Standard Chartered and the Property Market in China

Standard Chartered $STAN gave a bullish trading statement today and the market received it warmly, however the share price move looks to be a blip in a pronounced downtrend

I suspect the main reason for this is that investors have been pricing in a slowdown in Asian growth following tightening measures by China. In addition, the knock on effect of a temporary slowdown in industrial production following the disaster in Japan has scared investors. So is Standard Chartered a stock worth buying?

Is Standard Chartered Worth Buying?

I think not. Turning to the Standard Chartered statement, it seems quite positive...

“Standard Chartered is on course to deliver another strong first half.  We anticipate delivering cost growth broadly in line with income growth for the first six months of 2011. The credit environment remains benign across Asia. We are advantaged by a very strong balance sheet which remains highly liquid, very well capitalised, diverse and conservative; and are capturing increasing levels of business from our markets across Asia, Africa and the Middle East. "

...however, if we look into Standard Chartered said about regional performance, there is a red flag waving here...

“Sources of income growth remain well diversified, both by product and geography. Whilst income in India is lower than in the first half of 2010 and growth in Africa has been muted, this has been more than offset by very strong performances in Hong Kong, Singapore, Malaysia, MESA, China and Indonesia.”

...and the continued strength of Asian credit expansion is supported by other evidence. In normal circumstances, this would not be a matter for concern however China has been consistently raising reserve requirements in order to tame domestic demand and commodity price inflation.  The good news is that commodity price pressure is abating...

..but it is not clear if this is the start of a gently managed moderation or the beginning of a prolonged crash. The former would be good news for Standard Chartered but the latter would be damaging.

Anthony Bolton on China

It was interesting to read what top fund manager Anthony Bolton of Fidelity China Special Situations said recently concerning inflation and property prices in China. For example on inflation...

“I would not want to say that inflation is not a problem but I do not think it will stop the bull market unless it gets completely out of control. The authorities must tread a delicate path between slowing the economy to alleviate inflationary pressures and suppressing growth too much but I believe they will strike the right balance. I am expecting growth to fall back to 7-8% compared with last year's 10%, but that is still a very attractive level relative to the developed world.”

On the property market in China, Bolton cites the reports of empty cities and the speculation over 65million empty apartments. However, he concludes that the mortgage debt held against the properties is not high so he feels the long term picture is ‘very favourable’.

I’m not so sure and I think a cautious approach should be taken here. The good news is that the Chinese Government has the reserves to stimulate the economy if there is a sustained slowdown in housing. However, if there is a crash, China related equity investors-particularly with the US housing crash in their minds- won’t be slow to price this in negatively.

Cognex Offers Growth but Lacks Visibility

Cognex $CGNX is a world leading company in the field of machine vision systems. As such, this makes this stock a direct play on growth in Global Investment in Machinery and Equipment (IME). Cognex sells machines that ‘see’ and help measure and quantify factory automation processes. Whilst, Cognex is a play on this kind of capital spending, it does have a few key industry verticals which can cause performance to be lumpy.

Cognex splits its company into three separate divisions

• Factory Automation-(70% of sales) of which Auto production is a key vertical, Solar is a strong growth area
• Semiconductor and Electronics Capital Equipment (SEMI) (17% of sales)
• Surface Inspection (13% of sales)

By far the most important is Factory Automation which is also the fastest growing and with the highest gross margins of around 80% The other two divisions have gross margins of around 50% and due to these factors and, according to the conference call, Cognex appear to believe that they can continue to achieve overall gross margins of 72-75%

Cognex End Markets

Frankly, Cognex has had very favourable tailwinds over the last two years which has made growth look artificially strong. The last recession was characterised by a severe cutback in IME and Cognex suffered accordingly. However, with the recovery investment has flowed back and the low base effects have created very strong looking growth for Cognex. Some details here on trading history here...

$1000s	2006	2007	2008	2009	2010	2011	2012
Revenue	238,318	225,683	242,680	175,727	290,691	319,450	360,510
growth		-5.3%	7.5%	-27.6%	65.4%	9.9%	12.9%
Gross Profit	173,480	161,333	174,253	119,340	213,130	234,796	264,975
gross margin	73%	71%	72%	68%	73%	74%	74%
Op Profit	44,473	28,136	25,104	-12,668	75,173	76,668	86,522
margin	18.7%	12.5%	10.3%	-7.2%	25.9%	24.0%	24.0%

The slowdown from 2008-09 is demonstrative of the cyclical nature of Cognex’s end markets. However it is worth reflecting on the weakness in 2007. This was largely a consequence of a combination of factors including weakness in the semiconductor industry; an over reliance on the weakening North American auto production; low penetration within factory automation in Japan and some administrative difficulties within the North American sales operation.

Cognex addressed these problems buy increasing diversification in end markets and by shifting the sales focus to the types of countries (China/India/Korea ec) that are expanding automated production. As for the semiconductor industry, around ten years ago 66% of Cognex revenue was generated by this industry but now it is less than a third. Cognex mainly sells into the semiconductor equipment manufacturers that integrate Cognex solutions into their products. The US sales operation was restructured and finally, Cognex formed a partnership with Mitsubishi in order to generate accelerate longer term sales in Japan.

Future Prospects

Cognex’s revenues will be largely tied to global IME, their success in introducing the new Dataman product (they aim for a run rate of $10m by the end of year, but are ahead of expectations) and in increasing the number of customers that utilise vision machine solutions. For example, Cognex is targeting the Life Sciences industry for long term growth. This sort of growth will take time as Cognex integrates with OEM with this type of solution.

Thinking shorter term, Japan automotive comprises less than 1% of Cognex sales, and it is hard to see too much disruption from Japan factory automation beyond a quarter or two. Longer term the Mitsubishi partnership should help Cognex in Japan and also in China, where Mitsubishi has a strong sales infradtructure. In the recent results Cognex claimed that the key factory automation market was actually getting stronger. Surface inspection revenues tend to be lumpy from quarter to quarter, and semiconductor revenues were exceeding expectations.

Cognex Evaluation

Cognex has a strong balance sheet with $316.4m in cash and investments on the balance sheet. At a current price of $33.22 the market cap is $1.36bn and the Enterprise Value is therefore $1.17bn. It is a conservatively run company that has consistently generated strong cash flows.

$1000s	2006	2007	2008	2009	2010
Free Cash Flow	44,255	43,838	52,295	6,817	70,491
%Revenues	18.6%	19.4%	21.5%	3.9%	24.2%

On the other hand, revenues can be lumpy and earnings visibility is not great. The stock fell 10% after a disappointing forecast at the Q4 2010 results, yet they exceeded them in Q1 2011 and the Cognex share price soared. Buying Cognex is a tad tricky because we are in a period where manufacturing growth is moderating, so expectations need to be not unduly optimistic.

Nevertheless, on balance, I think Cognex has good long term prospects and analyst forecasts have it on an EPS of $1.49 and $1.77 for 2011 and 2012 respectively.  Whilst this seems expensive on a PE ratio basis, Cognex generates strong cash flows and has 23% of its market cap in cash and investments. I think it is better priced at $37 which gives 10% upside from the current price of $33.22. I picked some up.

Compact Ultrasound Sales Seen as Rising 11% Globally, Good News For Sonosite

Ultrasound manufacturer Sonosite $SONO is a stock that has been in the doldrums recently, but a disciplined investor will take the opportunity to buy more provided he continues to believe in the earnings prospects.  I do, and I think I am, so I bought some more! Sonosite was featured at length in an article linked here and I think it has good earnings potential as well as being a potential bid target.

Furthermore, an interesting report was recently released which adds strength to the potential for this stock to go higher. In a report produced by Harvey Klein of Klein Biomedical Consultants, the compact ultrasound market is predicted to grow at 13% per annum over the next five years. In the US the market is forecast to expand from $276m in 2010 to $505m in 2015. Outside of the US, the market is expected to grow at 10%

In addition, the report cites Sonosite's 2010 US market share as being 42% and an investor only has to look at the next two players (GE & Philips) to find potential acquirers of Sonosite. If the market plays out as expected, Sonosite's US sales (provided they keep market share) could rise to at least $212m by 2015.

Given the recent analyst upgrades, now looks like a good time to pick some up. I bought some more.



Source:

PR Web, 'Leading Industry Analyst Reports Record Highs In U.S. Compact Ultrasound Revenues For 2010'

Blue Coat Q3 Earnings Write Up

Blue Coat $BCSI gave disappointing results which contrast unfavourably with Riverbed $RVBD, but might there be value in the share price? Blue Coat was originally written up in an in-depth article on this blog. The linked article should serve as providing the background to this update following results. In summary Blue Coat is a 'turnaround' story but as still to demonstrate that the company is on track.

The orientation of this blog is towards Growth at Reasonable Price (GARP) investing and so BCSI does not, as yet, seem to be a stock worth buying. However, for investors who favour special situations or value type investing than Blue Coat offers a more compelling proposition. Hopefully, some of the information here will be of use.


Blue Coat Q3 Results

The results were disappointing

• Q3 Revenues of $123.8m vs. $125.1m estimates
• Adj EPS of 34c vs. 36c estimates

As was the outlook

• Q4 Revenues of $121-128m vs. $129.8m estimates
• Q4 EPS of 32-38c vs. 38c estimates

Clearly, these are disappointing numbers and the stock sold off aggressively afterwards. Aside from the miss, what is peculiar about the results is that the analysts focussed on the performance of the Americas and Europe but completely ignored the Asian region in their questions during the conference call. This is bemusing, because the Americas looked ok (close to usual sequential decline) and Europe did ok. Asia was rather disappointing. The management said that the results were in line with expectations bar the Americas being slightly weaker than expected.


Regional Breakdown for Blue Coat Revenues

Before looking at the results in detail, it is worth nothing some of the points to look for in the results

1. Blue Coat is restructuring the European Sales operation having previously over relied upon Tier 2 distributors
2. Secure Web Gateway (core business) is a low growth business now as Blue Coat already has strong market share
3. Blue Coat's WAN optimization solution is generally seen as weaker than Riverbed's (who reported v strong growth) but has the facility to offer security as well. When customers want both than Blue Coat is advantaged

Turning to the regional revenue numbers (the numbers in red represent sequential declines)

Region	Q2 09	Q3 09	Q4 09	Q1 10	Q2 10	Q3 10	Q4 10	Q1 11	Q2 11	Q3 11
Americas	61,295	44,110	52,663	53,305	55,255	53,561	58,344	54,612	56,937	55,067
EMEA	37,586	43,905	39,731	41,735	44,952	50,531	47,924	42,207	40,889	43,755
APAC	20,143	21,581	21,228	20,931	20,229	23,024	26,325	25,661	23,221	24,060
Total	119,024	109,596	113,622	115,989	120,436	127,116	132,596	122,480	121,047	122,882

Source: Blue Coat


The Q3 Americas numbers look weak but actually there are in line with last years sequential decline (-3.3% vs. -3.1%)  and the European numbers recorded a sequential increase which might suggest that Blue Coat is over the worst of the company's troubles in Europe. However, Q3 is normally a very strong quarter in Europe for Blue Coat. As noted above APAC sales were rather disappointing and Q3 was only 4.5% above 2009. This is not particularly good given that this region is leading the global recovery.

Interpolating the historical numbers and making the following assumptions could give the following revenues for Q4

• Americas follows 2009 sequential increase, giving $60m
• Europe Q4 tracks same relative performance (against 2009) as Q3 did, giving $39.1m
• APAC YoY tracks Q3, giving $27.5m

This totals as a-conservatively put together-revenue forecast of $126.6m for Q4. The analyst estimates are for $129.8m but Blue Coat are guiding towards $121-128m. Either, Blue Coat is trying to under promise/over deliver or there is a fundamental weakness here.


Blue Coats Strategy

Essentially, the new CEO is trying to restructure the European sales operation and reduce its dependence upon Tier 2 distribution. As a consequence, Blue Coat held back from major lead generation attempts. However, the company looks set to accelerate customer acquisition activity following the hiring of a new CMO and expansion of a number of sales partner alliances with the likes of HP, Microsoft, Oracle and IBM. Whilst this process can be expected to take time -management are asking for 6-9 months- Blue Coat is selling into very favourable end markets.

The core web gateway security market may be slowing but WAN optimisation sales for competitors such as Cisco and Riverbed are soaring. It may well be that Blue Coat's WAN offering is not as competitive as it once was. For example Riverbed are claiming 43% share of the Advanced Platform WAN Optimisation market and are releasing new products (Virtual Steelhead and Cloud Steelhead) which enable the transition towards cloud computing. Similarly, Riverbed has just released 'Whitewater' which is a cloud storage accelerator that enables cost effective moving of storage to the cloud.

In conclusion, whilst Blue Coat is generating large sums of cash -see previous research- recent revenue growth has been weak and, the company is challenged to generate growth in its core market of secure web gateway. Nevertheless, it has the elements of a turnaround story and is favoured by strong end markets. For the value investor this may prove compelling.

For a GARP investor, it may make more sense to wait for confirmation that the Blue Coat product offering is not being fundamentally challenged. In the opinion of this blog, anything less than $126.6m in the Q4 revenue numbers will be a disappointment.

Western Union and MoneyGram Value Traps?

Cash in Western Union Stock?

Western Union $WU has all the makings of a value trap investment. This research article will focus on Western Union but much of it is equally applicable to $MGI MoneyGram. Western Union stock is, on a superficial basis, very attractive for a portfolio, yet it contains danger. Any analyst research report should discuss these issues. On balance, I decided that this stock was not worth buying. Having said that, it is worthwhile to articulate the risk and reward profile of this stock in order to monitor.

Western Union Profit Drivers

The stock actually has a number of things going for it. I will outline these points in the context of the results. Western Union has...

• Good exposure to the expected rise in employment this year
• Very favourable demographic trends of globalisation and migrant workers
• Increasing utilisation of technology to capitalise on the potential of things like pre-paid cards and mobile money transfer
• An expanding network of 80,000 agents and 16,000 corridors and a global leading position in money transfers
• Highly cash generative business model

It's not hard to see why many would conclude that Western Union is a great stock to buy. As employment picks up in the developed economies, the kind of low level service personal that uses Western Union services will see an increase in income. Furthermore, increasing growth encourages more migration and this helps Western Union in its remittance business. For example, around 9% of Western Union's business involves remittances from USA to Mexico and, 85% of revenues are c2c. Putting all of these things together and, it is likely that Western Union will see a lot of potential upside this year.


Western Union Growth Strategy

Essentially, Western Union flourishes in environments whereby its customers do not have access to existing banking facilities. This is why international remittances of lowly paid workers are the core business for the company. Whilst this end market is guided by macro economic considerations (as discussed above) it is also being affected by technological changes. Western Union are seeking to stay ahead of the technology curve by expanding sales of pre-paid cards and establishing a long term position in mobile money transfer.

This is laudable but, I think, will prove challenging for Western Union. The world is full of companies of who, in recent history, suffered as their business models became obsolete as a consequence of technological changes. What is surprising, is how quickly these companies succumb to these pressures. Similarly, Western Union and its main competitor MoneyGram are facing significant challenges.


The Future of Money Transfers?

Here are five main challenges to companies like Western Union and MoneyGram. Most of which are coming from technological developments that threaten the core business of these companies

1. Increasing banking penetration in emerging markets, for example, Latin American banks servicing workers with branches in US
2. Email transfer banking and internet based transfers
3. Micro Finance companies (many which are non-profit) expanding activities/lending in emerging markets
4. Mobile phone based transfer payments
5. The Federal Reserve may force them to fully disclose fees and exchange rate charges, in line with the Dodd-Frank laws

Every one of these factors is a long term threat to Western Union. Whilst the results and conference call contained many positives, the 2-4% drop in pricing is a cause for concern. Western Union's management are arguing that this is part of a strategy to win market share via promotions.

However, I have my doubts. I think the company is trying to stem back the advance of inevitable technological change. History does not look too kindly on companies that have tried to do this.


Western Union Evaluation

Listening to the latest conference call, it is clear that Western Union expects to generate between $1-1.2bn in free cash flow for 2011. Analyst consensus is for EPS of $1.51 and operating margins are expected to expand by 100 basis points to 27%  The forecast EPS growth of 6.3% is not great but should be put in the context if a higher tax rate (impact forecast at negative 6-8c for EPS) plus $50m or 6c negative impact from restructuring charges. Adding these effects back in would give EPS growth of 15%

With an EV of $15bn and a stock price of $21.4 this would put Western Union on a forward FCF/EV of 7.3% and a PE ratio of 14.2x which is attractive. Furthermore, Western Union is set for positive upside from employment gains and a growing economy. The management is doing all the right things in engaging in share buy backs and looking to return cash to shareholders.

All of this is fine and, short term I would expect the stock price to go higher. However, longer term there are structural challenges here and I don't like trying to time when they are going to hit.

I'll take a pass on Western Union.





Source:

Bloomberg Website "Western Union, MoneyGram May Lose as Fed Sets Remittance Rules"  (Accessed 14 Feb 2011)

Core Labs Gives Gushing Numbers

Core Labs Earnings Review

The best way to play a rising oil price is to buy an oil service company, and Core Labs is one of the best ways to get exposure. Oil services stocks tend to be highly correlated with spot oil prices, because their end demand is guided by it. By way of comparison, exploration and production companies tend to be less correlated because their value tends to lie in their reserves, which are only released over time.

What makes Core Labs an attractive stock to buy is that they are focused on using technology to help oil producers define and maximize production from existing oil fields. Therefore, as oil prices go higher, Core Labs will see its services in greater demand. In addition, oil exploration is taking place in increasingly difficult environments (deep water, off shore etc) which encourages utilization of technology in order to be able to better define reserves.

Core Labs Results

Turning to Core Labs results and guidance

• Q4 Adjusted EPS of 84c vs. 81c estimates
• Q4 Revenues of $208.2m vs. $206.3m estimates

Guidance

• Q1 EPS of 82-84c vs. 82c estimates
• Q1 Revenues of $205-210m vs. $211.1m estimates
• Full Year EPS of $3.55-3.60 vs. $3.58 estimates
• Full Year Revenues of $890-910m vs. $893.2m estimates

So, Core Labs beat estimates and revenues for the quarter and, the mid point of full year revenue guidance is above estimates. Full year EPS guidance is within the range of analyst forecasts but Core Labs does tend to be conservative with guidance

Core Labs Growth Drivers

The really good news in this statement is that the biggest single division, Reservoir Description with 53.5% of revenues, is likely to see a strong return to growth. With high oil prices new large scale international deepwater projects are being developed alongside the worldwide shale reservoir projects. In addition, I believe that Core Labs is very active in Iraq and with the formulation of a new Government and the Kurdistan Regional Government planning to recommence exports, there is upside potential here.

Production Enhancement contributes 39.5% of revenues. The division has reported very strong revenue growth (41%) and margin expansion (300bp) which is quite impressive considering that it is strongly focused on North America. Core Labs are assuming a flat rig count for North America, although this is not necessarily a bad thing. Many rigs look likely to shift towards oil from gas as there is a wide historical discrepancy between oil/gas prices. Furthermore, Core Labs activity is in production enhancement so the company can generate strong growth even without a major pick up in exploration activity. The price of oil is more of a driver here.

Reservoir Management is the smallest of the division with only 7% of revenues and 8.7% of operating incomes. It is small, but has the potential for strong growth due to the growth of shale oil and gas projects. Unconventional types of oil and gas projects require greater understanding of reservoir optimization because of the unusual nature of their structural formulation.

Core Labs Stock Evaluation

Core Labs is a likeable stock but its hard to argue that it is anything other than fairly priced at the moment. This is not to say that it won’t go higher. If oil prices go north of $100 than Core Labs stock price will be easily north of a $100 too. However, investing is about risk and reward. Investors should buy stock when the odds are in their favor (value investing) and/or to manifest a strong viewpoint (growth investing) about the stocks growth drivers. Taking a view and assuming that oil prices will go higher this year is fine, but it doesn’t obviate the need to manage the risk of a slowdown in emerging markets.

In the statement Core Labs thinks that it will spend around the same amount in 2011 on capital expenditures. Interpolating the estimates for net income, and historical operating cash flow conversion will get to free cash flow generation of around$175m for 2011. This puts Core Labs on a forward FCF/EV of 4.2% and a forward PE of 25.5x assuming the current share price of $91.3 and that the company hits estimates. Core Labs looks to be fairly valued, although if oil prices rise, it is a great oil services stock to buy.

Givaudan Warns of Rising Raw Material Costs

Rising raw material costs are threatening to trim margins at flavours and fragrances companies.Industry leader Givaudan gave results to day and they confirmed the strong performance of this industry.

The stocks and sector are attractive to buy because they offer a combination of good cyclical growth (perfumes and other discretionary spending products) and secular growth trends. The latter being  exposure to emerging market growth and trends in personal healthcare (scents in creams etc) products. Moreover, the downside is limited by the secular trends within the food sector, which is relatively recession resistant.

The leading global players in this industry are Givaudan, Firmenich, International Flavors & Fragrances and Symrise.  My preferred play in the sector would by Symrise of Germany, which has relatively high exposure to emerging markets and is strongly positioned in the consumer health care market. However, I think today's statement by Givaudan is sufficient reason to hold off buying the stocks just yet.

In a post results interview Givaudan CEO Gilles Andrier talked of very high levels of raw material prices in the last few months. He also discussed high single digit to low double digit growth in raw material costs. All of which is hardly surprising, nor is it unexpected that Givaudan will seek to pass on these price increases. The CEO talked of conditions being similar to 2008 but, in reality, they are not.

Raw materials price rises may well be rising again, but this time around there isn't a major recession coming in terms of end demand. In other words, the flavours and fragrances companies should be able to pass on the rising input costs.

However, the price action today doesn't lie. It will take a while for the price increases to take effect and I think these companies will come under sporadic pressure as they all will all need to inform the market of the short term margin pressures. There will be a time to buy them, but it isn't just yet.

Anixter Distributes Growth

Anixter Ohm Sweet Ohm

Anixter is a world leading component distributor and a good play on global growth in manufacturing. The recent results were excellent and the stock has many positive drivers. It is a good stock to research. Rising commodity cost pressures are always a concern but, as a distributor, they should be able to pass raw material costs on.

Before talking about the company in more detail, I want to make some remarks on the recent results.

Anixter Q4 Results

According to Anixter, the global manufacturing outlook appears to be accelerating. For example Anixter sales are normally down 3% sequentially from Q3 to Q4. However, this year there was a sales increase. Most notably, it is North America and Europe that is normally weak in this period, but this year Anixter saw increases. Emerging markets were strong, in line with what everybody else is reporting in the sector.

The results weren't entirely positive for Anixter as they suffered a $17.3m unfavourable movement from discontinuation of a key Alcatel-Lucent account. On the other hand, Anixter benefitted from $19m in favourable copper pricing. In addition, Anixter have made good progress in managing working capital requirements as revenues have picked up. Ultimately, this will help cash flow generation in future.

From the conference call...

'we had some very strong focus on working capital management with $500 million roughly increase in revenue if you look at our historical measures where it takes about $0.25 of working capital per revenue dollar, that would have implied a working capital investment for the year of somewhere in the range of $125 million. But I think the actual number was somewhere in the $30 million, $40 million range. So we feel that we did a pretty good job on getting some enhanced inventory turns in certain parts of the business, getting better receivable collection in parts of the business. We certainly are going to continue that focus as we go into 2011. I'm not sure we can expect to get quite that much leverage other than that'

...in other words, they have demonstrated that the increased revenues are creating accelerated cash flow generation. This is a critical point for distributors as they can easily find growth being financed by having to increase inventories disproportionately. 


Anixter End Markets

Anixter has three main divisions and various industry verticals within these divisions. I'll briefly run through them in turn.

Enterprise cabling and security, representing 54.1% of revenues. Anixter is seeing good growth in IT infrastructure spending. In particular, Anixter is exposed to security and video surveillance spending, IP video networking and data centre spending. All of which look set for good growth in 2011.

Wire and Cable, representing 31.8% of revenues. This division looks set for strong growth in 2011. It is heavily exposed to late cycle major engineering projects. In particular with industrial, mining and energy projects. Quoting from the conference call..

'Mining projects in South America and Canada are going gangbusters. There are new mines opening in China, in Northern China. There are a lot of gas projects in Australia and Indonesia right now. There are gas and oil projects in the Middle East. There's a lot of development continuing there and power gen, there's projects in the U.S., Europe, North Africa, South America and Asia. So fairly broad I guess I'd say in the Emerging Markets, the places where you typically think of resource base and oil and gas kind of projects.'

....and this division looks set to provide Anixter with the strongest growth prospects for 2011.

OEM Supply, representing 14.1% of revenues. This division is the earliest in the cycle for Anixter and should see tougher comparables going forward as a result of recovering first. Furthermore, Anixter management were keen to note that they key aerospace industry vertical is likely to be flat for 2011. The relative weakness of aerospace supply is that Anixter's customers (Boeing and suppliers etc) still have inventory to workdown. Furthermore, Boeing 787 delays are holding back sales and Anixter is not a major supplier to Airbus.

Anixter Stock Evaluation

Anixter analyst forecasts are for EPS of $5.03 and $5.75 for 2011 and 2012 respectively. With a current share price if $68.5, this puts Anixter stock on forward PE ratios of 13.6x and 11.9x respectively. This is attractive for a company set to grow earnings in the teens. However, I always think that distributors should command an evaluation discount because of the gearing towards risk. A lot of good growth has been priced in and, any slowdown in the global economy could leave them with unwanted inventory and falling margins.

That said, growth prospects look good for 2011 and I think Anixter stock is better priced at closer to $77 or 15x 2011 forecasts. I will look for a dip here before buying, as a 12% return is probably not enough for me and the stock price has risen strongly recently. I don't like buying stocks too far from the 50 day moving average.