  . Were the earnings good enough to suggest that 3M Company can go higher in 2014?

3M Company's quality of earnings doesn't come cheap
On an absolute and relative basis, 3M Company doesn't look like a particularly cheap stock. A quick look at its valuation versus a collection of its industrial peers indicates that the stock has a lot of good news already priced in.

ITW EV to Free Cash Flow (TTM) Chart

On the other hand, good news comes from well run companies, and 3M Company's latest results were very solid. A few highlights include:


Friday, August 15, 2014

What is IBM These Days?

International Business Machines Corporation  is one of the most interesting propositions in the technology sector. The company is seeing ongoing deterioration in revenue. However, in common with its rival, Oracle Corporation , it still generates large amounts of free cash flow, and it's making aggressive investments in its growth platforms. Moreover, Oracle and IBM are both making partnerships -- witness IBM's recent deal with Apple -- in order to remain relevant in a changing IT landscape. With that said, investors are entitled to ask an existentialist question about IBM. What is it? A low-growth and highly cash-generative value play, or a company transitioning toward a becoming a long-term growth story?

IBM raises more questions than answers
First things first, IBM is not an expensive stock. The company trades on 13.3 times current earnings and less than 11 times the company's projection for non-GAAP EPS for 2014. For some value investors, that's pretty much all they need to know. Throw in the 2.4% dividend yield, and the targeted $16 billion in free cash flow for the year and it's seemingly a no-brainer.

Unfortunately, investing isn't as easy as that, and there are plenty of questions being asked about the company's plans. A chart of its segmental revenue growth reveals the extent of the revenue decline in recent years. Global technology services hasn't recorded positive year-over-year growth since the first quarter of 2012, and Global business services has only generated two quarters of (paltry) growth since the end of 2011.


Thursday, August 14, 2014

Johnson Controls Upside Potential

The irony behind the latest Johnson Controls'  results is that they confirm the outperformance of its automotive activities, at a time when the company is investing on the construction side. Moreover, rivals like Ingersoll-Rand  and United Technologies  also recently reported some moderate results in their heating, ventilation, and air conditioning, or HVAC, segments. With that said, does Johnson Controls' have some upside potential in the second half?

How Johnson Controls can outperform
The company reports out of three segments, of which readers can see the first nine months segmental income here.

Source: Johnson Controls Presentations

The good news is each segment has upside potential for the rest of 2014:


Wednesday, August 13, 2014

General Electric Set to Sell its Home Appliance Business, but at What Price?

According to press reports, General Electric Company is considering selling off its home appliances and lighting division, with figures of $1.5 billion to $2.5 billion being tossed around. While the deal makes perfect strategic sense for General Electric, the price looks too low when compared with home-appliance peers such as Whirlpool Corp . Moreover, the division has significant growth opportunities from the replacement cycle in the home appliance industry, and in LED lighting -- just look at Cree, Inc.  and its LED lighting prospects. So, what sort of price would make sense?

General Electric continues restructuring

From the company's perspective, selling the division would further CEO Jeffrey Immelt's aim of refocusing the company back onto its industrial side. Most people don't consider it a core holding, even though the home appliances and lighting division represents the most visible part of the business to the American consumer.

As for other elements of the company's plans, investors can read here about how it's been investing in its oil and gas division and here about its aviation division. Meanwhile, the IPO of Synchrony Financial, its consumer lending unit, is further evidence of its shift in emphasis toward the industrial sector. Meanwhile, the bid for Alstom's energy business is seen as a sign of acquisition activity in the sector and an attempt to generate cost synergies by consolidating power-generation operations.

In the context of all this activity, the sale of the home-appliances business makes perfect sense. Despite being an iconic business, the division ranks third in the U.S. behind Whirlpool and Electrolux. Moreover, it's the smallest contributor to segmental profitability, and selling it would free up management's time and resources to focus on its industrial operations.


Tuesday, August 12, 2014

Is it Time to Buy Danaher Corp?

Unfortunately, Danaher Corp unveiled a second-quarter set of results that only sought to prove how choppy the global economic recovery has been. Its earnings were mixed, with its life science operations notably outperforming other industrial areas -- in common with what Pall Corporation  has been reporting. Moreover, the two principal areas of weakness should sound a note of caution to other investors.

Danaher Corp. saw weakness in its communications results -- test and measurement segment. This doesn't bode well for Agilent Technologies. Also, dental consumables sales disappointed; they looked more promising in the previous quarter. This isn't a good sign for dental distributor Patterson Companies, Inc..

Danaher Corp. disappointsGoing into the second quarter, investors had some cause for optimism. After all, in the first quarter, the company had recorded core revenue growth of 3.5% -- at the high end of its full-year forecast of 2%-4% core revenue growth. However, the second quarter saw core revenue growth slow to 3%.
In addition, Danaher Corp. saw margin growth held back by some setbacks in its communications and dental consumables businesses. Readers can see how this affected profit growth in the following chart.

Source: Danaher Corp. Presentations

In fact, the issues spoiled Danaher's otherwise excellent record of segmental operating margin expansion.


Friday, August 8, 2014

Johnson & Johnson Latest Earnings Analysis

The investment case for Johnson & Johnson (NYSE: JNJ  ) in the past few years has focused on a combination of two things: its ability to generate growth through internal execution, and a "growth kicker" from a potential improvement in the more cyclical parts of its heath-care portfolio. By the look of its recent second-quarter results, the company continues to do well with the former but is finding the latter harder to come by. Is Johnson & Johnson still a buy?

Johnson & Johnson's consumer segment (19.2% of sales)
The company's management has certainly executed on most of the things it has set out to do in the past few years. In consumer products, after some well-documented product recalls and production difficulties, Johnson & Johnson has been steadily bringing the affected over-the-counter, or OTC, brands back into the marketplace. In fact, its U.S. OTC sales increased 9% in the quarter. Moreover, excluding the women's health category in the U.S., where a divestiture was made, would see U.S. consumer product sales rising 5%, instead of the reported 0.5% decline.