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Twenty-five plus years of excellence in economic, industry and market analysis including equity research, portfolio management, capital markets, business development and strategy. Deep, broad relationships with chief executives and their management teams, institutional investors, industry... More
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TheFirstShift
  • THIRD QUARTER TEA LEAVES - WE ARE READY TO CALL THIS ONE 0 comments
    Oct 22, 2013 1:22 PM | about stocks: UTX, PNR, ITW, KONE

    Hi All:

    I anticipate little drama for the balance of earnings season. Here is our take on today:

    ITW - 1 point revenue miss, (2) pt EPS miss - stock flat. Recent divestiture announcement and restatement kept traders away from the name in our view. No real surprises.

    PNR - Missed on revenue (4 pts), hit consensus - stock off (3). Larger, higher profile company now but people may be expecting too much. Operational performance was excellent.

    KONE.IX - order books up again (partially deals). Supports positive global HVAC thesis.

    UTX - (5) point revenue miss versus consensus, EPS +1 beat, flat stock. You knew the execution would be there but revenue miss was big. Stock reaction suggests nobody really cares and in fact commercial order books (China, Containers, etc.) look good. We would not be surprised if they held something back (only the Aerospace businesses missed on revenue).

    In a nutshell:

    1. 3Q revenue stinks.

    2. Earnings are generally coming through in line. Good companies find ways to deliver the numbers - and EVERYBODY was focused on costs. Even not so good companies weren't clueless.

    3. Europe - directionally up, varying degrees of optimism (we see it as "mathematically better" off low activity, NOT recovering).

    4. Expect more of the same - execute in low growth '14 - internal product development (get that extra point above market), cost focus (squeeze out more profit, cull every bit of fat) and deal discipline.

    What this means for our best ideas:

    MTW - HVAC should recover next year. You won't make much money on the "HVAC" names as they are priced for both a) recovery and b) M&A value. Better to think about MTW - cheaper, and you can't build a large building without a crane NOR put up a wind turbine (which is growing a lot in '14).

    BBD.B - UTX chatting up CSeries (of course, it uses their engine) and BBD has announced a lot of 4Q orders (which means when they report 3Q they didn't come in by 9/30 - so FCF from pre-payments won't hit until 4Q).

    GE - margins improving, cost cutting and share repurchase continues. It isn't sexy, glamorous or thrilling but it will work.

    CAT - kinder, gentler variant of MTW theme with less downside (trading 12% above the 52 week low) or upside (figure $100-110 = 12- 25% upside). Again, on new construction you have to dig the hole and move the dirt before the building goes up. Better to play the cheaper stock.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: UTX - Buy rated, $115 target price.

    Themes: Industrials, Third Quarter Stocks: UTX, PNR, ITW, KONE
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