3 Reasons to Like Illinois Tool Works

uying engineering component manufacturer Illinois Tool Works  is never going to be the raciest of investment propositions; however, the company is quietly going about the business of improving its prospects in 2014, and it deserves a close look. The company's recent results produced three key takeaways for investors to like about the stock, and provided plenty of information that would be useful investors in peers like Danaher Corporation   and Rockwell Automation .

Illinois Tool Works' impressive first quarter
Overall operating income increased by 16% even though revenue was only up by 4%. A quick look at a breakdown of operating income reveals how Illinois Tool Works generated its earnings in the quarter.

The red bars in the chart represent the growth rate in the quarter, while the total bars (red plus blue bars) represent the total operating income.

 

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Lennox International, Ingersoll-Rand and Johnson Controls on the HVAC market

Heating, ventilation, and air conditioning, or HVAC, company Lennox International is always an interesting one to follow because its results give a good perspective on a market that is very important for so many other companies. For example, companies like Ingersoll-Rand and Johnson Controls  have significant HVAC operations. The sector as a whole is also a useful barometer for the condition of the North American construction markets.

Lennox International gives mixed results
The market took a dim view of Lennox's recent results and immediately marked its stock down a few percentage points. It's a slightly harsh verdict on the earnings report since revenue came in slightly better than analyst forecasts. Moreover, the company maintained its full-year forecast of 3%-7% revenue growth at constant currency, and adjusted EPS of $4.20-$4.40; the mid-point of this range implies nearly 19% growth from 2013.

 

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Dover Corporation Equty Research

Dover Corporation  recently released its first set of quarterly results since the spin-off of its former communication technologies segment, Knowles Corporation . The report was impressive for three key reasons, and Fools should start to think about upgrading their expectations for the company. Here's why.

Bye, bye, Knowles Corporation
The first two factors relate to the spin-off of Knowles Corporation, how it changes the investment proposition with Dover Corporation and, ultimately, the ability of Dover's management to initiate expansion opportunities.

First, the spin-off will remove the vagaries of the handset market from potential Dover Corporation investors. Usually, when thinking about an industrial conglomerate, one needs to compare a host of investing options, all with their individual specific end markets. However, they all tend to be tied to general trends in industrial spending.

 

 

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Can GE Continue to Outperform?

It's hard to make the case that General Electric  isn't necessarily the best bellwether for the industrial economy, but I'm going to do it anyway! The argument is that the company's profitability is skewed toward a few large sectors of the economy. Ultimately, a company like Emerson Electric   may prove more indicative of the industrial sector overall, with Rockwell Automation  providing a good proxy for capital spending in the manufacturing sector.

Indeed, understanding General Electric's profit drivers is the key to Fools answering another question. Specifically, just how did the company record 8% revenue growth in its industrial segment in the recent quarter?

General Electric outperforming its peers in the first quarter
The question is relevant because Emerson Electric is expecting underlying growth of only 3%-5% this year, while Rockwell Automation's forecast of 3%-6% growth is pretty similar. With this in mind, is General Electric likely to continue growing its industrial revenue at nearly double what its peers are doing?

 

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Danaher Corporation Equity Research

Industrial conglomerate Danaher Corporation's  recent results were better than they superficially looked. Even though its second quarter guidance was lower than the market had hoped for, there is good reason to believe that Danaher has upside potential in 2014. Moreover, the earnings report suggested good things for other companies such as dental distributor Patterson Companies   in 2014, but less so for testing and measurement company Agilent Technologies . On balance, the positives outweighed the negatives, but is the company's stock still a good value?

3 reasons why Danaher's results were good
Danaher is the sort of company that often disappears under the radar of investors due to its low dividend yield and its P/E ratio of over 20 times current earnings. Moreover, its less than double-digit forecast EPS growth rate doesn't excite many. On the other hand, it's one of the best run companies in the industrial sector, and has relatively defensive end markets.

Focusing on the recent results, there are three key reasons why investors should like the company's stock.

 

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What the Industrial Supply Companies are Saying About the Economy

Investors in the industrial sector have faced a significant imponderable over the winter. Severe weather conditions were always going hit quarterly earnings, but they were also going to make it harder to judge the underlying conditions in the industrial economy. With these thoughts in mind it's a good idea to look at industrial supply companies such as Fastenal , MSC Industrial Supply, and WESCO International. Not only are they all exposed to the industrial sector, but they tend to have short-cycle order patterns. In other words, they get the first view on where trends are headed.

Fastenal and MSC Industrial give earnings
At the start of this earnings season, Alcoa came down on the side of those who saw the weather as the primary cause of weakness in the construction industry over the winter. The subsequent results from MSC Industrial and Fastenal offer a pretty similar story. For example, MSC's management talked of a weather-relate "slow start" in December and January, but then its organic growth rate picked up from 2%-3% to "the mid-6% range in February." 

Fastenal's improvement in March can clearly be seen by looking at sales growth at its stores that have been open for more than five years:

 

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IBM's Growth Strategy

It's easy to criticize Wall Street for being too myopic and focused on near-term targets, but is IBM  doing this too? IBM has laid out a specific set of metrics that it intends to hit, and it could be forcing its management to damage its long-term business development by hitting them. It's time to look more closely at what's going on at IBM, and whether its underlying business is being compromised or not.

Why IBM disappointed in its first quarter
It's no surprise that the first quarter conference call saw analysts asking question after question regarding how IBM intends to hit its targets. After all, the company's management has laid them out repeatedly, and appears to want to be judged by them.

For ease of reference, they are:

 

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Family Dollar is Worth a Look for Value Investors

The times they are still a-changin' at Family Dollar Stores. While growth is also slowing at competitors Dollar Tree Stores and Dollar General, and the market fears future competition from Wal-Mart, many of Family Dollar's problems are of its own making.

This is bad news, because no one likes an underperforming company. However, it could also be good news, because it means that Family Dollar could see some upside purely due to internal execution rather than needing to rely on the market.

Family Dollar rings up the changes
The following chart reveals how much the market has fallen out of love with Family Dollar. Over the last year, the company's valuation has fallen relative to Dollar Tree and Dollar General:

 

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What Alcoa's Results Mean to Paccar, Cummins and Ingersoll-Rand

Alcoa's  results and guidance always serve as a useful indicator for what sectors of the industrial economy are going to do well in the coming quarters. With regard to its latest results, the upgrade to its full-year end demand for the North American heavy truck and trailer market is obviously good news for truck maker Paccar   and engine manufacturer Cummins. In addition, Alcoa gave a positive outlook for the U.S. construction market; this should interest shareholders in Ingersoll-Rand. Despite the recent market sell-off, there is some good news out there.

Alcoa updates the market
The following table provides an update on Alcoa's end market guidance for 2014 vs. 2013. The sections in green are where guidance was upgraded from the previous quarter.

 

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Emerson Electric, a Nice Stock for Dividend Hungry Investors

Emerson Electric Co. ( is one of those large-cap industrial stocks whose prospects are always likely to follow the direction of the economy. Of course, this isn't a bad thing, but Foolish investors will wonder if there is a reason to buy the stock rather than one of its peers like General Electric Company, Rockwell Automation  , or Ingersoll-Rand ?

What Emerson Electric Co. offers investors
Given its $47 billion market cap and sprawling set of industrial businesses, the company's fortunes will inevitable rise and fall with the global industrial economy. Having said that, the stock is still attractive for a lot for investors. Emerson Electric is a relatively mature business that has tended to convert around 13.5% of its revenue into operating cash flow over the last three years. Moreover, its management promises to pay back between 50%-60% of cash flow to investors this year, so you can quickly understand the investment proposition Emerson Electric offers.

 

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Alcoa Earnings Analysis

The new earnings season got its symbolic start when Alcoa  released its results after the market closed on Tuesday. As ever, investors will want to know what its outlook says for the global economy. Alcoa management always gives good industry-specific guidance, as the aluminum producer has a privileged viewpoint on early stage order patterns in long-cycle industries. In this article, I will focus on the aerospace and automotive sectors, the strongest parts of the industrial economy over the last year.

Alcoa updates its industry outlook
A graphic depiction of Alcoa's end demand forecast for 2014 versus 2013 reveals much about trends in the global economy. The green coloring refers to areas in which Alcoa raised guidance from its previous quarter.

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RPM International Equity Research

The paintings and coatings sector has notably outperformed the market in recent years, as companies such as PPG Industries, Valspar , and Sherwin-Williams  have all delivered handsome returns to shareholders. RPM International   has done the same, but it has notably underperformed the rest. However, its recent performance has been relatively and absolutely strong in recent months, and despite its hefty valuation, the stock is one of the most interesting industrial plays out there.

Peer group dynamics
As ever with investing, the important thing is to look at the future rather than the past, and this observation carries some weight when looking RPM International. Foolish investors already know about RPM International's growth prospects in 2014, and it's time to update investors on how it's executing. A share-price graph of the company relative to its peers reveals that it's starting to outperform.

 

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Verint Systems Beats Estimates

Investors looking for a hot sector of IT spending should look no further than data analytics. IT companies like IBM   and Oracle   managed to generate growth with their analytics solutions. In addition, there is also a burgeoning opportunity for companies like Verint Systems  and NICE Systems to add analytics solutions to their core customer interaction capture solutions. Verint gave results recently, and there was much to suggest that the company's prospects have a lot further to run in 2014.

Verint Systems tops guidance
Verint and fellow Israeli company NICE Systems are world leaders in developing hardware to capture customer interactions. However, it's not just about product sales; both companies are developing the capability to offer software that analyzes that captured data. The idea is that customers will appreciate the opportunity to buy a total solution from one vendor, rather than a plethora of sellers across multi-platforms. It's a compelling story, at least from the look of Verint's latest results.

 

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ConAgra Foods has Much to do

Investors in food company ConAgra Foods must have breathed a sigh of relief over the company's latest earnings results. They weren't particularly good, but the company has had a series of issues over the past year. In other words, any results that don't indicate any more deterioration will immediately switch investors' focus to how cheap the stock is compared to peers like General Mills and Kraft Foods. Is it now time to see ConAgra as the value play in the sector?

ConAgra's problems
Going into its third-quarter results, ConAgra was reeling from a number of issues, covered in detail in a recent article. Unfortunately, ConAgra had difficulties in all three of its segments (consumer foods, commercial foods, and private brands), while its acquisition of Ralcorp has also disappointed, and the regulatory review process overshadowed the creation of its Ardent Mills joint venture with Cargill and CHS.

 

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Rockwell Automation Equity Research

Most industrial companies tend to say a similar thing with regard to end market conditions in their specific industry or geographic exposure. In other words, when a bellwether like General Electric Company  gives word on its various industry exposures, the commentary from most of its peers like Siemens  tends to follow in step. Interestingly, this wasn't the case with Rockwell Automation Inc. whose first-quarter results and guidance seemed somewhat out of sync with the market. What is going on? Furthermore, what does it mean for Rockwell Automation?

Summarizing Rockwell Automation's first quarter
The key takeaways from its recent earnings report and commentary:

 

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Which is Better Value, Ingersoll-Rand or Johnson Controls?

Anyone who believes the winter weather caused unnatural weakness in U.S. construction, and that activity will subsequently rebound, will be interested in Ingersoll-Rand. Along with Johnson Controls, which has a large building efficiency segment, Ingersoll-Rand has possibly given conservative guidance because of the weather. Is this enough of an argument to make the stock a buy? And what does it mean for Johnson Controls?

Ingersoll-Rand's earnings drivers
The key to answering this question is to appreciate how the company makes its money. Following the spin-off of its commercial and residential security businesses, called Allegion, Ingersoll-Rand's focus is on climate control and industrial solutions, with around 67% of segmental income coming from the former. Overall revenue growth is forecast to come in at 3%-4% for 2014, with the split between segments as follows:

 

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Should Aerospace Investors be Worried by AAR Corp's Results?

The aerospace industry is highly cyclical. It always has been and always will be, which is why Fools need to keep an eye out for any early warning signs of a downturn. Given that aviation services company AAR Corp recently reduced its full year guidance, are conditions are about to worsen for Boeing , and its aviation suppliers?

What happened to AAR Corp?
Essentially, the key takeaway from AAR Corp's results is that its problems in the quarter were more stock specific than emblematic of any kind of trend change in the industry. However, the devil is in the details, and there are a few things for aerospace investors to look out for. AAR Corp is a long-term Boeing supplier, so its commentary on the marketplace matters.

 

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More Trouble for Rackspace

Life just got a bit harder for cloud computing services company Rackspace Hosting. Google  aggressively reduced prices across its range of cloud services recently, while deep-pocketed competitors like Amazon, Microsoft, and Oracle are committed to offering infrastructure as a service, or IaaS, at highly competitive rates. In addition, Cisco Systems is planning to invest heavily in offering IaaS. While much of this is known to investors, it's sometimes easy to lose site of the fundamental reasons why these companies are doing this and why competition is only going to get more intense.

Why companies are investing in IaaSSimply put, it works. The companies that have transitioned to offering their services and applications on a software as a service, or SaaS, basis have seen a transformational improvement in their prospects. The three leading examples of this change are Adobe, Autodesk, and Intuit. Investing Fools already know how and why these companies are outperforming the markets.

 

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A Buying Opportunity with FedEx?

As Albert Einstein might have said, it's all relative isn't it? This thought comes to mind when considering the performance of FedEx  and United Parcel Service  over the winter period. An unusual confluence of events came together to hit both companies over the period, and investors should not be quick to superficially judge their future prospects based on an untypical quarter.

FedEx and UPS take multiple hits
While most attention has been focused on the disruptions caused by the extreme winter weather in the U.S., there were three other factors involved as well.

 

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3 Reasons to buy Danaher Corporation

There is no shortage of stock ideas for investors in what can loosely be called the diversified industrial sector. But not all conglomerates were made equally. For example, in the case of Danaher  , it's very hard to find a direct comparison. Instead, the company competes across a number of sectors with smaller companies like DENTSPLY, Ametek, Sigma-Aldrich Corporation, Agilent Technologies, and Waters  Corporation. The stock is one of the most attractive of the industrial conglomerates and here is why.

3 reasons why Danaher stands out
First, the company has a well-deserved reputation for acquiring smaller businesses and then extracting every last piece of profitability it can out of them. It's been highly rewarding for shareholders (the stock is up threefold in the last 10 years), and it's also left them holding a company containing some pretty diversified businesses. In other words, Danaher has the kind of diversification that can generate growth through the business cycle.

 

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