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.


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Ingersoll-Rand's Upside Potential in 2014

It's not easy to find screamingly cheap shares in the industrial sector right now, as most of the big names seem to be pricing in a cyclical recovery. With that said, Ingersoll-Rand looks decently priced should its end markets pick up. The tricky bit is that its rivals in the climate technologies space, such as Lennox International and Johnson Controls Inc. , have both given results recently that confirmed positive underlying conditions, but not to the extent that many had hoped. The good news with Ingersoll-Rand is that its guidance looks a bit conservative, so any upside surprise is likely to be well received, and here is why.


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Cisco isn't Performing, but it can Still go Higher

Cisco (NASDAQ: CSCO  ) is under-performing. Its stock price is nearly 20% worse off than the S&P 500 on a yearly comparison. The company's recent acquisition history has been underwhelming, and its corporate execution has been disappointing. The company appears to be moving into a zone whereby all it has to do is internally execute, and the stock price will likely go higher. For this reason alone, Cisco is worth a Foolish look.

What you already know about CiscoCisco's second-quarter results came in with an 8% sales decline, when the company had previously forecast a fall of 8%-10%. In addition, its sales decline is hurting gross margins because they came toward the bottom end of its 61%-62% guidance range. Given that it's guidance for the upcoming third quarter was for a 6%-8% sales decline, it's reasonable to assume that gross margins will be relatively weak in the next quarter as well.

While this was obviously new news to the market, Cisco's results actually told investors more about what they already knew about the company. 

 

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TJX Remains a Buy

Investors in off-price retailer The TJX Companies  will be very pleased with the company's latest results. Not only were earnings ahead of estimates, but management also guided investors toward some significant developments that should drive the company's long-term growth. There has always been a lot to like about TJX, and now there is even more.

TJX beats estimates, again
TJX previously guided toward diluted earnings per share in the range of $0.69-$0.72 and comparable-store-sales growth of 2% to 3%, but it delivered $0.75 and 5%, respectively, in its third quarter.

The company has a history of giving conservative guidance, and it arguably did so again this time around. Despite the impressive third-quarter numbers, management reiterated its fourth-quarter forecast of only 1%-2% comparable-store-sales growth, and diluted EPS of $0.77-$0.80. Don't be surprised if it beats projections.

A note of cautionA note of caution came from the outlook provided by a rival off-price retailer Ross Stores. In giving its outlook for the all-important fourth quarter, Ross' management argued that the upcoming holiday season "will be the most intensely competitive and promotional holiday selling period in recent years."

One issue that faces the entire retail industry is the six fewer shopping days between Thanksgiving and Christmas this year. In other words, in-store shopping is likely to be more intense, and retailers will fight hard for foot traffic by offering promotions. This is likely to create some confusing signals from the sector.

However, to be fair, Ross and TJX offered up the same guidance of 1%-2% comparable-store growth in the fourth quarter. The difference was that TJX beat EPS estimates in the third quarter, while Ross was only inline.

It was a similar story with Dollar Tree Stores. The dollar store missed analyst estimates for the second straight quarter, and its management spoke of "weak consumer confidence" and inevitably the short shopping season this year. Furthermore, EPS guidance for the fourth quarter of $1.01-$1.07 was weaker than the analyst consensus of $1.10.

However, Foolish investors should note that Dollar Tree's non-consumable categories (which tend to be more discretionary items) grew at a similar rate to consumable; that's a good sign that consumers do have a bit more discretionary income. It could be that Dollar Tree's management is just being cautious.

TJX's long-term growth prospects
Turning back to TJX, each of its divisions achieved good sales growth in the quarter.

Note that TJX's home goods (10% of total segment profits year-to-date) sales grew much faster than the company average, while according to management Ross' home business "ran at the same rate as the company" in the third quarter. Furthermore, TJX gave some positive updates on its long-term growth plans in three ways.

First, the company's management now believes it can increase its number of stores by 60% to 5,100 stores, with Marmaxx's (73% of segment profits and around 1,966 stores  currently) potential raised to 3,000 locations, some 400 more than it previously estimated.

Second, management declared itself "excited" by its e-commerce plans, and more investment will follow in due course.

Finally, its European segmental margins (6% of year-to-date segment profits) grew to 10.4% versus 9.1% last year, and TJX raised its long-term target to "10%-plus." Considering that Marmaxx has margins better than 15%, it's reasonable to expect that TJX can continue to increase European margins in the future.

Where next for TJX?
It's going to be a tricky season for retailers. The spending environment isn't fantastic, and the shortened selling season will cause great potential for retailers to report mixed signals as the holiday season progresses.

Nevertheless, TJX has consistently demonstrated an ability to appeal to off-price shoppers, irrespective of market conditions. Meanwhile, its long-term growth prospects are getting stronger, and investors should focus on these aspects of its potential rather than the short-term noise created by a shorter selling season.

Kinetic Concepts gets Taken Over but Who is Next?

Kinetic Concepts $KCI announced today that they have agreed a $4.98bn takeover bid from London based Apax Partners. Naturally, investors will want to know what Apax see in this deal and which companies could be next?

Kinetic Concepts is the largest single wound care company in the world and despite flattish looking sales over the last few years, I think this is a very good deal for Apax. Not only is Kinetic Concepts highly cash generative but they have leadership in the negative-pressure therapy market. This is exciting because this type of vacuum treatment helps wounds heal quicker and reduces the amount of days that a patient spends in hospital. In turn this produces a huge saving. In addition, with the launch of a portable device it should be possible for patients to be treated at home and therefore generate more cost savings. With hospital budgets likely to be challenged over the next few years this represents a great opportunity for Kinetic Concepts.

 In addition, following channel checks, it has been revealed to me that Kinetic’s LifeCell division is generating strong demand for reconstructive tissue matrix product ‘Strattice’. So, in my view, Apax is picking up a company that is set for acceleration in its sales growth but which is already generating huge amounts of cash. It is a smart deal for them. So who is next?

Advanced Medical Solutions

I think a small UK company could be next in line. Advanced Medical Solutions is a wound care focused company that has an established wound care healing product called Activheal and a wound closure product that rivals Johnson and Johnson’s $JNJ Dermabond. I’ve spoken to a few surgeons and the general opinion is that Liquiband is pretty similar to Dermabond in efficacy. So, in reality, sales growth is likely to be generated via pricing and the strength of the distribution ability. In other words, it represents a perfect opportunity for a larger company to come in and accelerate sales growth.

Potential suitors not only include the likes of Apax (who could know merge AMS’ products with Kinetic Concepts sales force) but also someone like Kinetic Concepts UK rival Smith and Nephew. In addition, now that Kinetic Concepts has gone to private equity there could be more pressure on a private equity purchase. AMS’ main rival in the UK is Convatec which is a private company. AMS is cash generative, profitable and has good growth prospects as it tries to expand sales for Liquiband in the US. I believe, a company that could be bid for in future.

I sold my Kinetic Concepts position and hold Advanced Medical Solutions.