Monday, October 20, 2014

Why UPS Stock Could Fall

United Parcel Service (NYSE: UPS  ) investors have watched their stock decline nearly 6% this year. Essentially, a poor performance during the winter (primarily due to the harsh weather and stronger-than-expected peak demand in the holiday season) has been followed by the need for increased investment. As such, the latest results saw the company lowering full-year earnings expectations. All of which raises some questions as to the future growth rate of UPS. Let's take a look at the bearish case for the company and discuss some issues management needs to deal with.

Demand shifting toward lower-yield packages?

As I've discussed in previous articles, UPS is seeing two significant shifts in end demand. As with rival package deliverer FedEx, its customers are shifting toward slower and less expensive ground-based services, while the continued strong growth of e-commerce means UPS is delivering proportionately more lighter-weight packages. Both shifts are not good news for the company's yield per package.


Sunday, October 19, 2014

How to Make Money in the Housing Market

There is no doubt that the housing recovery has slowed this year, but the evidence suggests that it's more of a temporary adjustment than the start of a decline. With that said, investors should be paying attention to which homebuilders are building the most in the marketplace today. Read on to find out why.

Which company is building the most homes these days?

The U.S. homebuilding market remains fragmented, with the top 10 companies contributing around a quarter of all new-home sales in 2013. However, there have been some pretty significant shifts within the top 10 in terms of homes sold. The following table shows market share and the percentage increase in homes sold from 2010-2013. The total increase in homes sold in the period is 33%, so any homebuilder that grew sales below that figure has obviously lost market share, and vice versa.


Tuesday, October 14, 2014

Why Emerson Electric Could Fall Further

Industrial equipment manufacturer Emerson Electric's (NYSE: EMR  ) stock price is down more than 8% year to date, and investors must be wondering when the company will join the broader market rally. By management's own admission, sales growth has been lower than hoped for this year. Moreover, there are a number of reasons the company could continue to disappoint investors in the near term. Let's look at three of them.

Emerson Electric needs more spending on energy infrastructure Source: Motley Fool Flickr.

An uncertain geopolitical situationIf there is one thing that has affected the company this year, it's geopolitical concerns. Essentially, sales have grown slower than orders as customers continue to display cautiousness on current spending due to global tensions. Unfortunately, there are no shortages of issues to worry about, including conflicts in the Middle East and Ukraine, the debt default situation in Argentina, and emerging market growth coming in lower than expected. Caution is not an uncommon situation in the industrial equipment sector right now.


Monday, October 13, 2014

Johnson Controls Conference Call Review

It's been a confusing year for investors in Johnson Controls  (NYSE: JCI  ) . The company is best known for its automotive products (mainly batteries and car interiors), and the automotive industry has been an outperformer recently within the industrial sector. In turn, the company has outperformed its peers, and its own expectations, with its automotive experience (car interiors and seating) segment. However, the stock is down nearly 7.5% year to date. Clearly, management needed to explain a few things during its third-quarter conference call, and here is what they said.

Cautiously optimistic on building efficiency

Before diving into the conference call, let's take a look at this chart, which depicts Johnson Controls' three segments by income for the first three quarters of its fiscal year.

Source: Johnson Controls company presentations.

Automotive experience (seats and interiors) and power solutions (automotive batteries, of which roughly three-quarters go to the aftermarket) make up the bulk of profit, but the company is investing in its building efficiency (heating, ventilation, and air conditioning, or HVAC) segment in order to diversify its income stream. More on that later.


Saturday, October 11, 2014

Why Emerson Electric Could Rise

Having endured a difficult 2014 so far, industrial equipment manufacturer Emerson Electric Co. (NYSE: EMR  ) is hoping to close out its year on a stronger note. By management's own admission, growth hasn't been as strong as it had expected it to be, and the company is trending toward the bottom end of its forecast for 3%-5% underlying sales growth for the full year. With that said, there are three key catalysts that could drive the stock higher from here. It's time to look at them in more detail.

Emerson Electric Co. is primed for growth

Firstly, this article is part of a series of articles on the company, and readers can learn about what management wants you to know in this article. One of the factors highlighted in the linked article leads into the first upside catalyst for Emerson Electric. Simply put, the company finds itself in the unusual position whereby orders are growing faster than sales, creating a significant backlog. For example, the three-month average for orders came in with a 7% increase at the end of July, whereas underlying sales growth was only 3% in the third quarter ended in June.


Thursday, October 9, 2014

Why UPS Could Rise

In a sense, the three reasons that United Parcel Service (NYSE: UPS  ) could rise in 2014 can be best understood by thinking about what has, and hasn't, changed in the global economy since 2008. What hasn't changed is the inexorable rise of e-commerce sales and therefore growing ground-based Business to Consumer, or B2C, growth for UPS. However, global trade hasn't grown in line with global GDP growth since 2008 -- a big change from previous economic recoveries. These two facts come together to create challenges and opportunities for UPS; let's examine how UPS is dealing with them, and why it looks set to soar.

E-commerce growth will likely lead to volume growth for UPS

A look at some simple statistics demonstrates the increasing importance of e-commerce sales to the economy. As the chart below shows, U.S. e-commerce sales have more than doubled since 2008. In addition, e-commerce now makes up a significant share of U.S. retail sales.

US E-Commerce Sales as Percent of Retail Sales Chart

All of which leads to the first two reasons that UPS can soar.


Friday, October 3, 2014

Emerson Electric Conference Call Review

Investors in industrial equipment company Emerson Electric Co. (NYSE: EMR  ) have watched their stock underperform the S&P 500 by around 15% year to date. The stock sold off after a disappointing set of third-quarter results, and readers may be wondering whether this is the trough in Emerson Electric Co.'s stock price for this year. In this context, management had plenty of things to say about the company's prospects. Let's look at five key takeaways from their commentary.

Orders better than sales

The first takeaway is that underlying sales--those that exclude acquisitions and divestitures-- came in at 3% and are trending at the low end of full-year guidance of underlying growth of 3%-5%. Underlying sales are important because they are a better gauge of the company's performance and future prospects. However, underlying order growth is a lot stronger; coming in at 5% in the third quarter. Moreover, Director of Investor Relations Patrick Fitzgerald said on the conference call:


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.