Earnings: CAT and BA
Is the market beginning to stall? After getting through all the government’s and Fed’s games, the market has survived and even moved higher; however, as we get back to focusing on earnings and the economic conditions on the ground, we quickly see that trouble and stagnation remain. Those concerns are certainly not universal. Amid the Western economic stagnation we are also seeing a shift in the technology industry, which is quickly expanding into the SaaS (Software as a Service) model coupled with Cloud technology. The core driver, however, remains the Fed, who is pushing the flow of investments into equities as the fix is in for treasuries (which remain unattractive as a source of real return).
Earnings: CAT and BA
Courtesy of Wikipedia
Caterpillar (CAT) has been a great measure of global expansion in the heavy industries. We quickly saw, after the height in the credit crisis in 2008-2009, that CAT and others in their sector saw strong top-line revenue as they quickly expanded into the BRIC nations, while the Western world suffered. However, as I recently have been pointing out, there has been a global slow-down in growth. The phrase “global slow-down” needs to be used carefully. In most cases we are referring to a slow-down in GROWTH, not actual contraction. We saw a hyper-expansion into the emerging markets space in the last couple of years and in many cases we are hitting a point of saturation. McDonald’s recent earnings reflected a similar story as they lowered their expected number of store openings and reported that sales are plateauing in places like China. McDonald’s has moved from growth to pricing/cost management in order to continue to maintain profits. CAT is similar, but different; their growth doesn’t come from building new stores, but selling more equipment. Equipment sales are slowing and CAT is now seeing the sales cycle change from a growth model to a replacement model (replacing old units with new ones). This is similar to the auto industry at which growth slows and their model focuses on replacing used cars. We should not panic because sales are slowing and plateauing, we need to understand it is a real factor in any business. The real question should be aimed at whether CAT and similar companies can restructure their business to focus on replacing, repairing, and leasing to maintain profit margins. The booming growth in the BRICS is slowing; no doubt growth still exists, but not compounding in the double digits that we have become accustomed to.
CAT posted lower-than-expected profits and cut its full year forecast on weaker demand. Total revenue fell 18% to $13.4 billion, while profits fell from $1.7 billion to $946 million ($2.54 a share to $1.45 a share). The company has and will continue to furlough thousands and reduce full-time work force by 3,000. In the past year the company has cut 13,000 jobs. Their sales outlook is weak and the stock is down 5% in the pre-market.
Future of CAT?
There is a future story that no one is talking about because all eyes continue to focus on the slowing growth in China story; Africa. In the coming years (5-10), Africa will be the main source of core growth in heavy industries. We are already seeing China and Russia making massive moves into Africa with huge multi-billion dollar projects, from oil and mining to water and manufacturing. Could Africa be the next huge growth story? I think so – but I don’t think the major media will take notice in the near-term and it will not be for a couple of years before we hear stories about African growth. There are problems in the Africa growth story for the U.S. First, it is a fractured content with 4 major trade coalitions and some of them overlapping. Second, some areas have been infiltrated with Muslim terrorists with strong anti-American sentiment (notice that Russia and China don’t suffer from this factor). Lastly, the U.S. has stringent trade relations with many nations (tariffs, protectionism, tying human rights with trade deals, etc.) thus making it hard for American companies to do business. There are a lot of hurdles, but a massive content with resources and a huge unemployed work force means that if there is a will there is a way. Perhaps our biggest obstacle is our own government, as it seems that China, Russia, and Brazil have been making huge and fast in-roads into Africa. Can CAT see big growth in Africa? Sure, they are already in business on the Dark Continent, but the questions are how fast will it grow and how well is CAT positioned. Stay tuned in the years to come, it will be the race for claiming a stake in Africa.
Courtesy of Afrographique
Courtesy of wikipedia
Boeing (BA) saw top-line revenue increase 11% from a year earlier. The battle with Airbus and the problem with their Dreamliner have certainly made it a bumpy road; however, the company saw an increase of 14% in aircraft deliveries and it seems that most of the headaches of the Dreamliner are now behind them (hopefully). The company is also raising their full-year earnings from $6.20 – $6.40 to $6.50 – $6.65. They are also boosting their Dreamliner production. Air transportation continues to grow worldwide and these new, more efficient aircraft are becoming sought after as fuel prices increase. Sales continue to remain strong in the BRIC and emerging markets and with a host of new airports coming online in the next decade, the race for dominance between Airbus and Boeing will continue. The one chink in Boeing’s armor is their defense industry division, which has become a concern with the government shutdown and also possible defense spending cuts; however, their commercial aircraft division is doing well. The stock is up over 2.5% in the pre-market.
Support & Resistance
The momentum is slowing and we could be in for some consolidation and some pressure. I don’t see anything in the short-term to be too concerned about and would look at the 15,000 level for some basic support.
Apple had some interesting action yesterday, the hype around the new iPad drew some initial excitement, but it quickly became a sell the news story as we saw selling pressure hit into the late session. However, the NDX is still being driven by some huge core tech stocks and so far the growth still looks good, despite the domestic economic struggles.
Much like the Dow Jones, it looks like we are starting to see some consolidation in here and earnings remain mixed. The constant story is some slowing down in top-line revenue growth, globally. A pull back to 1700 is certainly in the cards, but I don’t see any reason for a mass exodus, because bonds still remain unattractive. VIX is in the 13 range, which seems a fair range for now.
The RUT is starting to come off and this year the RUT has been the best indicator for broad-based order flow and even predicting both the Fed and government outcomes. It is starting to look a little weak and we could see some profit taking that would push the index down to the 1080 range. But I don’t see anything to panic about.
I honestly believe that the next big boom in growth will come from Africa. First it will be core and heavy industries, primarily because the work force will not have much disposable income. Their spending habits will be much like the Chinese in the 1990′s, in which their spending went towards necessities (food, toiletries, medicine, basic housing). We will then see a slow rise in incomes and in 5 – 10 years the spending will move to more disposable income, much like the Chinese in the 2000′s.
This is not going to happen overnight, but it is coming. Reading several articles about the African growth and huge utility, mining, and oil projects – most coming from multi-nationals, excluding the U.S., shows that the race is already in the initial stages. Heavy industry and construction will be the first to benefit, along with the commodity producers and refiners. It will be slow going, but we will also see manufacturing starting up as manufacturing costs in China and other BRIC nations continue to rise and no longer remain competitive.
As I’ve mentioned, there are several national coalitions for trade and commerce, many of them have over-lapping nations. The question is which one will eventually be the dominant organization that builds trust among both the African nations and the foreign investments?
The massive civil wars, coups, and genocides of the 1970′s and 1980′s are over, for the most part. A few fractured border wars started in the 1990′s are beginning to cool off as well. No doubt that their remains significant security concerns, but some of the national coalitions have done well to address these. Not ALL of Africa will be easy to see growth, but there is enough interest in really building up these nations that we will see growth.
The tide of society’s needs and desires will eventually trump any army, dictator, or WALL. People embrace consumption (capitalism) regardless of their political or economic ideology. The desire for man to improve his standard of living will always be a driving force.
This Africa story is the silent growth story that we ignore as we continue to focus on Washington games, Europe’s solvency problems, and the BRICs. It is the dark horse that could very well be the next big boom in the decades to come.
Courtesy of the Economist