The most important financial metric for a business person investing in stocks is what corporations actually say about their businesses. The numbers are the real news in a sea of noise that can distract you from what is actually happening in the business world.
There have been some massive frauds and we all know that corporations manage their earnings to the best of their ability, but generally speaking, financial reporting is fairly accurate and transparent due to accounting standards and laws.
Doom and gloom in the financial world is a common theme in financial media; bad news always sells better than good news. But plenty of corporations are reporting respectable numbers and their expectations going into 2014 are going up.
One off-the-radar company that just reported record third-quarter results is IDEX Corporation (IEX) out of Lake Forest, Illinois. This company has several business lines, but it specializes in manufacturing fluid and metering products for industrial markets like oil and gas, alternative energy, and water and wastewater treatment. The company also sells precise fluidic components for health and science applications, as well as fire and safety products like pumps and foam systems. IDEX makes the “Jaws of Life” extrication tools used by firefighters.
As a mature business, this corporation is doing pretty well. Third-quarter sales grew two percent comparatively to $491 million, but orders grew 14% to $532 million, due to increased demand for large dispensing equipment.
The company’s gross and operating margins improved in the latest quarter. Earnings grew 16% from $55.0 million to $64.0 million. Earnings per share grew 18% to $0.78.
The company is buying back shares, and its cash and equivalents position grew 25% to $400 million. Management increased its full-year earnings-per-share (EPS) guidance and now expects five percent in organic revenue growth for the fourth quarter.
Asset prices are at the whim of monetary policy, but in terms of portfolio strategy, it’s just as meaningful what corporations report about their businesses. If anything, improving outlooks in this market help justify current valuations. (See “Two Very Different Stocks That Could Beat the Street.”)
The one trend that’s been prevalent for a number of years now is the lack of economic consistency among industries, geographic regions, and even among individual corporations within specific sectors. It’s feast or famine in terms of financial results in the third quarter. This lack of economic uniformity is a real problem, with economic improvement only available in some specific sectors and regions; the trickle-down effect is localized.
I always like to look at earnings results and companies that I may not even have any interest in just to get a sense as to what business conditions are like in a specific industry or region. I find it helps my general market view and my expectations for the stock market.
Generally speaking, the financial health of U.S. corporations continues to get stronger. Business expectations in terms of earnings results for 2014 seem to be improving. This doesn’t, however, mean that the market’s recent run-up hasn’t been in anticipation of this happening.
There is growth out there, but the stock market has already bet on it. Therefore, investors need not chase any positions, because the market is overbought. Solid, growing businesses, such as NIKE, Inc. (NYSE/NKE) or Colgate-Palmolive Company (NYSE/CL), are worth putting on investors’ watch lists in anticipation of a more attractive entry point during a correction.