Just wrapping up my final observations from EPG, the multi-segment industrial conference in Florida. We heard from IDEX (IEX), Roper Industries (ROP), Emerson Electric (EMR) and General Electric (GE).
GE's order pipeline, according to CEO Jeff Immelt, looks solid into the second half. Given its global reach and visibility, the company may enjoy a recovery in Power, Industrial Services and U.S. Healthcare orders into the second half. This would be a welcomed situation, relative to the GE's goal of achieving $2.00 per share in earnings as early as 2018 -- a sizable improvement from the $1.50 forecasted here for 2016.
Continued uncertainty in global oil and gas capex and flattish margins out of Aviation (LEAP Engines) remain headwinds, though. Given this order signal (and Emerson's minus 5% to 0% order rate reported this morning), it seems the worst may be behind our beloved core industrial group from an earnings perspective, at least for the balance of this year. I'm also interested in seeing how GE uses the $30 billion in available and deployable cash over the next couple years. I've been stingy with my entry point for GE shares, but it could find a place in a steady portfolio if shares are acquired slowly on weakness. It is no longer a financial, which is a good thing. And the divestments that GE has promised have been executed with near-seamless elegance.
IDEX is a favorite of mine. The company's cash flow, prudent process of returning cash to shareholders and disciplined acquisition strategy have attracted me for years. The playbook is to buy high-margin component businesses of relatively small size, integrate them and build niche leadership in areas such as fluidics, optical components, health and sciences and pumps. IDEX has completed about 30 acquisitions over the past decade. The goal is to sustainably offer 10% to 15% annual earnings growth on single-digit sales growth, and given the diversification of this portfolio of businesses, overall cyclicality is muted.
I am less excited about Roper Industries and Emerson Electric at the moment.
Not that Roper needs an encore, but it has acquired its way away from a core industrial portfolio into asset-light and technology-centric services for consumers, transportation and health care in recent years. The acquisitions are getting larger and the law of large numbers could be an impediment for future roadmap development. The free cash flow conversion is top-notch, but you have to pay up for it, big-time.
Regarding Emerson, the name right now is all about a portfolio reshuffle. It is planning to sell or spin Network Power and its Power businesses. We'll see how Emerson reallocates; it likely will be in the big process segment. In the meantime, Climate orders have softened some and they will continue to restructure their way to prosperity. Earnings stabilization seems like the goal here.
You will hear more from me about risk/reward dynamics in this group here at EPG over time. From an analytical standpoint, there is plenty of "raw material" to play with, and they can be interesting compounders if bought properly over time.
Currently, however, I am waiting for a pullback in the group to get more excited.
May 18, 2016 | 9:45 AM EDT
Chip Guidance Skews Downward
- Growth will return to this group, but this lull in activity still needs time to adjust.
Analog Devices (ADI) reported second-quarter earnings this morning that were in line with expectations. Guidance for the coming quarter came in light, though, signaling earnings flat-to-down 10% vs. the consensus view. ADI is among the most broad-based chip solutions companies with industrial, automotive and consumer exposure. We have heard from Microchip (MCHP) and Skyworks Solutions (SWKS) as well recently, and we observed a similar forward view.
It seems as if sideways movement with a downward skew in the chips and semi-cap-equipment land. Unfortunately, it feels a lot like many other sub-sectors in the currently wobbly economic environment.
Globally, we are seeing adjustments in the automotive landscape from an inventory perspective. Similarly, in industrial automation, we have seen a slowdown in underlying industrial capital spending. Overall, though, and over the long term, this period seems like just like a lull following a period of excitement for industrial automation and vehicular electrification themes. We really like the long-term drivers of connectivity and internet of things (IoT) and ADI, among others, like Amphenol Corp. (APH) and TE Connectivity (TEL) seem very well positioned for this continued trend.
Growth will return to this group, but it appears that this lull in activity still needs time to adjust, from a customer working-capital standpoint, and from an earnings-expectations standpoint. Expect more data points in this group -- Applied Materials (AMAT) reports tomorrow -- and I expect a similarly unenthusiastic view of near-term prospects for earnings growth.
Overall, this secular niche should be able to hold premium earnings multiples, so watch the earnings forecasts more closely. I expect that we will have a better shot at better-quality stocks in another quarter or two. Some in this group do indeed have secular tailwinds at their backs. My risk/reward ranges are sharpening as we get closer, but it is still too early to buy them.
May 18, 2016 | 7:30 AM EDT
Electrical Products Group Conference Lacks Steam
- As the conference wrapped up its second day, this is why it lacked forward momentum.
Day two of the Electrical Products Group Conference on Tuesday was a bit of a snoozer. It was a continuation of yesterday in many ways, as the themes hashed out were similar: Strong U.S. non-residential construction, strength in HVAC, tough oil and gas markets that have no real recovery expected in 2016 and a China that remains soft and choppy. Also, all of the companies that presented were seeking bolt-on type acquisitions.
Colfax Corp. (CFX) still has some heavy lifting to do, before it can participate in any meaningful way in the acquisition environment. The company's recent management changes and weakness in its stock has folks leaving this one on the back burner until trends become clearer. Orders need to firm up in their fluid handling markets and they need to see a rebuild of aftermarket strength. This will take time. CEO Matthew Trerotola, new at the helm, needs some time to get the house in order. In the meantime, it's a trading stock at best, hugging in the $30 range.
Hubbell (HUBB)'s CEO David Nord called second quarter orders sloppy and erratic, as well as running weaker than expected. The stock's valuation is middling, compared to the big premiums awarded to it in the past. It likely reflects this weaker demand environment from an earnings perspective. I think Hubbell remains an acquisition candidate, though, which would keep a lid on multiple compression, if weakening second quarter trends become more acute into the second half.
A bright spot was Ingersoll-Rand (IR). The company cited strong momentum in domestic commercial HVAC and controls. The strength is broad-based and seen in retail, education, office government, and healthcare infrastructure. I really like the setup from margin expansion perspective at IR and see some possible cyclical upside once their compressor product lines recover. Despite the stock's recent run, valuation multiples remain at the lower end of the group.
- Dover Corporation (DOV) talked up its acquisition game in fluid handling. This company continues to have to address its portfolio.
- United Technologies (UTX) kicked up R&D spending at Otis after "years of underinvestment."
- Textron (TXT) has a slate of new products that can drive above market growth.
Overall, it was a sleepy day at EPG. More of the same, overall. None of the stocks seemed particularly interesting at current levels either, so I can just take this time to focus on developing my cumulative knowledge and focus on my entry/exit points for the stocks.