Today's Market: Private Equity Firms On The Prowl And Manufacturers Rising On Earnings

Includes: BA, NFLX, SWY, UTX, WHR
by: Matthew Smith

Manufacturers have seen solid results this week with Whirlpool (NYSE:WHR) and Boeing (NYSE:BA) leading the way and possibly foreshadowing better results from other names such as United Technologies (NYSE:UTX). That is a multi-year play and has us bullish of those names moving forward. Also this morning we have activist investors and private equity firms wheeling and dealing with Carl Icahn making a move with his Netflix (NASDAQ:NFLX) stake and the hedge fund Cerberus, among other names, rumored to be looking at a possible takeover of Safeway (NYSE:SWY).

Chart of the Day:

With rates trading back down to three month lows it appears that a small window has opened for those looking to use debt to fund deals to enter the market. This is great news for investors and should lead to a flurry of deals under $10 billion before year-end.

(Click to enlarge)

Source: Yahoo Finance

We have economic news today and it is as follows:

  • MBA Mortgage Index (7:00 a.m. EST): Est: N/A Actual: -0.6%
  • Export Prices - Ex Ag (8:30 a.m. EST): Est: N/A Actual: 0.3%
  • Import Prices - Ex Oil (8:30 a.m. EST): Est: N/A Actual: 0.1%
  • FHFA Housing Price Ind. (9:00 a.m. EST): Est: N/A Actual: 0.3%
  • Crude Inventories (10:30 a.m. EST): Est: N/A

Asian markets finished lower today:

  • All Ordinaries -- down 0.27%
  • Shanghai Composite -- down 1.25%
  • Nikkei 225 -- down 1.95%
  • NZSE 50 -- up 0.92%
  • Seoul Composite -- down 0.99%

In Europe, markets are trading lower this morning:

  • CAC 40 -- up 0.00%
  • DAX -- down 0.03%
  • FTSE 100 -- down 0.81%
  • OSE -- down 0.27%

Activists and LBO Firms Making Moves ...

Carl Icahn announced yesterday that he had sold roughly half of his stake in Netflix after netting a profit of over 450% in roughly 14 months. According to the SEC filing, Mr. Icahn had been selling shares since October 10th and took his firm's overall position down from 9.4% to 4.1%, which allowed him to pocket over $800 million in profits. Some of the weakness is Netflix shares yesterday was obviously due to Mr. Icahn and that will be something to pay attention to moving forward as an extra 5% of shares are now floating around in the open market now at the exact same time that those who follow Mr. Icahn in and out of trades will be looking to exit their positions in some manner over the next few sessions. The Icahn effect goes both ways and although he still maintains a solid position in the company he is playing with the house's money and the market knows this and will adjust accordingly.

We could all take a page out of Carl Icahn's book and learn to take profits to lock in those gains. Knowing when not to be a "pig" in this business is key and one of the best is showing investors that there is no shame in lowering one's profile in a big winner.

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Source: Yahoo Finance

Also catching our eye is another stock we have been following over the past few months and that is Safeway which has rumors swirling that private equity investors may make a deal for all or part of the company. Shares are up 10% in pre-market trading and Deutsche Bank says that $56/share in a buyout is fair. That would make this a deal over $10 billion which simply highlights the cheap credit available out there right now for LBO firms and with rates having retreated this past month might very well be opening a window where deal flow picks up. The company did recently announce a large share buyback program and the sale of some assets but most importantly they enacted a poison pill which has to be considered at this time. Any offer will have to be rich, so it will be interesting to see how this plays out.

Manufacturers Posting Strong Numbers ...

Manufacturers who do not have exposure to the end user commodity sector have been fairing quite well in recent sessions as their earnings have come in above expectations. Whirlpool posted very strong results earlier this week, doubling profits and making many of the analysts who raised concerns recently look quite foolish. The company moved production to lower cost areas which helped margins but also saw stronger demand than many had forecast for the quarter. North American sales were up 8.3%, even with the uncertainty of the government shutdown keeping consumers away, and sales in Europe, the Middle East and Africa rose 10.8%. The strength was enough to allow Whirlpool to raise their full year earnings estimates to $9.90-10.10/share from $9.50-10.00/share with the Q4 range now $2.84-3.04/share. For more on the results and forward guidance we would advise readers to read the conference call, located here.

Boeing has been a big winner for readers over the past year and we expect to see further gains over the next few years as the 787 production increases and leads to growth on both the top and bottom lines.

(Click to enlarge)

Source: Yahoo Finance

Posting strong numbers this morning was one of our favorites, Boeing. Not only were the numbers strong, but so too were the guidance going forward as well as the story. The company is hoping for 787 production to be 10/month as their exit rate for 2013 with that figure rising to 12/month by 2016 and 14/month by the end of the decade. The higher the production the higher the revenues and profits, which lead to better margins. The higher production figures are something to get excited about moving forward, and the market is doing just that as in pre-market trading. Boeing's numbers for the quarter exceeded analysts' expectations both on the top and bottom lines with revenues coming in at $22.1 billion versus the expected $21.7 billion and actual EPS of $1.80/share versus the estimate of $1.51/share. The story remains strong here and we believe readers should remain long their holdings. This is a multi-year play and with the production guidance delivered this morning we think that there is a lot of upside left.

As bullish as the story is at Boeing, one has to believe that United Technologies will be a beneficiary of this good news as well. Especially when one considers just how diversified the company is and how good news for Whirlpool is also good news for United Technologies too. The stronger the U.S. economy becomes, the better United Technologies will perform and although this has already been a strong winner we think that there is further to run as the economy continues to chug along. When growth becomes easier to come by, this name will be a screaming buy as one would expect all business segments to see big pickups in business. We remain bullish the housing market, even in the face of rising interest rates, and think that this will benefit many of the manufacturing names moving forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.