Posts Tagged ‘recession’
Why owning blue chips makes so much sense in a slow-growth environment: they have the cash and they are willing to spend it to keep shareholders happy—and that’s just one of the reasons.
Take Caterpillar Inc. (CAT), for example. This company is experiencing slow business conditions, because the mining industry is in its own recession.
The company can’t manufacture sales, but it can keep buying back its own shares. Management allocated $1.7 billion for share repurchases in this quarter alone. Last year, the company spent a total of $2.0 billion buying its own shares.
Caterpillar’s recent financial results surprised Wall Street. Even though sales were down comparatively, 2013 fourth-quarter revenues beat consensus by $1.0 billion and consensus earnings by $0.26 per share.
Caterpillar is a global benchmark and an enterprise worth following. The company offers a lot of industry and global economic information to investors. (See “A Must-Read for Long-Term Equity Investors.”)
Big corporations have the cash, and while capital expenditures on plant, equipment, and employees are restrained, shareholders are the beneficiaries of such strong balance sheets.
United Technologies Corporation (UTX) reported fourth-quarter revenues below Wall Street consensus, but earnings were better than expected. The company plans to buy back $1.0 billion of its own shares this year after spending $1.2 billion in 2013.
Share repurchases help shareholders and corporate executives on a short-term basis, but if there is a drawback to them, it’s the opportunity cost of new business investment; excess cash could be invested in new research and development, expansion, acquisition, and innovation. A company that chooses to buy back its own shares is one that’s … Read More
I keep telling you about my suspicion that the backbone of any stock market—corporate earnings growth—is disappearing. Now, we see it in the numbers…
Of the 106 companies in the S&P 500 that have issued corporate earnings guidance for the fourth quarter, an astounding 94 of them have issued negative guidance—that’s 89% of the companies issuing guidance, warning it will be negative, which is well above the five-year average rate of 63%. (Source: FactSet, December 13, 2013.)
And analysts continue to drop their expectations for corporate earnings growth for the fourth quarter. As of September 30, analysts expected fourth-quarter corporate earnings growth in the current quarter would be 9.5%. By last week, that rate had come down to 6.5%. (Source: Ibid.) I expect corporate earnings growth for the fourth quarter will continue to disappear.
So we have 2013 ending with the smallest increase in corporate earnings since 2009. How can 2014 be any better?
The risks that disappearing corporate earnings growth creates for the key stock indices continue to be ignored. And problems in the global economy are mounting, not improving, with each passing day.
Economic growth in China, the second-biggest economic hub in the global economy, is declining rapidly. The country is expected to post a growth rate this year that is “embarrassingly” low compared to China’s historical economic growth rate. Manufacturing activity in the country is rapidly declining. The HSBS Flash China Manufacturing Purchasing Managers’ Index (PMI) dropped to a three-month low in December. (Source: Markit, December 16, 2013.)
We are seeing an economic slowdown in the stronger eurozone nations like France. In December, manufacturing activity in this … Read More
You don’t often hear a lot about United Technologies Corporation (UTX) these days; it’s an old economy name that doesn’t seem to garner much attention from the media.
Nevertheless, the company that makes elevators, helicopters, airplane engines, and HVAC (heating, ventilation, and air conditioning) and fire/security systems continues to perform excellently. It’s a component of the Dow Jones Industrial Average, and the stock’s had an exceptional year. (See “The One Market Sector That’s Consistently Outperforming the Rest.”)
Approximately $17.0 billion of the company’s total sales in 2012 came from its “UTC Climate, Controls and Security” business. Next was “Pratt & Whitney” aircraft engines at $14.0 billion. “Otis” elevators and escalators brought in $12.0 billion in sales last year, followed by “UTC Aerospace Systems” at $8.3 billion and “Sikorsky” helicopters at $6.8 billion.
As a conglomerate with a strong constituent in aerospace, United Technologies has an excellent track record of increasing its dividends to stockholders.
In 2012, the company increased its common share dividend by a total of 11.5%, representing its 76th consecutive year of paying dividends. According to the company, from fiscal year-end 2002 to year-end 2012, United Technologies delivered a 225% total return to shareholders, which is more than double the total return of the DOW or S&P 500.
In 2008, the company paid out $1.35 in total dividends per share. By the end of last year, that figure was $2.03 per share.
Of the company’s total sales, 40% are in the U.S. market, followed by 26% in Europe and 20% in the Asia Pacific region.
Since the recession, United Technologies’ sales, earnings, and earnings per share … Read More
In late February, we took a look at Drew Industries Incorporated (DW) out of Elkhart, Indiana. The company is a major component supplier to the recreational vehicle (RV) market and also sells to the manufactured homes market.
The RV market has been experiencing a significant upswing in business conditions. Drew Industries’ total sales are 87% in the RV segment, and the company just reported another solid quarter of growth.
For the company, 2009 was a very tough year. Net sales dropped by more than $100 million compared to 2008, and the company incurred a major net loss. But business conditions turned around in 2010, and have been especially good over the last two years.
During the Great Recession, the company’s 2009 sales dropped to $398 million. By 2012, total sales were a record $901 million, which is a pretty significant turnaround for any business.
Last year Drew Industries returned $45.0 million to shareholders with a special cash dividend of $2.00 per share. Between 2001 and 2012, the company quadrupled its content per travel trailer and fifth-wheel RV. Drew Industries now operates 31 manufacturing facilities in 11 states.
Drew Industries’ five-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
Drew’s third quarter of 2013 also revealed continued economic growth. The company’s consolidated net sales grew 11% to $251 million. Earnings jumped significantly, growing 52% to $14.8 million, or $0.62 per fully diluted share. The company finished the third quarter with a solid gain in its cash position.
It’s great to see genuine new business growth in an old economy industry. Drew’s solid business execution is noteworthy, especially in an industry … Read More
If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.
Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)
We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.
Is this the peak optimism?
As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.
Chart courtesy of www.StockCharts.com
What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.
The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their … Read More
I harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.
In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)
But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.
According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)
And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)
When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise … Read More
The auto industry is back on its feet again, following some lean years during the recession in 2008 when General Motors Company (NYSE/GM) had to be saved by the government. And whether you agreed with General Motors (GM) being bailed out or not, the reality is that the company has rebounded via massive restructuring and better leadership with a stronger vision of where the company should be headed. Moreover, GM now employs over 210,000 people, which may not have been the case if the automaker had been allowed to fail.
GM is now a $50.0-billion company, and while it is no longer the stock market leader in its backyard, the company has been able to grow a very healthy and viable business in China, where GM is the country’s top foreign automaker. Apparently, the Chinese love their GM vehicles and associate the brand with prestige and quality. (Imagine that! Maybe Americans are missing out…)
Chart courtesy of www.StockCharts.com
For GM, China was the path to recovery. The country has invested billions of capital into the world’s largest auto market and so far, it has paid off.
In fact, GM now sells more vehicles in China than domestically. In the first half of 2013, GM and its joint partners sold a record 1.57 million vehicles, up 10.6% year-over-year, according to the company. Sales in China exceeded the 1.4 million GM vehicles sold in the United States. Now, you can say that China actually helped to save GM from the salvage yards.
The auto market in China is potentially enormous, and its growth will be largely dictated by government policies towards … Read More
These days, central banks are on a very dangerous monetary policy path. Paper money printing has become the norm. Major central banks around the world are taking the same actions; they have learned the phrase “quantitative easing” well. Economy’s soft; no problem! We’ll just print more money so our currency falls in value and our exports rise! (If only it were that simple.)
Two central banks are at the forefront when it comes to implementing paper money printing: the U.S.’s Federal Reserve and the Bank of Japan. And it isn’t a secret how poorly these two nations are faring despite their quantitative easing efforts.
In these pages, I have been very critical of quantitative easing.
With that said, to date, I have only heard one senior financial politician and one central bank head criticize the use of quantitative easing.
Canada’s Finance Minister, Jim Flaherty, at a private dinner with his G20 equals this week, criticized the use of quantitative easing by the U.S. central bank. The following day, he said, “It’s not good public policy.” He said the U.S. should have never implemented quantitative easing, but “Now that they’ve done it, they should get out of it as quickly as they can.” (Source: “‘Not good public policy’: Flaherty appears at odds with BoC, G20 as he criticizes U.S. quantitative easing,” Financial Post, October 16, 2013.)
The governor of the central bank of Canada, Stephen Poloz, has a similar take. He said, “[we] certainly agree that quantitative easing is one of the last things we want to be in a position to have to use.” (Source: Ibid.)
Finally, … Read More
Investment risk for the very near-term stock market is going up. There’s been pressure on interest rates, investor sentiment was hit by the lack of tapering to quantitative easing, and finally, the third-quarter earnings outlook is mediocre at best.
Everything related to the stock market has been exceptional this year. While earnings growth was completely and totally lackluster, with several exceptions, the main stock market indices proceeded to rise tremendously based on continued monetary expansion and the fact that there really is nowhere else for investors to go but stocks.
Second-quarter earnings season was unimpressive, and I think it will be the same for the third-quarter reporting season. Financial results very well could be the catalyst for a major market retrenchment in October. I think that all investors need to prepare for such an eventuality. Generally speaking I do think that stocks can continue to rise in 2014; however, corporations will have to provide genuine earnings growth and top-line growth to keep valuations from pushing the envelope.
I would say that, given current earnings and expectations for 2014, the stock market is at least slightly—if not fully—overvalued at present. With the expectation of very modest earnings growth in the third quarter and little in the way of sales growth (especially among large-cap companies), recent stock market strength has been an expansion of valuations only.
This is why I’m so cautious near-term and why October could be a wild ride for share prices.
It is quite likely that market leaders that did well in the first two quarters of this year will continue to do so. These are the “Johnson & … Read More
First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)
From a boring (but extremely important) economic point of view:
When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!
An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
But it doesn’t end there.
Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)
And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
When we look … Read More
The chart below of the Dow Jones Industrial Average depicts the precise moment when the Federal Reserve made its announcement last Wednesday that it was not planning to taper its quantitative easing at this time.
Chart courtesy of www.StockCharts.com
This is really troublesome. Key stock indices have become addicted to easy money and any news about more money printing just drives the market higher. This pattern has been going on since the Federal Reserve first promised it would rev up its printing presses back in 2008.
Unfortunately, as this continues, the fundamentals that are supposed to actually drive key stock indices higher—corporate earnings—are under major pressure. We have been seeing companies in key stock indices playing “tricks” to increase their corporate earnings per share (such as buying back their own stock), but these antics can’t go on forever.
Software giant Microsoft Corporation (NASDAQ/MSFT) has announced the company’s board of directors has approved a share buyback program worth $40.0 billion. (Source: Microsoft Corporation Investor Relations, September 17, 2013.)
CBS Corporation (NYSE/CBS) said it has increased the amount of its share buyback program to $6.0 billion. (Source: CBS Corporation Investor Relations, July 25, 2013.)
These two companies are only two of the many big-name companies in key stock indices that are rigorously buying back their shares. Other names, like Juniper Networks, Inc. (NYSE/JNPR) and Time Warner Cable Inc. (NYSE/TWC), are taking a similar approach.
As I have recently written, it’s not just corporate earnings growth that’s the problem—revenue growth is also lacking. Companies in key stock indices enjoyed double-digit (or close to it) earnings growth in 2009, 2010, and 2011, as they … Read More
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