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.


Thursday, August 7, 2014

3 Reasons to Feel Good About Pratt & Whitney's Geared Turbofan Engine

Another day, another announcement that a major airline, American Airlines, is placing 100 orders for CFM International's LEAP-1A engines to power its fleet of Airbus 320neo. This is good news for General Electric (CFM is a joint venture between General Electric and Snecma) as it competes with United Technologies' Pratt & Whitney for engine orders on the revamped A320. It's obviously not such good news for United Technologies. Moreover, given that a Pratt & Whitney engine recently caught fire on a Bombardier  CSeries jet on a ground test, investors are entitled to start feeling apprehensive about United Technologies' prospects going forward. Is it really that bad for United Technologies?

Bombardier's CSeries problems

The CSeries matters to Pratt & Whitney, because the PW1000G geared turbofan engine is the exclusive engine option on the planes. In fact, aside from the A320neo -- where it competes with CFM -- the engine is currently only offered elsewhere as an option on some smaller circulation regional jets. Therefore, earlier in the year, when Bombardier's CSeries jet was delayed for a fourth time, investors must have started to downplay expectations for the PW1000G. Indeed, the CSeries -- originally expected to enter service in 2013 -- is now expected to be commercially available for service as late as the second half of 2015. Throw in the engine fire mentioned above, and the problems appear to be mounting for Pratt & Whitney.


Wednesday, August 6, 2014

American Railcar Industries Earnings Preview

After rival railcar manufacturer, Greenbrier Companies  reported a strong set of earnings recently, investors in American Railcar Industries  must be wondering if it and Trinity Industries have any upside going into their forthcoming earnings?

Greenbrier beats, American Railcar Industries next?
There are three factors that Fools need to focus on with the earnings of Greenbrier, American Railcar Industries, and Trinity Industries:

  • Railcar order books
  • Demand created by regulatory changes
  • The mix of railcars for sale (more upfront revenue) versus railcars for lease (longer term earnings and cash flow, but less upfront revenue)

The indications are that railcar demand is strong in 2014.


Tuesday, August 5, 2014

Good News for Boeing, FedEx and UPS

A few news reports might have led Foolish investors to scratch their heads with confusion recently. On the one hand, the U.S. trade deficit came in lower than expected in May -- indicating good global growth. On the other, it was reported that the managing director of the IMF, Christine Lagarde, was signaling a cut in the IMF's global growth forecasts. Although, the two events appear contradictory, there is actually an explanation, which sees a positive outcome for companies like United Parcel Service, FedEx , and Boeing.

U.S. trade deficit lower
The drop in the U.S. trade deficit to $44.4 billion in May, was somewhat lower than most economists had forecast, and turns out to be a good indication of U.S. growth for three reasons. First, exports grew to a record high -- suggesting that international growth will aid U.S. GDP growth in future quarters, as American companies export more. Second, nonpetroleum imports also hit a new high -- an indication that U.S. domestic demand has picked up. Third, the reason that the deficit fell, partly because net imports of oil fell, this is a good sign because it indicates that the U.S. is moving toward self sufficiency in energy production.

The following chart demonstrates the U.S. trade deficit, and the impact of falling net oil imports:

US Trade Deficit Chart

Moreover, a snap-back in U.S. growth is only to be expected following a weather-affected first quarter in North America. All told, the strength in export demand is a positive sign, and augers well for logistics and shipping companies like UPS and FedEx.


Monday, August 4, 2014

Time to Buy ConAgra?

ConAgra Foods  shareholders have had a hard time stomaching its earnings and outlook statements in the last couple of years. The company has disappointed across all of its segments, and its acquisition of Ralcorp has been fraught with unexpected difficulties. With that said, the stock now stands at a valuation discount to peers like Treehouse Foods and Kraft Foods  , but does this make it the value play in the sector? It's time to look more closely.

ConAgra Foods in charts
Sometimes a chart tells you a lot of what you need to know about a stock. For example, ConAgra's price chart reveals that after every disappointing earnings report, the value hunters move in on the expectation that it will sort out its difficulties in due course.

CAG Chart

CAG data by YCharts.

Unfortunately, the latest setback has taken the stock price almost back to where it was in February when it last guided expectations lower. However, don't be surprised if the value players and activist investors start sniffing around the stock, because on a relative value basis, the stock is starting to look cheap.

ConAgra's acquisition of private-label food company Ralcorp is intended to enable the company to sell both branded and private-label foods into its customer base. The idea is that ConAgra can generate synergies in the process and take advantage of offering a range of products to the same retailers. With this in mind, Fools should keep an eye on its valuation versus Kraft (branded foods) and Treehouse Foods (primarily a private-label company).

Enterprise value (market cap plus debt) to free cash flow is used, because ConAgra took a $681 million non-cash impairment charge in the recent fourth quarter, which reduced its net income for the full year to just $315 million. In addition, ConAgra, Treehouse, and Kraft all contain significant, but varying, amounts of debt.

CAG EV to Free Cash Flow (TTM) Chart

There is no doubt that ConAgra looks like a good relative value, but is it?