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April, 2008 Archive

ABB is an Unstoppable Beast!

I love ABB! ABB delivered a picture perfect quarter across all metrics with net income rising 87% year-over-year to over $1 billion. Revenues rose 29% to $7.96 billion. Orders rose 28% to $10.8 billion, driving the backlog up 46% compared to a year ago. The real story for me is the blowout of estimates of the operating-profit margin, which expanded to 15.9% while analysts had expected it to be around 13%. Who doesn’t love expanding margins? I’ve said I’d expect to see margins expand to around 18%. ABB maintains its 2008 growth rates of 10% in automation and 15-20% in power. These are fabulous results, showing ABB businesses are on fire and operating improvements continues. Shares are up over 5% in Switzerland in early trade around 180 kr. Even with this move, the stock still trades below a PEG of 1, making it one of the cheapest value growth companies still! Highlights from the press release are:

CFO and interim CEO Michel Demare says, “Demand from utilities and most of our major industrial markets remained strong around the world, especially in emerging economies, but also in the U.S. Customers continued to invest in areas where we are market and technology leaders – power infrastructure, energy efficiency and productivity.

“These excellent results also reflect our continuing strong operational performance,”

“Lower cost sourcing, footprint optimization, better project execution and risk management, and more efficient capacity utilization all contributed to our improved results.”

These were operational improvements former CEO Fred Kindle architected and these initiatives seem to be sustaining itself even after Kindle quit in February. While it may be a bit early to say ABB can run just as well without Fred Kindle, such worries that caused ABB to sell off in February when Kindle left seems to be misplaced, at least for now.

Unexpectedly, ABB was a big beneficiary of higher commodity prices:

“Order growth continued in all divisions, led by Process Automation, where metals, minerals and marine customers in all regions built capacity or upgraded existing capacity to take advantage of high commodity prices and sustained demand.”

Emerging economies’ insatiable need for energy to power their new cities continues:

“Automation Products and Power Products also reported strong order growth, especially in emerging economies, reflecting favorable demand across all industrial markets and ongoing investments by power utilities in new and upgraded infrastructure.”

Finally, strength in robotics was driven by higher demand across all industries but especially by the automotive industry. This highlights the strength in autos overseas and that the disgustingly weak auto industry in the U.S. is only an U.S. problem: ” BRIC nations would produce 20 million vehicles in 2008 as against 17.4 million by both America and Canada, Scotiabank’s auto industry specialist Carlos Gomes said in a study released on Thursday.” (BRIC nations overtake North America in auto production – The Economic Times)

For the full ABB earnings release, go to http://www.abb.com/cawp/seitp202/bb97d62eeedbde75c125741c00450241.aspx

Again, as with all the other global growth names, the same themes emerge: strength in utilities, energy efficiency and conservation, power generation, infrastructure, oil and gas.  The companies are telling us the lay of the land.  Investing shouldn’t be this easy but right now it  is.  Why bother with all the traditional sectors that are junk now?  (i.e. drugs/pharma, banks, tech)  Make it easy on yourself, if you don’t know industrials that well, go learn a few.  It’s worth it in this environment.

**Disclosure: I own ABB as of this post**

Must be a Goldman research joke: Buy Puts on Industrials? Really!?

Wednesday’s Barron’s article “Other’s May Catch GE’s Industrial Disease” cites Goldman options strategists John Marshall and Stuart Kaiser recommending clients to buy puts on the Select Sector Industrial SPDR (XLI), a ETF that’s supposed to track the industrial sector. The recommendation was to buy XLI June 36 puts, which was trading around $1.10 while the XLI was trading at $37.37 at the time of the article. Marshall and Kaiser’s report cited the following reason (which I think is totally ridiculous):

“The GE earnings miss and guidance revision last week highlights how the increasingly weak macro environment can quickly sneak up on even the most diversified and well-run of industrials businesses,”

I would actually be buying calls in specific industrial names and have Honeywell (HON) and Union Pacific (UNP) calls on my book for the past 2 weeks.

My biggest problem with this recommendation is the XLI is about 18% GE (making the XLI basically a lite GE play), its kind of late to buy the puts AFTER GE took that dive from $37ish to$32ish! And why did GE take that big plunge? It sure wasn’t because GE is an industrial. It was because we found out GE was more of a financial than an industrial where GE’s financial unit took GE’s earnings per share down by 7 cents and negated any positives the industrial units were producing.

None of the other components in the XLI has any financial units like GE (hence they’re true industrials, unlike GE). After listening to GE’s call, one should actually be bullish on export industrials. Read the rest of this entry »

Eaton Scores First for Industrials

Diversified industrial Eaton Corp (ETN) reported first quarter earnings of $1.64 (vs. $1.56 a year ago) after accounting for an $0.06 charge for acquisitions and integration of those acquisitions. Excluding those charges, Eaton earned $1.70 vs. the $1.66 street estimates. Eaton also raised full year guidance by $0.05 to between $7.30 and $7.80.

Eaton is diversified across several important industries with a diversified product line within those industries, making Eaton a good proxy on the economy. Driving earnings are Eaton’s 55% international exposure and extra strong strength in aerospace and ag equiptment. As expected, Eaton’s traditional markets such as autos and trucking remains weak, but the outlook for both autos and trucking is brighter going forward. Depressed auto business due to the recent strike has left pent up demand that should offset any loss caused by the strike. The trucking downturn is expected to bottom in the 2nd quarter and turn up in the 2nd half of the year.

Nonresidential Construction – Concerns too broadbased, opportunities exist

Problems in commercial real estate as expected. However, opportunities exist in Read the rest of this entry »