Saturday, November 22, 2014

The bullish case for United Parcel Service

United Parcel Service (NYSE: UPS  ) investors will have been pleased to see the stock rising after a solid set of results. I've already covered the key points on the third-quarter earnings, and then looked at the five things that management wants you to know about the company's prospects. Now it's time to look at the company purely from the perspective of an investor looking to buy the stock. In doing so, I'll outline the three reasons the stock could start to play catch-up with its rival FedEx (NYSE: FDX  ) and the market in 2014.

UPS Chart

UPS data by YCharts.

E-commerce brings challenges and opportunities

The reasons for the underperformance of UPS relative to FedEx have already been discussed in more detail. Simply put, UPS was harder hit than FedEx by the severe winter weather last year. However, one development that affects both companies is the burgeoning development of e-commerce deliveries, and in particular, from business to consumer, or B2C, channels.


Friday, November 21, 2014

Johnson Controls Earnings Analysis

It's been a difficult year for Johnson Controls (NYSE: JCI  ) investors, as they have watched their stock underperform the market. The market was looking for some signs of improvement in its fourth-quarter results. In the end, the company delivered a solid quarter with the headline numbers pretty much in line with expectations.

It's time to look at what happened in the fourth quarter, and to look for any indications of where the company is headed next.

Source: Johnson Controls.

Johnson Controls fourth-quarter results

A quick look at the headline numbers:

  • Fourth-quarter revenue of $11 billion versus analyst estimates of $11.2 billion
  • Fourth-quarter adjusted diluted EPS of $1.04 versus analyst estimates of $1.01 and internal guidance of $1-$1.02
  • First-quarter 2015 EPS guidance of $0.74-$0.77 versus analyst estimates of $0.77

Fourth-quarter EPS is ahead of estimates, but the guidance for the first quarter is a little light compared to analyst estimates. In short, it was a mixed set of earnings, with sales up 3% and gross profit up 2%.


MSC Industrial Earnings Analysis

MSC Industrial (NYSE: MSM  ) reported a mixed set of results for its fourth quarter. Revenue came in better than analyst expectations, but in common with rival industrial supply company Fastenal, MSC Industrial is seeing ongoing margin pressures. Moreover, its guidance for the first quarter of fiscal 2015 was lighter than analyst expectations.

MSC Industrial meets earnings expectations, but guidance disappoints

A quick look at the highlights of its fourth-quarter earnings:

  • Fourth-quarter sales of $726.6 million versus internal guidance of $718 million-$730 million and analyst estimate of $724.8 million
  • Gross margin of 45.6% versus internal guidance of 45.7%-46.1%
  • Operating expenses of $231 million versus internal guidance of $230 million
  • Tax rate of 37.7% versus internal guidance of 36.7%
  • Adjusted non-generally accepted accounting principles EPS of $1.02 versus internal guidance of $0.98-$1.02 and analyst estimate of $1.01

Sales came in ahead of analyst estimates (and above the midrange of company guidance) and EPS topped internal guidance. So why was the stock marked down initially after the report?

3 considerations

There are three things to consider about these results, and investors should watch them closely, because the industrial equipment wholesale industry is always a useful bellwether of the economy.


Wednesday, November 19, 2014

Danaher Corporation's Business Strategy

The market greeted industrial conglomerate Danaher's (NYSE: DHR  ) latest quarterly results with a nice pop on the day of the earnings release. This was the first set of company earnings presided over by new CEO Tom Joyce. Naturally, investors were keen to find out just what kind of message the new chief executive was looking to give out. His predecessor,Larry Culp, was closely associated with the company's success over the years, and Joyce has large boots to fill. So, in that context, we'll look at five key takeaways from the company's quarterly conference call. Is Joyce taking the company in the right direction?

Business as usual at Danaher?

In a previous article, Fools looked at the earnings in more detail. The company is known for acquiring businesses and then applying its Danaher Business System, or DBS, to them. Simply put, it's a management strategy that emphasizes lean manufacturing processes that can be applied across all segments of the company. While the current results will still be a product of Culp's management, the question is does Joyce plan to change its business strategy?

DBS Explained Source: Danaher Website


Tuesday, November 18, 2014

Middleby Corporation Equity Analysis

Stock in food equipment company Middleby Corporation (NASDAQ: MIDD  ) is in line with the S&P 500 index so far this year -- it's recorded a 5.1% increase as of this writing. However, this is definitely not a case of a company simply tracking the market.In reality, it's been a volatile year, with the stock trading at $100 in March, and then some 28% lower, at $72, in August, only to increase 21% to the price of around $85 as of this writing. Why has the stock been so volatile this year?

MIDD Chart

MIDD data by YCharts.

Future earnings for Middleby Corporation

As the following chart demonstrates, Middleby's current valuation has little to do with its current earnings -- it's the market's view on its future earnings that counts.


Monday, November 17, 2014

UPS Earnings Call Review

It's been a difficult year for United Parcel Service  (NYSE: UPS  ) investors, as they have watched their stock underperform key rival FedEx (NYSE: FDX  ) and the S&P 500. However, the third-quarter results saw a return to form, and investors have cause to believe that the stock can go do well going forward. Here is a look at what management wants you to know about the business, and why UPS could be a stock to buy.

What you need to know about UPS in 2014

Essentially, UPS has had a difficult year for two main reasons. First, a combination of bad weather and unexpected spikes in demand during last year's holiday season hurt its profitability in its first quarter. Moreover, UPS had to reduce its 2014 earnings forecast in July due to increasing its investment plans in order to ensure it will meet peak demand spikes in future.

Second, the relatively stronger growth in its e-commerce business-to-consumer, or B2C, packages is pressuring margins downward. B2C packages tend to be lighter and lower-yielding deliveries. In addition, UPS and FedEx are having to deal with burgeoning e-commerce delivery growth by expanding capacity -- something else to pressure margins.

The following five points from UPS' earnings call address these two issues.


Sunday, November 16, 2014

Precision CastParts Equity Analysis

Precision Castparts Corp.'s  (NYSE: PCP  ) earnings came in a little lighter than expected, but investors might not want to panic just yet. Any company involved in the production of heavy capital goods is likely to see some lumpiness in its revenue and earnings from quarter to quarter -- and so it was with Precision Castparts' second quarter.

Source: Precision Castparts.

Earnings highlights

A brief recap:

  • Q2 revenue of $2.52 billion versus analyst estimates of $2.52 billion
  • Q2 earnings per share of $3.24 versus analyst estimates of $3.32

So it's an earnings "miss," and the market did what the market usually does in such cases: It promptly marked the stock down yesterday, on an otherwise strong day for the S&P 500.

However, as noted above, Precision Castparts is always going to be a business with a degree of uncertainty around the level of its earnings from quarter to quarter. Indeed, CEO Mark Donegan further alluded to this fact in his commentary on the outlook for the upcoming third quarter.


Saturday, November 15, 2014

Check Point Software Earnings Analysis

he information-technology network security sector is unusual in the sense that its leading companies offer markedly different maturity levels. If FireEye and Palto Alto Networks (NYSE: PANW  ) are the new kids on the block, and Fortinet (NASDAQ: FTNT  ) is the maturing teenager, then Check Point Software (NASDAQ: CHKP  ) is very much the mature old uncle. With that said, Fools shouldn't dismiss the stock as unexciting. On the contrary, there was a lot to like about Check Point's recent third-quarter earnings, and the numbers confirm that the company's business strategy is working. Time for a look.

Check Point Software's third-quarter results

Highlights of its earnings and guidance for the upcoming fourth quarter:

  • Third-quarter revenue of $370.4 million vs. analyst estimate of $367.1 million
  • Third-quarter earnings per share of $0.93 vs. analyst estimates of $0.91
  • Fourth-quarter revenue guidance of $395 million-$430 million vs. analyst estimate of $410.3 million
  • Fourth-quarter EPS guidance of $0.99-$1.09 vs. analyst estimate of $1.03

In summary, revenue and EPS beat analyst expectations and guidance was ahead of what the market projected. This is obviously good news, particularly because Check Point's management is known for giving conservative guidance.


Polycom Earnings Analysis

Video conferencing company Polycom's (NASDAQ: PLCM  ) earnings are always likely to cause some fireworks because of the company's high-risk, high-reward nature. Some investors will balk at the mention of high risk, while others will warm to the idea of high reward. With Polycom's third-quarter results just in, it's clear that the optimists have won this round -- but not by much.

Polycom wants you to collaborate. Source: Polycom.

Polycom beats estimates; guidance was a bit light

A quick recap of the third-quarter earnings and fourth-quarter guidance:

  • Third-quarter revenue came in flat at $335.7 million, versus analyst estimates of $334.9 million.
  • Third-quarter Non-GAAP diluted EPS came in at $0.22, versus analyst estimates of $0.20.
  • Fourth-quarter revenue guidance of $342 million to $352 million straddled analyst estimates of $349 million.
  • Fourth-quarter non-GAAP EPS guidance of $0.21 to $0.23 also straddled analyst estimates of $0.22.

Third-quarter revenue and EPS beat estimates, but Fools should note that the midpoint of fourth-quarter revenue guidance is below the market consensus. In addition, management gave fourth-quarter guidance of non-GAAP gross margins of 59% to 59.2%, implying a decline from the 59.4% level he company achieved in the third quarter.

What Polycom is trying to achieve with its earnings

Essentially, Polycom is competing against the unified communications operations of two giant tech companies: Cisco Systems (NASDAQ: CSCO  ) and China's Huawei. It also faces a number of small competitors offering cheaper, less sophisticated solutions and even Google's (NASDAQ: GOOG  ) Chromebox at the low end.


Tuesday, November 11, 2014

Robert Half International Earnings Review

Staffing services company Robert Half International (NYSE: RHI  ) beat analyst estimates for the third quarter and delivered guidance ahead of the Wall Street consensus for the fourth quarter. In an act of almost prescient behavior, the market took the stock more than 5% higher before the results. However, all of these short-term movements shouldn't trouble long-term investors unduly, as the positive drivers behind the stock remain in place. Robert Half is set for continued growth, but what about its valuation?

Robert Half International tops estimates
A quick look at the earnings and guidance versus consensus analyst estimates confirms tht the underlying trends in the business remain strong:

  • Third-quarter revenue of $1.22 billion, versus estimates of $1.2 billion.
  • Third-quarter EPS of $0.63, versus estimates of $0.58.
  • Fourth-quarter revenue guidance of $1.175 billion to $1.225 billion, versus estimates of $1.2 billion.
  • Fourth-quarter EPS guidance of $0.57-$0.62, versus estimates of $0.58.

Moreover, commentary on the trends in the third quarter and the first few weeks of the fourth were positive. The following table summarizes what management disclosed on the conference call.


Cognex Earnings Review

Cognex Corporation (NASDAQ: CGNX  ) did pretty much what it had said it would do in its bumper third quarter. However, on closer inspection, there is one number that suggests its full-year earnings growth is going to be stronger than many think. It's time to look in more detail at the earnings, and the commentary on the earnings call.

Cognex reports record earnings Readers should note that there is an earnings preview of Cognex on the Motley Fool website that outlines the key things for investors to look for. Now to the numbers:

  • Third-quarter revenue of $169.4 million vs. analyst expectations of $168.2 million, and internal guidance of $165 million-$170 million.
  • Third-quarter non-GAAP adjusted diluted EPS of $0.59 vs. analyst expectations of $0.56.
  • Gross margin of 74% vs. internal expectations of a mid-70% range.
  • Effective tax rate of 19% vs. internal expectation of 19%.
  • Fourth-quarter revenue guidance of $111 million-$114 million vs. analyst expectations of $113 million.
  • Fourth-quarter gross margin guidance as being similar to the third quarter, at 74%.

The revenue is at the top of the internal range and above analyst estimates, while EPS is clearly ahead. Gross margin and the tax rate were in line, and the revenue guidance for the fourth quarter is pretty much in line with analyst expectations. So where is the upside that I mentioned in the lead?


Cognex Earnings Preview

Machine vision company Cognex Corporation (NASDAQ: CGNX  ) is one of the most compelling growth stocks in the industrial sector. It's also one of the most expensive, trading at 28 times forecast earnings for 2014. That's a heady mix that ensures that investors will closely follow its upcoming third-quarter earnings report. Let's see what those investors might expect.

Cognex: the numbers
Cognex investors will remember the company's fourth-quarter results from February, when the company beat earnings estimates and promptly fell more than 8%, only to rise 7% the next day. While it's always interesting to follow such events, long-term investors will want to look at its earnings in the context of the development of the business.

Before delving into a qualitative discussion, here is what Cognex's management forecasted for the third quarter at the time of the second-quarter earnings call.


Monday, November 10, 2014

Is PPG Industries a Dividend Stock to Buy?

The nice thing about paintings and coatings company PPG Industries (NYSE: PPG  ) is that the stock offers something for growth- and income-seeking investors alike. One one hand, analysts expect the stock to grow its earnings in the mid-teens for the next couple of years. On the other, the company is a Dividend Aristocrat, having raised its payout for 42 years in a row. If you're an income investor, is now the time to buy into PPG Industries? Let's take a closer look.

A Dividend Aristocrat, but also a cyclical stock

The key to growing a dividend is a combination of generating good return on equity, or ROE, and having the earnings and free cash flow to reinvest in the business. In other words, companies need to generate good ROE (net income from shareholder equity) and then use whatever earnings are left over, after dividends have been paid, to reinvest so as to generate growth.


Why Jacobs Engineering Group Slumped in 2014

Shares in engineering consultant Jacobs Engineering Group (NYSE: JEC  ) have declined more than 26% this year, as of this writing. Such a result is hardly surprising, given that EPS guidance has been significantly lowered this year. At the start of the year, analysts were predicting 2014 EPS to reach $3.66, but today that forecast stands at $3.29. What happened to the company this year, and will this be an ongoing problem?

Jacobs needs customers to increase spending on processing. Source: Jacobs Engineering.

Restructuring costs and tougher end-markets than previously expected

The company has been wrestling with two main issues this year:


Sunday, November 9, 2014

Danaher Corporation Earnings Analysis

The market gave Danaher's  (NYSE: DHR  ) third-quarter earnings results the thumbs-up and sent the stock up more than 3% on the day of their release, last Thursday. The numbers weren't fantastic, but they reassured Danaher investors that management is dealing well with an uncertain macroenvironment. But did we learn anything new about Danaher's prospects?

Danaher's earnings beat cautious guidance

Danaher declared that third-quarter earnings per share of $0.95 were above expectations, but management arguably had given cautious guidance the last time around. At the time of its second-quarter earnings, management had forecast that core revenue growth would be 2%-4% for the full year, and discussed ongoing weakness in two of its higher-margin businesses: communications testing (test and measurement segment) and U.S. dental consumables (dental).

In truth, nothing really changed from an end-market perspective in the third quarter. Core revenue growth came in at 3%, and the two specific product lines remained weak. However, there was some positive news on the weak product areas. Earlier in the week, Danaher announced the merger of its communications unit with NetScout Systems. Plus, strong growth in other parts of the dental segment more than offset ongoing sluggishness with U.S. dental consumables.

The end result was core operating margin growth in four of its five segments -- note the return to form in dental -- and action has been taken on its ailing communications (test and measurement) product line. The following chart is measured in basis points, in which 100 basis points is equivalent to 1%:

Source: Danaher Presentations.


Is Pentair a Dividend Stock to Buy?

Pentair PLC (NYSE: PNR  ) is one of the lesser known Dividend Aristocrats -- stocks that have raised their dividend for 25 consecutive years or more -- but that doesn't mean it lacks attention from certain quarters. The company specializes in water flow technology (valves, controls, and process technologies) and often gets attention from investors looking for a thematic way to play the increasing need for the management of water resources. Are these two factors -- water and a dividend -- enough to make the stock a long-term buy for income seekers?

More cyclical than you might think

The theory is as simple as it is attractive. Long-term population growth, particularly in emerging markets, will lead to a 25% increase in freshwater demand by 2030. Moreover, we live in a world where, according to the UN CEO Water Mandate, one-third of the population already lives in "water-stressed countries." Given the strains that an increasing population will put on water infrastructure, for agriculture and industry as well as human consumption, the need for investment is substantial.
So is Pentair's long-term demand assured, and should you go ahead and buy this Dividend Aristocrat?
Investing is rarely that simple, of course, and the reality is that Pentair's prospects turn out to be quite cyclical in nature. The following chart demonstrates the significant declines in its revenue and operating income in the last recession. Don't be fooled by the dramatic increases from 2012 onward; that's due to a $5 billion acquisition of the valve and flow control operations of Tyco. (More on that later.)

Source: Morningstar.

Guidance cut

Moreover, earlier this year, Pentair was forced to reduce its earnings estimates for 2014 and 2015 for a couple of cyclically related reasons. The range of its 2014 EPS guidance was reduced from $3.85-$4 to $3.65-$3.70 -- a $0.25 reduction at the midpoint. Its 2015 EPS guidance was likewise reduced from $5 to $4.50. There were two main reasons for the decline, and both are cyclically related.


Why 3M Company Has Underperformed

It's been a frustrating year for shareholders in 3M Company (NYSE: MMM  ) . The company hasn't really done anything wrong, yet the stock has underperformed the S&P 500 by more than 7% this year, as of this writing. The relative weakness is somewhat surprising for such a highly regarded company. Why has the company underperformed, and what can it do about it from here on?

Source: 3M Company.

Global growth weakening; North America fine
As always in investing, there's no clear picture; however, there are three related reasons that 3M is underperforming. First, the diversified industrial sector has been weak in the market this year. A quick look at 3M's share price performance alongside peers Dover Corp. (NYSE: DOV  ) , Illinois Tool Works (NYSE: ITW  ) , and Danaher (NYSE: DHR  )  shows that the whole sector has found it tough going this year.


Wednesday, November 5, 2014

Dividend Investing Stocks: Emerson Electric

Emerson Electric is a Dividend Aristocrat, one of a select band of companies that have increased their payouts annually for at least 25 years. Income-seeking investors love such stocks, but they also love shares that appreciate over time. With that said, what are the prospects for Emerson Electric to remain a Dividend Aristocrat, and is it time for dividend-seeking investors to buy this company?

A mature dividend playEmerson Electric is a mature company, providing manufacturing and technology for a number of markets, with a relatively high dividend of roughly 2.8%.
Naturally, the stock will attract income seekers, given a yield almost 0.5% above that of the U.S. 10-year Treasury note. However, its relatively high payout ratio -- about 37% of last year's earnings were paid out to shareholders in dividends -- means that its ability to grow its dividend aggressively in future years is somewhat constrained.

To explain this idea quantitatively...


Why Has Johnson Controls Slumped This Year?

Investors in Johnson Controls  have watched their stock decline by nearly 14% this year, even as the company has outperformed expectations in one of its three segments (automotive experience) and made a host of initiatives to improve productivity. With that said, you might be wondering just why the company has declined in 2014. Let's take a look.

Source: Johnson Controls

Great Expectations
No, not a treatise on Charles Dickens, but a lead-in to what has happened this year with the company. Simply put, at the start of the year, investors had expected positive things from its three segments:

  • Power solutions (automotive batteries) was expected to have a strong winter thanks to severe cold weather in North America.
  • The building efficiency (heating, ventilation, and air-conditioning, or HVAC) segment was expected to see a pickup in demand from a long-anticipated improvement in North American construction activity.
  • Automotive experience (car seating and interiors) looked set to have a good year as North America and China automotive sales and production looked likely to remain in growth mode.

Fast-forward to what actually happened, and it's a mixed story.


Monday, November 3, 2014

Is Sonic Automotive a Stock to Buy?

Why does Wall Street hate car dealer Sonic Automotive? It's a cheap stock -- its price-to-earnings over earnings-per-share growth, or PEG, ratio is less than 1 -- yet analysts have a consensus hold/sell recommendation on it. Given that Warren Buffett recently bought the largest privately owned car dealership in the U.S., the Van Tuyl Group, is Wall Street missing something with Sonic Automotive?

Car dealerships are about to change

The Internet has changed many aspects of business, and the car retail industry is not immune from its effects. Indeed, Elon Musk is doing everything he can to disrupt the traditional dealer-franchise model by selling Tesla Motors cars directly to customers. Moreover, consumers are increasingly getting used to using pricing information from online sources in order to make more efficient purchasing decisions -- it beats haggling with a salesperson on a car lot.

With these kinds of pressures building on the industry, it's essential that car dealerships adjust to new realities, and the good news is that Sonic Automotive is doing just that. The bad news is that Wall Street doesn't like the uncertainty that comes with change, and there is a lot of it coming at Sonic Automotive.