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Technology Archive

Precision Castparts: Part 1 – Overview of an Abandoned Growth Story

Precision Castparts (PCP) has been on a nasty slide down to $100 since tapping $130 when it reported earnings on May 6, 2008. Stocks who supply products going into commercial airlines, including PCP, continued to be sold off. Investors seem spooked by recent fleet downsizing by the major U.S. carriers on the back of high oil prices and struggling consumers. Or, PCP is getting dumped along with all other stocks related to Defense just because Obama won the Democratic nomination, which people take to mean Obama will be president and that the U.S. will never need a single bullet again or sell our weapons of war to the rest of the world. Geez investors are imaginative!

I don’t believe things have gotten worse for PCP since May 6th. The U.S. fleet downsizing has a minimal, if any, negative impact on PCP’s aerospace business. Like other airplane parts supplier, PCP’s aerospace business is levered to GLOBAL commercial airline demand, which is still flying off the charts. PCP’s direct exposure to Defense compared to its overall aerospace business is limited. More importantly, PCP has large exposure to the hot hot hot global power generation and oil & gas infrastructure. This segment, which PCP calls it’s power generation segment, is growing like a weed such that PCP has to expand 2 new factories to meet demand.

Here’s the plan. Overview of PCP, then the opportunities in power generation, and finally addressing the more complex concerns of the U.S. commercial airline exposure. Read the rest of this entry »

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**

Restructured Portfolio: Dynamics Engineering & Industrialization Focus Fund

Finding my comfort zone. Restructuring the portfolio to suit my strong point. Not trying to run a diversified portfolio. I’m not running this for retirement. Its a specialized fund in science, engineering, and technology. Most picks here are for the long term, looking at supercycles of 7-14 years that will dwarf the credit crisis we have now, which is already making Paul Bunyan look like a baby (much much bigger, and hairier).

  1. Union Pacific (UNP) – Weak dollar. Lets keep exporting stuff! Maybe some lead back to China? Just kidding. How about just some POT(ash).
  2. Potash Corp. of Saskatchewan, Inc. (POT) – If you saw how excited the CEO was on Fast Money talking about the potential growth, you’d think he was smoking some. Perfect explanation of the growth: once people taste meat, they don’t go back. Meat requires several times more grains to produce. Show me the POT baby.
  3. Companhia Vale do Rio Doce (RIO) – Steel producers being able to raise prices?  I think the real beneficiary here is Companhia Vale do Rio Doce (aka CVRD).  CVRD is the hand that’s squeezing the toothpaste of steel producers’ margins.  I don’t think steel producers want to raise prices.  Commodity prices are forcing them to.  They’re just passing on CVRD’s price hikes, not really expanding margins and making more mula.
  4. Southern Copper Corp. (PCU) – Even though we don’t notice it, civilization is built on copper.  And man oh man are we building.
  5. Precision Castparts Corp. (PCP) – Riding the commercial airplane replacement and buildout cycle. Also, essential for the furnaces going into the power plants popping up in China every 2 weeks.
  6. ABB Ltd. (ABB) – Perfect play on the power grid (along with PCU and PCP), both the decaying ones in the U.S. and the new grids to be build in China, India, Russia, Europe, Mid East, and Latin America. A growth-value. Hard to say that about many stocks. A lot of advanced energy-generation and energy-conservation technologies no one talks about.
  7. Foster Wheeler, Ltd. (FWLT) – No MDR, but should approach MDR’s perfection with the opportunities in the Middle East and especially in Asia. The new products they’re pushing including the CFB and Pluto platforms should help margins & efficiency explode.
  8. McDermott International Inc. (MDR) – 4000% over 5 years, and still trading at the lower end of it’s P/E range. This should not be classified as a Engineering & Construction company. It’s a highly efficient mass (low cost) producer of oil & gas infrastructure.
  9. TransOcean, Inc. (RIG) – love National Geographics’ “Oil, Sweat, and RIGs” series.
  10. Chesapeake Energy Corp. (CHK) – Natty (natural gas) is so much cheaper on a BTU energy basis than oil. L.A.’s Long Beach harbor is already switching to NatGas for clean energy, other municipalities will do the same.
  11. First Solar, Inc. (FSLR) – CdTe is the RIGHT semiconductor material for capturing solar energy, silicon is not. Simple as that.
  12. L-3 Communications Holdings Inc. (LLL) – Best defense contractor. Period. Little to no operational risk and in a highly efficient niche of government contracts. No design and manufacturing problems that everyone from Lockheed Martin (LMT) to Northrop Grumman (NOC) and Boeing (BA) deal with daily. Raytheon (RTN) could have been like LLL, except RTN’s management prefers to run RTN like feudalism Japan.
  13. Corning Inc. (GLW) – How awesome is that signal on the oscilloscope for the ClearCurve optical fibers?!?!!! THAT…is what gives engineers wet dreams.
  14. Apple Inc. (AAPL) – iPhone should NOT a smartphone and shouldn’t be compared to a Blackberry (RIMM) or a Nokia (NOK) product. The iPhone is a full-fledged tablet PC with a complete operating system.
  15. FTI Consulting, Inc. (FCN) – Anticipating lots of legal activity required in the aftermath of the credit/mortgage apocalypse. Municipals suing financial corporations, corporations restructing, etc.
  16. Annaly Capital Management, Inc. (NLY) – Attempt to be the vulture, not the meat in this credit crisis. I can take the pain. No pain no gain.
  17. Hologic Inc. (HOLX) – @ forefront of women’s diagnostics technology. Because like most people, I have a mother.
  18. Altria Group Inc. (MO) – Yield, weak dollar, defensive diversification.  Don’t smoke. It’ll make you ugly…like a camel.
  19. McDonald’s Corp. (MCD) – MickyD’s Baby! Yield, weak dollar, defensive diversification.

**Disclosure: Author is long UNP, POT, RIO, PCU, PCP, ABB, FWLT, MDR, RIG, CHK, FSLR, LLL, GLW, AAPL, FCN, NLY, HOLX, MO, MCD as of this post. **

T. Boone Pickens’ Interview on CNBC

Maybe not much for the short term trader here (except Pickens’ call to short oil and natural gas here as he expects a pullback in both during the 2nd quarter.) However, I found his comments on the longterm outlook of energy, energy sources, and viable vs. fairy-tale alternative energy to be extremely useful for investing long term as energy will only become more scarce.

vid 1: Boone Pickens on $100 Oil (http://www.cnbc.com/id/15840232?video=658910248)

vid 2: Boone Pickens, BP Capital CEO discusses energy and the economy.
(http://www.cnbc.com/id/15840232?video=658914274)

Checking in from a Self-Imposed Trading Vacation

After going to some 60% cash in early January, I’ve taken a seat high up in the bleachers to just watch the action and try not to get too involved.  As I keep hearing, and have been trying to do, patience is your best trading skill in a market like this.  If you’re not a great swing trader (I guess I’m ok, but its not gonna be how I make my name), then its probably best to take it slow and not throw everything at the momentum names like Apple (AAPL) last year.  I’m not particularly a big fan of Warren Buffet, but yes, maybe it is time to go to Buffet style this year as we meander around and frustrate short term players.  Even the fact that Warren himself has come out to play, getting involved with the bond insurers and becoming the biggest share holder in Kraft.

I do not believe the worst is over.  Even as the banks’ writedowns keep coming in, I’m still waiting for the Armageddons that’s the $2 Trillion aggregate damages related to mortgages and CDOs Annaly (NLY) CEO Mike Farrell has estimated.  With under about $200 Billion in writedowns and borrowings from the Fed’s TAFy auctions, we still have a ways to go as you can see.  Having said that, these go-nowhere days are great for doing homework.  I’m going to pick at some of my long-term investments on today’s rather bullish action so far (bullish because I would’ve expected us to be down much more on the inflation data in the CPI and the breakdown of another private equity deal between 3COM and Bain Capital).

1. MO – building up this position to be the largest holding in the portfolio head of the breakup of the domestic and Philip Morris International businesses and the opportunities that comes with, including increased buybacks, dividends, and realization of extraneous assets such as Altria’s 28.6% stake in SAB Miller.  No question in my mind that the Fed’s excessive rate hikes have put the U.S. into a recession, which makes defensive names like Altria great right now.

The Fed raised rates to knock down inflation, which has been caused by international growth not U.S. growth.  I guess the Fed is finally finding out that it’s “broad hammer” tool of interest rates hammers the U.S. much harder than the rest of the world.  So, global growth continues, commodities continues to rise, and the U.S. has to deal with stagflation where inflation continues because the rest of the world keeps growing and Americans have less money to buy the inflated goods because the economy’s weak, their houses are worth less, and their retirement funds have shrunk.

2. PCU – So, I’ve taken a starter position in PCU with the intention of building up a larger position.  U.S. home construction has been nonexistent and thus a non-factor in copper prices.  Manufacturing activity has fallen off quite a bit in the U.S., yet copper prices are again trying to take out that $375 mark (as pointed out by Helene Meisler on RealMoney.com today).  Also, China’s determination to keep Rio Tinto out of BHP’s hands tells me commodities are still in short supply, or so says those in charge of the country…who I’d say are much much smarter than me.

3.  POT – Same here.  Higher commodities are here to stay.  If you saw how the CEO was salivating bullishness on Fast Money last week, you’d want into this stock too.  I’m taking a starter position and hoping this thing pulls back, although it’s just tapped another all-time high and got legs to go higher.  The interesting point that the CEO made was, once the rising middle class tries meat as a source of protein, they never go back.  But as I learned in h.s. biology, it more energy efficient to have a vegetarian diet than to feed those crops to livestock.  In other words, higher demand for meat requires a lot more crops, and thereby requiring a lot more fertilizers as well as farmland (bodes well for Deere still).

4.  PCP – Boosted this position to a meaningful size as orders for the 787 Dreamliner as well as smaller planes keep coming in.  I thought we could see another big drop in 787-related names, but I’m not so sure now so I want to at least have a good stack of PCP.  Boeing’s nearly finished with another 787 for testing purposes, and have 2 more on the way, so demand for PCP’s products aren’t going to fall off as sharply as if the whole production was on hold.  Also, China building a power plant every 2 weeks certainly helps the demand for high-performance metals.

5.  UNP – Coal on fire? (no pun intended)  Got to move the coal to the coast somehow so they can be shipped to China.  Same with the ag story and moving fertilizers to the coasts.  See how nice the world starting from the U.S. coast and beyond looks?  Already had a position. Building it up.

*Disclosure: Author owns AAPL, MO, PCU, POT, PCP, and UNP as of this post * 

Corning, a momentum name, even into the teeth of a recession? Maybe.

Apologies for the lack of updates recently. Been having a lot of personal issues to deal with. Plus, the economy, and thus the market, seems to be at a tipping point and until the direction becomes clear, I’m not comfortable making researched analysis on the fundamentals for investments at a time when the fundamentals may not matter. If it’s true that the Fed’s way way way behind the curve, as I believe they are, that we cannot avoid a recession, there may be a lot of multiple contractions to come. If it’s true that there are no triple bottoms, the indicies look right to break to the downside. Be that as it may, I still hold Corning (GLW) for it’s fairly cheap valuations and what looks like a secular growth trend in the LCD panel business. More than half of Corning’s business is outside of the U.S. and if the U.S. only grazes a recession, I believe growth areas in Brazil, Russia, and China has accumulated enough wealth as of late for internal consumer activity to sustain growth, particularly on consumer goods for a rising middle class such as big screen TV’s and electronics (both driving the demand for LCDs). As of late, this demand momentum in LCD panels still has umph, so says my favorite source- Purchasing.com:

“The global large-sized liquid crystal display panel market will reach a milestone in 2008 when 100 million panels ships for the first time ever. Large size panels measure 10 inches or more diagonally.

Global LCD-TV panel shipments are expected to reach 181.1 million units by 2011, rising at an annual rate of 27.7%, up from 53.2 million units in 2006, according to researcher iSuppli. In terms of revenue, LCD-TV panels will grow to $52.9 billion by 2011, increasing 19% per year from $22.2 billion in 2006. ” ~ LCD demand keeps growing, by Jim Carbone, Purchasing.com, 1/3/2008

Full Article:  LCD demand keeps growing at Purchasing.com

**Disclosure: I own shares of GLW as of this post.**

“Deep Sea Drillers on National Geographic” – Must Watch for Oil Service Stocks and OIH

Spectacular documentary I saw tonight on National Geographic. Part of the MegaMovers series. Don’t worry, its not one of those old school black&white slideshows you saw in school. A must watch for anyone trying to learn about the oil and oil service industry as it showcases the various planning, logistics, and technologies/ships required to build a natural gas field in the Gulf of Mexico. If you have any oil service stock, whether it be Schlumberger (SLB), TransOcean (RIG), Baker Hughes (BHI), or XTO Energy (XTO), you can’t miss this. This is part of going beyond the basics of financials/technicals and actually understanding the business. Here’s the program summary:

Deep Sea Drillers [TV-G Ratings N/A] (airs Friday, October 26, 12AM, Saturday, October 27, 1PM)

“In an attempt to tap some of the most inaccessible natural gas on the planet, five vessels are building an 1,800 square mile gas network in the Gulf of Mexico. This record breaking project costing more than $2 billion dollars could produce enough gas tonearly 5 million U.S. households. View 1 miles below the oceans surface to witness this project in action and see how the worlds largest pipe laying ship, which carries 22,000 tons of pipes or the equivalent weight of more than 1,000 jet planes.”

Program website: Deep Sea Drillers[TV-G Ratings N/A]


**Disclosure: author is long RIG**

“Subprime” NOT the headline from Honeywell’s quarter – Part 2: Strength in Energy, Construction, and Infrastructure

Moving on in Honeywell’s call, management was also excited about the Specialty Materials business:

“Let’s go now to slide number 8, Specialty Materials. Sales are up 6% for SM; segment profit increased 43% driving 340 basis point improvement segment margins to 13%. UOP had a great quarter; sales grew 28% compared to last year and UOP continues to experience strong demand for its proprietary technologies refining and petrochemical market conditions remain favorable, and we continue to leverage a strong market positions and global presence in UOP. Chlorine [ph] products were down 15% in revenues in the quarter due to softness in refrigerants, which is impart of course due to continued weak demands in the U.S. housing market, strong advanced fiber sales within specialty products were offset by declines at resins and chemicals due to a plant maintenance outage, so those two are essentially offset; specialty products and resins and chemicals.”

Read the rest of this entry »

“Subprime” NOT the headline from Honeywell’s quarter – Part 1: Building Energy Efficiency

Honeywell Confirms Strength in Energy, Construction, and Infrastructure

Since they reported on Friday morning, all I’ve been hearing is “Caterpillar reported terrible numbers and so did Honeywell, undermining the global growth thesis, causing the massive 300+ selloff in the Dow.” Ok, I own CAT, which wasn’t pretty. I guess I’m just glad it didn’t take a 16% shallacking like it did same quarter last year (on my birthday no less!). Honeywell however, I thought was pretty darn good given headwinds such as the massive Dreamliner 787 delay and the housing recession. The headlines on Reuters reads: Honeywell sees subprime hitting industry-paper. Just had to tag on the word “subprime” to scare the bejesus out of investors. Interesting choice of highlighting this tiny tiny part of the whole conference call. Well, why don’t we focus on all the great things Honeywell did in this quarter and where we can look for opportunities? (I’ve already talked up Honeywell enough in my past posts and I continue to put my money where my mouth is, but we lets look at other related industries shall we?) Read the rest of this entry »

Brush Engineered Materials, Just not Good Enough for Me

As Precision Castparts (PCP) keeps running away from me, I’ve been searching for the “next play” in specialized/engineered metals and materials. In this new age of industrializing the world, specialized materials play a huge role behind the scenes that make this whole process possible. Working with solid materials might almost seem arcane in this digital age, but material technology has been developing at a rapid pace as well, allowing engineers to design materials down to the very molecule structures so a material can do whatever you want. This advance allows us to cut out a lot of mechanical systems in certain applications. For instance, some materials can absorb shock, thus removing the need to build a spring into a system – eliminating the hassle of installing the string, quality control of the string, and wear and tear in the connections. Today’s extreme tech all need these space-age materials. Nuclear plants need metals with unnatural properties to withstand the abuse inside. Cell phones now use antennas of just a piece of metal with all the communications properties built into the metal. In my search, I looked at Brush Engineered Materials (BW), which is okay. However, Precision Castparts is still best of breed as it’s portfolio of businesses is in all the right trends from aerospace to nuclear power with international exposure. Here’s the skinny on why I don’t like Brush Engineered Materials as much.

ONE - Join the fight against global poverty (non-affiliate)

Read the rest of this entry »