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This earnings season four of the ten companies in the Industrial Electrical Equipment subsector have all beaten their earnings estimates. The four companies are Woodward Inc. (WWD) -- 7/25, Eaton Corp. (ETN) -- 7/25, AMETEK Inc. (AME) -- 7/26, and ABB Ltd. (ABB) -- 7/26. These four companies all have 5-year EPS Growth Estimates per annum of 12.8% to 14.0%. In other words they are all good growers. One stock in the subsector, A.O. Smith Corp. (AOS) -- 7/19 -- only met analyst expectations.

From this record, one would think these stocks would all be climbing. Unfortunately, U.S. markets are currently beset with the U.S. debt ceiling / loss of U.S.’s Aaa rating drama. U.S. markets are beset by the EU credit crisis. Plus the Industrial Electrical Equipment makers are worried about their Chinese counterpart, Hollysys Automation Technologies (HOLI). HOLI’s stock jumped Tuesday on an upgrade to Buy by Roth Capital. This seemed to hurt the performance of all of HOLI’s U.S. counterparts today ( July 26). The market expects any success by Hollysys Automation Technologies is likely to hurt HOLI’s U.S. counterparts’ growth plans in China. The negative impact of this last fear was probably a one-day phenomenon for the near term.

There are five more companies to report in this subsector: Belden Inc. (BDC) -- 7/28, Rockwell Automation Inc. (ROK) -- 7/28, Franklin Electric Co. Inc. (FELE) -- 8/3, Littlefuse Inc. (LFUS) -- 8/4, abd Regal Beloit Corp. (RBC) -- 8/4 . In the current market environment, I am personally too scared to simply invest directly in these stocks, although most of them look like good investments. The market could go up dramatically on relief about the U.S. debt ceiling, or it could plummet on further worries about the same. The fear present tends to make one think the market will go down near term. Further some like Doug Kass think a large federal spending cut will be part of the eventual Congressional agreement. Kass thinks the spending cuts enacted will have a negative impact on the economy and the U.S. equities markets in the short term. He thinks the analysts will start to cut Q3 and beyond estimates as soon as the Congressional spending cuts are enacted. Then the analysts’ negative earnings and revenue revisions will make the market fall on lowered fundamental expectations. There is logic in what Kass says.

With all of the above in mind, I cannot in good conscience recommend now as a good time to buy these good stocks. All I can do is recognize that overall the earnings in this sector have been fantastic. This means that it might be possible to play these stocks across earnings for one day. If you buy the day before the earnings announcement (or the day of the announcement if the announcement is after the market close), you might be able to make some money on the likely slight upsurge on likely earnings beats. In this uncertain environment, this may be one of the better strategies. With this in mind, let’s look at some of the data for the Industrial Electrical Equipment makers that will report shortly. The fundamental financial data are in the table below. The data are from TDameritrade and Yahoo Finance. 

Stock

ROK

FELE

LFUS

RBC

BDC

Reporting Date

7/28

8/3

8/4

8/4

8/8

Avg. Daily Volume

1,303,380

99,180

123,355

314,253

240,605

Price

$80.66

$44.94

$55.41

$64.34

$35.39

1 yr. Analysts Target Price

$93.36

$48.00

$65.63

$86.11

$44.58

PE

20.61

24.98

14.60

16.71

14.29

FPE

14.83

15.34

11.97

11.51

12.42

Avg. Analysts’ Opinion

2.5

3.0

2.5

1.8

1.2

Price/Book

6.27

2.36

2.47

1.77

2.44

Price/Cash Flow

16.76

15.65

10.9

10.66

12.85

FY2011 EPS Growth Estimate

50.20%

28.90%

25.10%

20.80%

27.70%

FY2012 EPS Growth Estimate

18.80%

17.20%

4.50%

20.80%

26.10%

5 yr. EPS Growth Estimate per annum

14.50%

40.00%

10.00%

13.17%

8.00%

Market Cap

$11.64B

$1.05B

$1.26B

$2.49B

$1.68B

Enterprise Value

$11.87B

$1.14B

$1.21B

$2.88B

$1.95B

Beta

1.72

0.85

1.89

1.29

1.98

Short Interest as a % of Float

3.05%

4.73%

4.19%

4.56%

4.25%

Cash per Share (mrq)

$7.07

$4.42

$5.79

$6.72

$6.82

Total Debt/Total Capital (mrq)

32.77%

25.18%

13.21%

23.75%

44.50%

Quick Ratio (mrq)

1.98

2.12

2.56

1.69

1.75

Interest Coverage (mrq)

14.22

6.08

92.02

13.43

4.91

Return on Equity (ttm)

34.55%

10.16%

18.92%

11.47%

12.53%

EPS Growth (mrq)

46.77%

43.87%

39.20%

1.51%

51.04%

EPS Growth (ttm)

124.10%

42.66%

157.71%

21.79%

92.09%

Revenue Growth (mrq)

25.73%

15.84%

15.76%

30.62%

20.08%

Revenue Growth (ttm)

26.35%

16.18%

28.69%

26.61%

19.49%

Annual Dividend Rate

$1.70

$0.54

$0.60

$0.72

$0.20

Gross Profit Margin (ttm)

39.54%

32.50%

38.89%

24.37%

28.76%

Operating Profit Margin (ttm)

12.90%

9.13%

18.52%

9.99%

8.26%

Net Profit Margin (ttm)

10.40%

5.86%

13.44%

6.50%

4.54%

The most important detail in short-term trading may be the average daily volume of a stock. If there is very low volume your trade could easily go in an illogical direction. ROK is the only stock of the 5 yet to report with volume over 1,000,000 per day. Two others, RBC and BDC, are marginal candidates at average daily volumes of 314,253 and 240,605 shares. Unfortunately these are two of the slowest growers (5-year EPS Growth Estimate per annum), and they have two of the lowest Net Profit Margins. Three strikes make them not worth the risk.

This leaves ROK as the only reasonable short-term trading option over earnings. After the push downward today due at least partially to HOLI, ROK may be ready for a move upward, especially if it reports good results July 28. The Beta on this stock is 1.72, so I will look to limit my risk as much as possible.

My strategy will be to buy the stock on Wednesday at the time I think best. Since I tend to think Bernanke and the Fed (the Beige Book at 2pm EDT Wednesday) will be a downer for the markets, I may buy at some time after that. Alternatively I might buy early in the morning if the Durable Goods number is particularly good. I will try to buy the stock near a low. Then I will try to sell an out of the money call option (or nearly out of the money option) at a higher point. This will make the call option provide me with more protection to the downside. It will also mean that I will earn more when I sell both the call(s) and the stock shares after earnings the next day. If you sell an out-of-the-money call option (or a nearly out of the money one), the stock will go up almost twice as fast as the option value early on. This should make the trade profitable. Currently I am thinking about an $80 August call. However, where ROK opens in the morning may determine my actual actions. I would normally give some consideration to just selling the $80 put option, but the market is beginning to worry me with regard to its near-term direction. Stocks with Betas of 1.72 are not ones you want to ride down with the overall market, even if they are good growers. The put option requires a longer term outlook.

The two year ROK chart is below - (click to expand):

Technically ROK is near oversold levels on the Slow Stochastic sub chart. This is good if you are hoping for a bounce upward. Further ROK is near both its lower Bollinger Band and its 200-day SMA. Both of these provide some support for the stock. The stock chart is very strong. The overall sub sectors earnings have been great. Only the overall market direction is a worry. I wish I could have everything! Still this looks like it may be a good one-day play. If the market looks particularly healthy tomorrow after the Fed news, you might consider using a call spread. Alternatively you could just buy the stock outright without selling a call option to play this likely positive move. If you buy the stock outright, you will at least have the comfort of knowing that you have a fundamentally sound stock with a strong chart.

ROK is primarily involved in industrial automation power, control, and information systems. It provides systems to improve productivity and conserve power. It sells worldwide to the U.S., Canada, Europe, the Middle East, Africa, the Asian Pacific, and Latin America. It should have a good future.

I should add that all of the stocks in the Industrial Electrical Equipment subsector that beat on earnings are likely ones that you may wish to consider for the longer term. This particular moment in time is probably not the best moment to load up on long-term investments though. If you think you may be interested longer term, you should watch the other earnings in this sector. It does seem to be a strongly performing sector with some great dividends. Growth and dividends can be a great combination.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ROK over the next 72 hours.

Source: Industrial Electrical Equipment Makers Are Looking Strong