By Carlos Guillen
Despite the slew of companies reporting better than expected financial results after the close of trading yesterday and before the open today, equity markets, as reflected by the Dow Jones Industrial Average, started the session sharply lower, oscillated a bit, then began ramping higher. Perhaps it was the worse than expected initial claims data that did it, or maybe investors feel that after a strong rally in the past month, it is time to take some money off the table. Whatever the case is, investors were encouraged by the better than expected durable order, which bode well for the near term economy.
Clearly not very encouraging today was that data showed the number of people filing for unemployment benefits ticked higher, not showing signs of improvement. According to the Department of Labor, initial claims during the week ended July 20 totaled 343,000, increasing from the 336,000 revised figure reported for the prior week and landing above the Street's estimate of 340,000. The result is still below the 350,000 level, which economists say is consistent with moderate labor market growth of about 150,000 net new jobs a month. The initial claims' four-week moving average was 345,250, decreasing from the prior week's average of 346,500. While the initial claims ticked higher, a bird's eye view of the data is showing stability. Considering that firings are slowing and that nonfarm gains have also been consistent, averaging around 195,000 per month in the second quarter, it is apparent that the jobs market is handling the most recent government job cuts fairly well, and it is probable that the foundations are being set for improvements in employment.
The main bit of economic data that was overall encouraging and should have lifted stocks from the get-go today was durable goods orders. According to the U.S. Census Bureau, new orders for manufactured durable goods during June increased month-over-month by 4.2 percent to $244.5 billion, better than the Street's consensus estimate calling for a 1.8 percent month-over-month rise, representing a third month of growth on top of an upwardly revised 5.2 percent gain (from 3.7%) in May. Concurrently, non-defense capital goods, excluding aircraft, rose by 0.7 percent, after increasing by 2.2 percent in the prior month. These orders are considered a proxy for future business investment in items such as computers, engines and communications gear, so while it did increase for a fourth consecutive month, its tepid growth was not enough to convince investors of a meaningful contribution to overall economic growth in the short term.
At the moment investors appear to be digesting the bits of economic data and the most recent earnings results and are now finding some direction to the upside with the Dow now moving slightly into positive trading territory.
Recreational Vehicles Burning Rubber
There's nothing quite like having you, the warm sun, and a 600cc engine to hang on to for dear life while you tear up the asphalt, dirt, snow and waves. Today we got a few recreational vehicle quarterly results all at the same time, and it's looking like times are good for people who like to have fun in the sun burning rubber, popping wheelies and hopping waves. Motorcycle icon Harley Davidson (HOG), ATV and snowmobile expert Arctic Cat (ACAT), and powerboat maker Brunswick (BC) are each having a good day on earnings announcements, although each of them has a little bit of a different story.
Harley's quarter was somewhat of a global growth story, although the US was good too. The company beat by $0.03 on the bottom line while revenue of $1.63 billion was in line with consensus. Overall revenue growth was +4% year over year which is a decent result on the surface but you can see where the Company is making nice inroads into the global markets, particularly Latin America and Asia.
In terms of retail motorcycle units sold, sales were up 4.4% in the US while being up 12.3% in Asia and 39.2% in Latin America. In 2009 the company made a goal of opening more than 100 new stores worldwide by the end of 2014 and they have already achieved that. There was an interesting result in Europe too, where sales were only up slightly; however, industry data suggested that overall heavyweight motorcycle registrations were down 9% in Europe in the first half of this year.
Gross margin was also up to 36.9% from 35.9% year over year. Meanwhile, the company will introduce a new 2014 vehicle lineup next month.
With ACAT, the big story has been a revamped product line, along with a better cost structure. The company beat by a whole $0.20 on the bottom line for their fiscal 1Q, with revenues up 8.5% year over year to $120.8 million, which was 4% below consensus. Gross margin was all the way up to 24.1% from 20.2% as a better product mix boosted the bottom line. Management is now guiding for 12-14% revenue growth for the year.
One trend ACAT has been able to capitalize on is the side-by-side market, which is the fastest growing segment in the industry. Their Wildcat side-by-side product line seems to be a big hit, and was the driver of the 5% growth in all-terrain vehicle sales. Meanwhile, snowmobile revenue was up 26%, as the company had 10 new products available including its first in-house engine and an expanding partnership with Yamaha.
For Brunswick the story is a struggling Powerboat industry coming back from the dead. BC beat by $0.16 on the bottom line for its 2Q, with revenues up 4.2% to $1.1 billion, in line with consensus. Management also gave guidance for EPS to be $2.55-2.65 which is better than the $2.51 consensus estimate.
As of 2012, US powerboat sales (75% of the company's revenue is from boats, mainly engines) were still less than half of what they were at the peak and are still just barely recovering from the recession; that means there is room for strong percentage gains off the lows. Engine sales were up 7%, and while boats were up just 1%, it achieved 2% growth internationally whereas it had been down in 1Q. Overall, boat sales are going to continue to be uneven as the company intentionally continues to wind down some business but engines continue to recover well.
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