Earnings Update Note
Apologies for the lack of updates recently. Had some personal business to take care of. Some of my favorite names that I’ve written about have reported. Industrial stocks Boeing (BA), ABB (ABB), and my new addition Manitowoc (MTW) had stellar earnings and are the first to bounce back after last week’s selloff. On the other hand, Caterpillar (CAT), Johnson Controls (JCI) came in slightly below my expectations and I was definitely disappointed in favorite tech Akamai Technologies (AKAM), and not just because Akamai slid more than 20% after earnings.
My bullish notes on Boeing still apply and ABB’s nearly doubling of net income shows the infrastructure buildout can’t be stopped. Manitowoc, which I added during last week’s selloff, reported spectacular earnings of $1.53/share vs. estimates of $1.23 a share as well as raising full-year guidance from a range of $4.40-$4.50 to a range of $4.70-$4.90. I’ll get back to you on this new addition after the conference call tomorrow.
While Caterpillar did not blow out the numbers as I had thought given the strength of Hitachi Construction’s number a couple of weeks ago, Caterpillar simply returned to where it was when I wrote about the strength in Hitachi’s numbers. In that sense, Caterpillar’s stock is performing decently well. Caterpillar is still too cheap down here. Management expects better comparisons year-over-year during the second half than the first half. One major problem this quarter was a supply disruption due to a supplier going bankrupt, so hopefully no such unexpected events will cause damage next quarter. Caterpillar is also going through a corporate wide restructuring to squeeze a lot of efficiency out of the whole company’s operation system. To do so, they’re having to stop and evaluate problems along the way. Yes, “stop” operations to fix the new methods. Given the scale and complexity of revamping its whole operation, I’m actually impressed with how smooth Caterpillar is still doing and am willing to ride this transition through with the management, even though it might be a slow progress whose results might not be immediately apparent. Yes, housing is still a drag on CAT, but like other multinationals the international business is what we’re buying CAT for, and that business is booming.
Johnson Control’s quarter would have been ok if not for a wacking by skyrocketing lead prices for its batteries (power solutions) business. Autos and housing are definitely still taking a toll on business (duh, these are the two worst sectors in the U.S.!), so the stock might be a bit hard to own going forward. It’s still the best in show as an auto stock, much better than GM, Ford, or even Toyota. However, I am considering switching to Honeywell, who has similar housing and auto businesses but also has a huge aerospace business, which is still in superbull mode. Aerospace is in superbull because…it takes glancing blows, is unphased by any downward pressure, and just keeps ramping.
Finally, Akamai was a disappointment, and not just because it fell more than 20%. I have been behind Akamai as my favorite tech name, but I might have to demote it to a bench player. I sold a third of my position but will keep the rest as it has gotten from too expensive to too cheap rather quickly. Akamai’s having trouble gaining significant number of new customers and will likely have to just squeeze more money out of old customers by offering them more services. My analysis on the digital online revolution and Akamai’s core position in it is still true, which is why I’m holding on. However, we’ll have to accept the fact that Akamai has grown up (which is probably why it got added to the S&P 500) and gone from a super fast grower to…just a fast grower. I still believe Akamai can grow at over 25% a year, although that’s down from the 30%+ estimates of the past, which is why there was so much disappointment. At current valuations and assuming a 25% growth rate, I do not believe Akamai will go below $30. We’ll have to see where we are after we shake out all the momentum players that only play the super fast growers. Fil Zucchi over at Minyanville.com has a much better analysis of Akamai’s current situation.
As for portfolio changes in this recent thunderstorm…I dropped CSCO, BTU and HAL and picked up GLW and EMC for tech and PBR for oil.
**Disclosure: Author owns BA, ABB, MTW, CAT, JCI, AKAM, GLW, EMC, PBR. **
