Oversold Industrial Electrical Equipment Stocks Are Starting to Rebound

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 |  Includes: ABB, AME, ETN, HMC, ROK, TM
by: David White

The above categorization of these companies is a bit of a misnomer. Many of these companies deal in automation equipment and software programs for businesses. They literally save other industrial companies money. They make businesses run more efficiently from a management standpoint. They save companies energy through improved manufacturing techniques and improved lighting, cooling, heating, and power management. In these times of rising energy prices, even the emerging market and third world companies are investing in these companies’ products and technological know-how. They literally cannot afford not to. A few of these companies are Eaton Corp. (NYSE:ETN), AMETEK Inc. (NYSE:AME), ABB Ltd. (NYSE:ABB), and Rockwell Automation Inc. (NYSE:ROK). They all beat and raised this last quarter. That is how well they and their sub sector are doing these days.

In response to the current “second recession” fears, these companies have been among the hardest hit because industrials typically do poorly in bad economic times. They have been trashed with their super sector, even though that characterization is not particularly apt. In the case of these companies, you would not be buying a new crane, earth mover, tractor, or machine tool for your shop. You would in many cases be buying automation. You would be saving on labor, power, time, etc. You would not be simply expanding.

Looking back at the recently passed recession, what do we see that many companies did? They got leaner and meaner. They did not spend on more people. They spent on streamlining their processes -- on automation and increased productivity. These are the things the companies in the Industrial Electrical Equipment sub sector provide. Of course, they provide other things such as components for planes and autos too, but those industries are still on the rebound. For example, the July bookings brought Airbus’ total net orders for 2011 to 785, and they raised the overall backlog to the highest record level ever of 4039 aircraft. Boeing is a distant second this year with only 268 commercial plane orders so far this year. However, it is finally completing testing on the Boeing 787 Dreamliner this weekend. If Boeing ramps up production of this plane quickly, the orders should flow in.

Combined car, light-duty trucks, SUV/Cross-over, and Cross-over sales are up in 2011 over 2010. When you consider that sales were hurt overall by the huge slow down in Japanese automaker sales due to the major earthquake/tsunami/nuclear and electrical disaster, the performance can only be termed encouraging. Brand loyalty still exists, and some of the Japanese brands have perhaps the strongest brand loyalty. A few examples of the Japanese poor performance compared to July 2010 percentage are: Toyota (NYSE:TM) Camry/Solara -22.9%, Toyota Corolla/Matrix -35.7%, Honda (HM) Accord -26.9%, Honda Civic -39.7%, and Honda CR-V -30.5%. With figures like those, it is a miracle total US sales grew at all. My point is that the biggest companies that the industrial electrical equipment makers serve are still doing well. Admittedly HIS Automotive recently cut its estimate for U.S. auto sales to 12.5 million from 12.7million in FY2011. It cut its estimates for FY2012 to 13.5 million from 14.7 million. However, the 2011 figure could be chalked up to the Japanese problems, and the original 2012 figure may have been “pie in the sky” in the first place. As real dates approach, unreal estimates tend to become more real. The most recent figure still represents good growth, and the CEOs of the car companies seem optimistic and perhaps even happy.

Until recently all of the above stocks’ charts had good uptrends. Not that much has changed, yet the stocks have fallen demonstrably. Partially this was due to the fact that they were over bought because they had been performing so well of late. However, it was also due to the fact that these stocks have done consistently well for the last year, and their outlooks are good too, even with the downturn talk. The fundamental financial data in the table below gives an extremely positive outlook. 

Stock

ETN

AME

ABB

ROK

Price

$40.65

$37.95

$21.59

$62.05

1 yr Analysts’ Target price

$61.49

$52.22

$31.08

$87.29

Predicted % Gain

51.3%

37.6%

44.0%

40.7%

PE

11.91

17.90

16.29

14.37

FPE

8.49

14.32

11.13

11.43

Avg. Analysts’ Opinion

2.1

2.0

1.5

2.4

FY2011 EPS Estimate 30 days ago

$3.92

$2.25

$1.56

$4.58

Current FY2011 EPS Estimate

$4.04

$2.33

$1.58

$4.64

FY2012 EPS Estimate 30 days ago

$4.65

$2.54

$1.91

$5.44

Current FY2012 EPS Estimate

$4.79

$2.65

$1.94

$5.43

EPS % Growth Estimate for 2011

43.80%

32.40%

26.40%

52.10%

EPS %Growth Estimate for 2012

18.60%

13.70%

22.80%

17.00%

5 yr. EPS % Growth Estimate per annum

12.80%

13.50%

13.40%

14.50%

Market Cap

$13.87B

$6.13B

$49.44B

$8.89B

Enterprise Value

$16.75B

$7.41B

$48.19B

$8.77B

Beta

1.41

0.86

1.46

1.75

Total Cash per share (mrq)

$2.59

$1.26

$2.15

$7.14

Price/book

1.7

3.09

3.09

4.68

Price/Cash Flow

8.01

14.46

12.85

11.75

Short Interest as a % of

1.16%

0.78%

0.13%

3.05%

Total Debt/Total Capital (mrq)

31.51%

37.88%

18.15%

32.30%

Quick Ratio (mrq)

1.22

1.19

1.01

1.8

Interest Coverage (mrq)

13.77

9.05

83.56

16.05

Return on Equity (ttm

15.91%

19.37%

20.06%

38.21%

EPS Growth (mrq)

46.39%

37.80%

43.10%

48.23%

EPS Growth (ttm)

47.04%

55.42%

13.02%

84.08%

Revenue Growth (mrq)

21.08%

28.19%

27.82%

19.56%

Revenue Growth (ttm)

19.68%

29.03%

12.78%

24.67%

Annual Dividend Rate

$1.36

$0.24

$0.6827

$1.70

Dividend Yield

3.50%

0.70%

3.17%

2.90%

Gross Profit Margin (ttm)

30.00%

33.96%

30.51%

39.57%

Operating Profit Margin (ttm)

8.79%

20.48%

12.75%

13.49%

Net Profit Margin (ttm)

7.77%

12.26%

9.05%

10.99%

Click to enlarge

The data above show that these are all stable mid to large caps. They all have good 5 year EPS Growth estimates of 12.80% to 14.50%. They all beat and guided higher in the most recent quarter. Those upwardly revised estimates have not been revised downward in the last 30 days even given the crash of the overall markets. This is a true show of strength. The fundamentals above back this view up. Of the four, I tend to like AME and ROK best because they have the highest 5 year EPS Growth Estimates and the highest Net Profit Margins (ttm). To me this means they are well run in a competitive industry. I should also note that both ETNs, ABB, and ROK have substantial dividends of approximately 3%. ROK still has the best growth characteristics and Net Profit Margin (ttm) even with a high dividend. This speaks particularly well of it. It got hurt badly in the move downward as it has the highest Beta of the four (1.75). This is what you would expect of a growth stock. It is something you should keep in mind when you consider which stock may rebound the most and the fastest.

The one year below charts provide some technical detail.

The one year chart of ETN:

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(Click to enlarge)

The one year chart of AME:

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(Click to enlarge)

The one year chart of ABB:

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(Click to enlarge)

The one year chart of ROK:

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(Click to enlarge)

The Slow Stochastic sub charts for each of the above stocks indicate each is oversold. The huge recent gaps down along with the fundamental data presented above lead one to believe that these stocks all should try to fill their gaps. If each only makes it about halfway up in the near term, you will still make profits. These all seems to be stocks that you can own for the longer term. However, you can likely make a year's worth of profits on these stocks in the next few weeks.

Good Luck Trading.

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