Thursday, July 31, 2014

Aloca Earnings Analysis

Alcoa's  earnings are always interesting because the company gives great guidance on the industrial economy. In addition, the earnings come at the start of the new earnings seasons, and they give Fools the chance to confirm whether Alcoa's commentary matches what their companies have been saying recently. In this regard, shareholders in Cummins, Johnson Controls, and Caterpillar  should follow closely, Alcoa's management had a lot of interesting things to say.

Alcoa upgrades market forecasts, good for Cummins
A summation of Alcoa's end market guidance reveals that the only formal upgrade to its outlook was in the heavy truck and trailer market. The parts in green are where upgrades took place.

Source: Alcoa presentations

Tuesday, July 29, 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 Fortinet  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.


The Best Stocks to Play the LED Lighting Boom

Shareholders in lighting company Acuity Brands were given a rude reminder of the risk of holding a highly rated stock recently. The company's third quarter results missed estimates and the stock plunged more than 15%. But it might not all be so bad. Acuity's management doesn't give earnings guidance, so Fools should expect some volatility around the results. In addition, the company is attractive for a host of reasons, many of which also apply to Cree  and Hubbell . Is this a good buying opportunity in Acuity Brands?

Acuity Brands, Cree, and Hubbell: cyclical and secular growth prospects
Acuity Brands is attractive because it has cyclical growth prospects via an upturn in spending in the commercial and industrial construction sector. In addition, it also has a secular growth story from the growth in utilization of LED lighting. Given the company's P/E ratio of 33 times current earnings, it's reasonable to conclude that Acuity needs both these growth drivers to perform in order to take the stock higher.

The good news is that the indications from Cree's LED lighting results is that the secular story is very much intact. Cree manufactures LED products, lighting (LED based), and power and radio frequency products. In its latest set of results, LED products (which service a range of industries) only grew 3%, but Cree's LED lighting solutions grew 35% and now make up 44% of its total sales from just 37% last year. Moreover, Cree's management expects "double digit growth in lighting in both LED fixtures and LED bulb" -- good news for Acuity because LED lighting sales now make up a third of its overall sales.


Sunday, July 27, 2014

U.S. Car Companies Set to Win Big in China?

Faced with slowing economic growth, China's authorities have come up with the time-honored (dishonored?) solution of facilitating the creation of more debt. In the most recent case, China has opened up the asset-backed securities, or ABS, market to foreign car companies in an attempt to stimulate growth in the sector. In the near to midterm this looks like good news for a car company like Ford Motor Company , and also for car parts suppliers like Johnson Controls  or Visteon  .

What happened in China?
The move by the China Banking Regulatory Commission to allow foreign car companies to issue ABS is going to enable companies like the finance arms of Ford, Volkswagen, BMW and Toyota, among others, to start to challenge local banks in the issuance credit. ABS products are bundles of loans (in this case car loans) that are packaged and then sold on to other investors. Issuing ABS helps car finance companies because they are able to transfer risk and issue more loans to car purchasers.


Friday, July 25, 2014

Can Boeing Increase Margins This Year?

One of the key considerations for Boeing investors in 2014 is whether the aerospace giant can increase operating margins on its commercial airplanes. Already this year, suppliers such as Spirit AeroSystems and Triumph Group have faced issues on different Boeing programs, and the increasing complexity of newer planes appears to be causing Boeing some production problems, too. All of this could contribute to cost overruns. It's time to look closer at some of these issues.

Boeing, Spirit AeroSystems, and Triumph Group
The company's full-year 2014 operating profit margin guidance of around 10% for its Boeing commercial airplanes, or BCA, segment looks a little conservative in light of the first-quarter result of 11.8%. As such, Boeing appears to have substantive opportunity to beat internal guidance, but it won't be plain sailing for a few reasons.

Fools already know that Boeing is still on track to ramp up production of the 787 Dreamliner to a rate of 10 a month in 2014. However, Boeing has had production issues with the 787, including the discovery of hairline cracks on the wings of some planes in production.

Moreover, two suppliers have also had issues on Boeing programs. Earlier, in the year, Triumph Group saw its costs increase due to internal quality issues that required replacement of some parts on the 747-8 -- a relatively new aircraft that Boeing has had difficulty selling. The aircraft maker only received 17 gross orders for its 747 planes in 2013, and it only has one order in the year to date. Boeing made two production rate cuts on the 747-8 last year.


Thursday, July 24, 2014

General Electric's Aviation Growth Prospects

The aviation sector has been a standout performer for General Electric  in recent years, and the evidence suggests that Fools can expect more to come in the future. Near-term and mid-term indicators look positive, even as Pratt & Whitney, a unit of United Technologies , is competing hard with General Electric for new engine orders on the revamped Airbus A320 plane. General Electric's engines remains well placed on Boeing and Airbus programs, and its services revenues also look set to turn upwards. Moreover, industry trends remain positive, and the the aviation segment looks set to be a strong contributor to profits for years to come.

What aviation means to General Electric
A quick look at General Electric's industrial segment profit in 2013 demonstrates the growing importance of the aviation unit. Interested Fools can read an article focused on the oil and gas segment here.

Source: General Electric Presentations.

The aviation segment generated nearly $22 billion in revenue in 2013, with its commercial aerospace-based revenue significantly larger than its military business


Wednesday, July 23, 2014

Stanley Black & Decker Earnings Analysis

One of the most consistent investment themes of 2014 so far has been that developed markets have gotten relatively stronger, while emerging markets have weakened. Therefore, what to do about Stanley Black & Decker ? The stock looks like a good value, and there are plenty of reasons to like it, but a large part of its growth prospects depends upon emerging markets. With that said, what are home improvement peers like Whirlpool  and Snap-on Incorporated  saying about end markets, and what should Fools consider before buying into Stanley Black & Decker?

Why emerging markets matter to Stanley Black & Decker
Back in October, investors were treated to an eye-watering mid-teens slump in the stock price as the company lowered its full-year 2013 guidance by more than 10%. The problems in 2013 were focused on the difficulty in raising margins in its security segment (particularly from its acquisition of Swedish security company Niscayah), and weaker growth expectations from its industrial and Construction Do-It-Yourself, or CDIY, segments. In particular, emerging markets had slowed, and sequestration effects had hit U.S. governmental revenue.


Monday, July 21, 2014

Reasons to Buy FedEx

Following a weather affected start to the year UPS  and FedEx    have recovered nicely, with FedEx's latest results sending the stock sharply higher. Both stocks will always be correlated plays on global growth, but by stint of its productivity improvement plan, FedEx has an opportunity to strongly grow profits in the coming years. Moreover, e-commerce offers a good long-term growth opportunity. There is a lot to like about FedEx.

FedEx delivers strong results
Earlier in the year, FedEx was forced to reduce its full-year EPS guidance to $6.55-$6.80, and its rival, UPS, also reduced expectations by guiding the market to the low end of its full-year guidance of $5.05-$5.30. The good news is that FedEx summarily delivered diluted EPS of $6.75 in its full-year to May 2014. The market clearly liked the fact that its EPS figure came in at the top end of its range, but there are five other reasons investors should look favorably on the company.

Reasons to like FedEx
First, FedEx gave a slight upgrade to its expectations for U.S. GDP growth in 2015. A hike in expectations from 3% to 3.1% may not seem much, but it matters a lot to a company whose revenue correlates to economic growth. Moreover, at the start of the year, FedEx had predicted U.S. GDP growth of 2.4% in 2014, and global growth of 2.8%. Weather clearly played a part in reducing those estimates to 2.2% and 2.7%, respectively, but on a positive note, FedEx sees global growth accelerating to 3.1% in 2015 -- in line with U.S. guidance discussed earlier.


Sunday, July 20, 2014

Stocks Exposed to the Business Jet Market

It's no secret that the commercial aerospace market has been very strong in recent years, with Boeing and Airbus continuing to build up large backlogs, but one sub-segment has been far slower to recover from the recession: the business jet market. However, it looks as though it's hit bottom, and it could be set to grow in future. Companies like General Dynamics (NYSE: GD  ) , Bombardier (TSX: BBD.B  ) , Ametek (NYSE: AME  ) , and Textron (NYSE: TXT  ) are worth considering in order to play this theme, and Fools should start looking more closely at these companies.

Is the business jet market recovering?
Industry data and historical relationships suggest that the answer to this question should be in the positive. The business jet market has always been super-cyclical, as corporate spending on them tends to lag corporate profitability. However, in the last few years, corporations have been highly reluctant to open the spending floodgates. Indeed, they continue to take a "cautiously optimistic" approach in the light of a moderately growing economy.

The good news is that, according to a Bloomberg research report, the downtrend in business jet deliveries looks to have bottomed, and with corporate profits on the rise, it's reasonable to expect some growth from here.

Thursday, July 17, 2014

What Caterpillar's Sales Figures Tell You About the Economy

In case anyone was in any doubt as to the ongoing bifurcation in prospects between developed and emerging markets, then Caterpillar's  latest monthly sales data will make it clear. Moreover, based on Caterpillar's numbers, investors in the industrial sector should look closely at their stocks' exposure to various industries. As a consequence of what Caterpillar just reported, companies like Joy Global  can expect some varied conditions in the mining sector, and there was even some negative news for General Electric Company  in the power generation market. It's time to look more closely.

Caterpillar reports mixed construction trends
The company reports out of three separate industrial segments, and Fools already know that in its first-quarter results in April, Caterpillar upgraded its forecast for full-year construction machinery sales from 5% to 10%. At the same time, it downgraded its view on full-year resource industry sales from a negative to 10% to a negative 20%. Its energy and transportation guidance was left unchanged. Fast forward to the May sales data and a few themes are emerging.

First, there appears to be a strong divergence between Asia/Pacific and North America in terms of construction trends.

Source: Caterpillar presentations

In addition, according to a Bloomberg research report, China's fixed-asset investment continues to moderate from the torrid pace of growth in previous years.


Wednesday, July 16, 2014

Stocks to Win the War on Coal

In another blow to the coal industry, the Environmental Protection Agency, recently announced rules demanding that power plants should reduce carbon emissions by 30% from 2005 levels by 2030. The likely effect of enacting these rules will be to damage prospects for U.S. coal miners, and with China increasingly concerned with reducing its dependence on coal, their (coal miners') export prospects could also be adversely affected in the future. With that said, it's time to look at which companies have upside and downside opportunities if the "war on coal" continues.

False dawn for coal mining?
You don't need to be Einstein to understand the importance of relativity, and the fact that Joy Global's    management recently predicted U.S. coal production would be incrementally positive this year is obviously a short-term positive.

However, it's far too early to conclude that coal has passed an inflexion point on the way to another multi-year expansion. For example, Caterpillar   recently lowered its forecast for full-year resource industry sales from a negative 10% to a negative 20%. Caterpillar's stock price is doing well this year, but it's more about the construction sector exceeding expectations and successful implementation of manufacturing cost reductions.

In addition, A quick look at U.S. coal production over the last 30 years demonstrates the demise of coal in recent years. Moreover, Fools should note that the extent of the period of decline since the last recession indicates that this isn't just an adjustment to a slowdown in global growth.

US Coal Production Chart

Monday, July 14, 2014

Oracle's Earnings Guidance Just Changed

Another set of earnings meant another disappointment for Oracle  shareholders. Earnings, revenue, and key performance metrics all came in toward the bottom end of guidance, and Fools must be wondering just how reliable Oracle's guidance actually is? However, the company also made some reporting changes that should make its earnings easier to follow in the future, yet most of these adjustments simply reflect a change in industry-end demand.

In common with its main rival IBM , Oracle is shifting its efforts toward areas of growth such as cloud infrastructure. The question is, how will Oracle's new guidance help Fools to better follow the company?


Thursday, July 10, 2014

Caterpillar, Johnson Controls and NCI Building Systems: Set for a Better Second Half?

Anyone wondering about the state of play in the economy should keep a close eye on the commercial construction sector in the U.S. While, the recovery in the U.S. residential market is likely to moderate from its torrid pace last year, the commercial construction sector has yet to really take off at all. In this regard, Caterpillar , Johnson Controls and NCI Building Systems  are all interesting to look at for clues as to if and when the sector will meaningfully contribute to economic growth again.

Caterpillar and Johnson Controls
At first, they may appear to be a disparate collection of business to look at, but all three have a specific exposures to the industry. Moreover, as outlined in a previous article they all looked like they were giving somewhat conservative guidance in their results in the first calendar quarter. Now that the second calendar quarter results are in, what are they saying about the state of the industry?

Caterpillar's results and guidance were the most positive overall, as the company upgraded its full-year forecast for construction machinery sales from 5% to 10%. Essentially, Caterpillar's construction machinery sales are receiving a boost from an inventory rebuild by its customers after they ran down inventory in 2013. On a positive note, management also outlined on the conference call, that there had been an increase in end-user demand -- a good sign for the industry.

Monday, July 7, 2014

General Electric's Oil & Gas Segment Analysis

The oil and gas services market doesn't always spring to mind when considering General Electric Company , but the company has made a number of strategic investments in the sector. Indeed, oil and gas is a key part of its strategy to realign itself as an industrial company. However, General Electric will have to be careful over its growth plans, because the industry has a number of long-term trends driving it, and companies like Baker Hughes Inc. and Dresser-Rand Group are seeing mixed fortunes in dealing with them.

The importance of oil and gas to General Electric Company
A quick look at 2013 industrial revenue by segment demonstrates that oil and gas is still only its fourth largest industrial profit center.

Source: General Electric Presentations

On the other hand, due to a combination of acquisitions and organic growth, the oil and gas segment has grown profits by 51% over the last five years.


Saturday, July 5, 2014

Middleby Corporation Equity Research

According to analyst estimates, food equipment company Middleby Corporation  is on track for low-teens sales growth, with 12% and 22% EPS growth over the next couple of years. Moreover, there are a few reasons why investors can expect upside to those estimates going forward. In addition, industry rivals like Dover Corp.   and Illinois Tool Works  are also reporting good numbers in the food equipment sector -- indicating that Middleby's end markets are good. Is all of it enough to justify its valuation of nearly 26 times forward earnings for 2014?

Middleby middles it
The company operates out of three industry groupings and a quick look at its 2013 revenue split reveals the relative importance of each.

Source: Middleby Corporation Presentations

Middleby's commercial food segment competes with Illinois Tool Works and Dover Corporation, and its rivals are making some positive noises about the marketplace. For example, Illinois Tool Works reported strong growth in its food equipment sales in its most recent quarter. Moreover, in common with Middleby, Dover Corp. sees expansion opportunities in its refrigeration and food segment through products that enhance productivity.

Friday, July 4, 2014

Why Medtronic's Purchase of Covidien Makes Sense

Medtronic  investors are probably wondering what they could be getting with the acquisition of medical device company Covidien for $42.9 biillion. Simply put, Covidien's attraction is that its surgical equipment is helping it to outperform Johnson & Johnson  within the category, and fears of encroaching competition from Intuitive Surgical are probably overdone. Superficially, the company's forecast EPS growth rate of 7% for 2014 doesn't make it look like a high growth proposition, but for a host of reasons its growth is better than the headline numbers suggest. Let's take a quick look at three major reasons why Covidien is attractive to Medtronic.

Emerging markets
First, emerging market spending on health care is an exciting growth opportunity for the stock. For example, Johnson & Johnson's U.S. sales only increased 2.2% in its last quarter, while international sales grew 5.3% on an operational basis.

Although emerging markets only contributed 14.7% of Covidien's sales in the recent second quarter, they contributed 46% of the growth in the quarter. Moreover, as part of its growth plans for emerging markets, Covidien made an acquisition of a surgical equipment business in Brazil, and entered into a joint venture in China with a medical stapler company. Growth looks set to continue in 2014, with its emerging market sales growing 14% operationally in the second quarter and BRIC growth coming in at the "high teens".