Thursday, November 29, 2012

Market Outlook From UK Multinationals

It’s common with many US focused investors to forget about the rest of the World in terms of company and industry updates. Quarterly reporting in the US means that most up to date ‘tells’ come from there but it would be a mistake to ignore what major bellwethers are saying in other markets. In this article I’m going to discuss three recent statements from the UK and how they relate to some US stocks.

Cookson Cooks Up a Mess

Cookson plc gave a recent profit warning and cited weakness in its Engineered Ceramics business as the cause for its full year performance is now expected to come in ‘materially below’ previous expectations. Investors should note that this division is a major supplier of consumables to the steel industry

“trading performance in the third quarter, and in particular over the last month, have been weaker than previous expectations. Assuming a continuation of current end-market conditions, the Engineered Ceramics division's performance in the second half of 2012 is now expected to be substantially below both the first half and previous expectations.”

Note that conditions appear to have accelerated to the downside recently. The US, Europe and Brazil were cited as particular areas of weakness with foundry castings and in particular solar mentioned as experiencing a further slowdown from the second quarter.

Allegheny Technology (NYSE: ATI) should take particular note of this commentary. I know the stock has been weak this year and no one likes contemplating further weakness ahead, but Cookson and Allegheny share many of the same profit drivers. If Cookson’s end customers are seeing weakness then it is highly likely that Allegheny’s metal producing operations are also seeing weakness. Allegheny may have relatively more exposure to aerospace and oil & gas, but I think it’s too large and too diversified not to feel the effects of a general slowdown.

The recent weakness in solar expressed by Cookson is only mirroring what Jabil Circuit said recently regarding this market. Things are getting worse and when you put these statements together with Intel’s recent lowering of guidance it is hard not to conclude that life is getting tougher for Applied Materials (NASDAQ: AMAT). Again, I know conditions have been like this for a while and AMAT has taken a restructuring charge on solar, but these companies are saying that things have got worse from the second quarter. In the long term AMAT may well be a great investment but look out for near term volatility here.

Putting on the Wolseley

Alas I am not talking about the high end tea room that is so popular with North American visitors to London, but rather the British company that supplies much of their plumbing supplies back home. Nearly half of Wolseley’s revenue comes from the US and it is the no 1 player in the US heating and plumbing supply market. Its recent full year results speak much about where growth is in the global economy.

For the full year, revenues in the US were up 8.4% on a like for like basis with the UK down .8% and France down 1.4%. Moreover Wolseley mentioned that Waterworks and Industrial business grew strongly in recent trading but demand weakened in the oil and gas sectors. Interestingly the repairs, maintenance and improvement (RMI) market in the US was described as ‘resilient’ and a ‘modest recovery’ was cited in the new residential market.

The message is clear, stick with your US housing plays. My preferred play is Home Depot (NYSE: HD) as I think it offers the widest exposure to the US housing market and has a cheap valuation. The company is a huge cash generator and as input costs like copper and other metals reduce in price we can expect some margin expansion here. Home Depot’s profit is the difference between two huge numbers and the slightest incremental reduction in costs is going to accelerate profits significantly.

I also like something like Beacon Roofing Supply (NASDAQ: BECN).  Rather like Wolseley it is the leading player in a highly fragmented US marketplace. In other words it can grow by consolidating its industry and it has good recurring revenues from roofing maintenance plus some upside kicker from new builds. I like prospects here. The company is trying to increase pricing and there is a sense that demand was pulled forward this year due to mild weather. Will Beacon’s customers not react negatively to pricing increases? In general I think customers don’t reject pricing as long as their end markets are looking better and the housing indicators are looking better in the US.

Growth Checked at Burberry’s

The last company from over the pond to look at here is Burberry. It gave a nasty profit warning of which I wrote about here. Since then, there hasn’t really been any retail company reporting and saying that things got better in China and Asia in general.  We should listen to what these companies are saying. Conditions aren’t a disaster, but they are not what a stock like Burberry had priced into it and we can see that from the share price reaction.

Subsequently it is hard to like some of the more Asian focused luxury plays out there like Coach or Tiffany (NYSE: TIF). In particular the latter has already lowered its full year sales growth forecast and its EPS target for the full year. It has also failed to hit market estimates for the last three quarters in a row. I have no idea what will happen in the next quarter, but if Burberry is saying that conditions are getting weaker it is difficult for me to be too bullish about Tiffany.

The Bottom Line

I hope you have enjoyed this trip over the pond and found it helpful in making investing decisions. If it’s useful then I’ll be happy to cover any specific industries or themes that readers are interested in, just leave a note in the comments section below.