Hold stock pick Johnson Controls for delivery on second-half promises

Shares of Johnson Controls (JCI) hit a new 52-week high yesterday on anticipation of a better than expected second half for calendar 2013. They also hit my $37 target price in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

What to do? Hold on for the anticipated improvement in earnings in the June and September quarters and into the 2014 fiscal year that begins with the December quarter.

You can see the anticipated improvement earnings if you look at the quarterly breakdown in analyst projections. For the June 2013 quarter, Wall Street is expecting earnings growth of 17% and for the September quarter earnings growth of 18%. Despite that surge in the last two quarters of company’s 2013 fiscal year, growth for fiscal 2013 will be an anemic 0.4%.

The shares aren’t terribly expensive even after climbing 26.4% in 2013 as of May 21. At today’s $37.42, they trade at just 14 times projected earnings per share for the fiscal year that ends in September 2013. That’s near the lower end of the historical price-to-earnings ratio on the shares, according to Standard & Poor’s.

But to move up from here the company will need to deliver on Wall Street’s hopes for the second half of fiscal 2013 and for fiscal 2014, which begins with the December 2013 quarter. Wall Street right now is expecting 21% growth for fiscal 2014.

I think the odds are in favor of the second-half promise coming true. The company’s building efficiency (temperature and energy management for non-residential buildings) and its battery units show strong seasonality with revenue and margins both picking up in the warmer months. I’d add in price increases in the company’s aftermarket battery segment of 3% to 4% that will kick in beginning n July. (Price increases for the building efficiency business that went into effect at the end of 2012 will show up in the second half of 2013.) And finally, $375 million or so in restructuring charges that the company took in the third and fourth quarters of fiscal 2012 and in the first quarter of fiscal 2013 should help margins in the second half of fiscal 2013.

A weak European economy could be a problem if it leads to as steeper than now expected drop in auto sales in that market. Right now the North American market looks likely to continue its recovery with light vehicle sales on a path to 15.4 million units in 2013 from 14.4 million in 2012. April figures on new car registrations in Europe weren’t as positive as they first seemed. Registrations did climb in April 2013 by 1.7% from April 2012, the first year over year increase since September 2011, but the gain was almost entirely due to the way that Easter fell in 2013 versus 2012. The calendar change added two selling days to April 2013. The best that can be said about the April numbers, finally, is that they don’t show demand driving over a cliff. Everybody expects European auto sales to be down; as long as they’re not down way more than expected, bad news counts as good news.

As of May 22 I’m raising my target price for these shares to $42.40 by December 2013. The shares carry a 2.1% dividend yield. The next quarterly dividend of 19 cents a share will be paid to shareholders of record as of June 7.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Johnson Controls as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Palladium isn’t gold–thank goodness; tweaking my target price for stock pick Stillwater Mining

The dust has settled at Stillwater Mining (SWC) with the election of four new board members backed by the Clinton Group, an activist investor that wants the company to focus on the profitability of its U.S. platinum and palladium mines and cut back or end plans to expand into copper mining after a 2011 acquisition of copper reserves in Argentina.

That removes a major distraction hanging over the company’ stock and should leave the shares free to reflect Stillwater’s unique position as the only U.S. producer of platinum and palladium at a time when mines in South Africa are cutting production due to strikes. (Stillwater Mining is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Palladium and platinum are two of the very few commodities that remain in a supply deficit in 2013 and that are likely, Barclays projects, to remain in deficit in 2014. Because of strikes in South Africa, global platinum production fell 10% in 2013 and palladium production fell 11%.

And unlike gold, where a bare 10% of consumption goes for industrial production, 60% of platinum consumption and 91% of palladium consumption goes to industrial production. That’s been especially good for palladium as demand rose 16% to a record 9.9 million ounces in 2013 as the global auto industry continued a recovery. (At least outside of Europe.) Palladium and platinum are key ingredients in automobile catalytic converters.

You can see the platinum/palladium story very quickly by comparing the performance of ETFs for those metals with that of a gold ETF. Read more

Yen stalls today–but this isn’t a reversal of the rally in Japanese stocks

Today the yen stalled in its seemingly relentless descent versus the dollar on comments from Japanese Economy Minister Akira Amari that the yen had corrected a lot and that further losses would have a negative effect on the Japanese economy.

On that the yen rallied 0.97% against the dollar to 102.28. The yen had opened the day at 103.12. (Remember that since the yen/dollar exchange rate is expressed as yen to the dollar, a higher number indicates a weaker yen.)

Speculation among currency traders is that Amari’s remarks were intended not to stop the drop in the yen but to moderate its speed. Although the Bank of Japan and the government of Shinzo Abe remain committed to weakening the yen until they achieve a shift from Japan’s ingrained deflation to inflation, the last thing the central bank or the government wants is a fall so fast that it seems out of control. That would panic the financial markets and undo any stimulative effect that a cheaper currency would have.

Looking at the charts, JP Morgan projects that the yen faces its next major test at 103.50 to the dollar, not far below the 103 to 103.10 level the currency reached on May 17. If the yen drops through that support, the next target would be 105.5. That level marks a 61.8% Fibonacci retracement  from the yen’s 2007 high.

I think it’s extremely unlikely given the momentum behind the yen’s recent drop that the currency will stop on a dime at 103.

We may get some backing and filling as the markets move through support at 103, but I think the odds favor a move to 105 without too much market angst. I’d expect it to take longer, however, to take the yen through 105.

At the moment, the Wall Street consensus remains 110 by the end of 2013.

A second LNG plant gets a U.S. export license–the best stock pick on that news is Chicago Bridge and Iron

On Friday, May 17, the U.S. Department of Energy approved what is only the second permit to export liquefied natural gas from the United States. The permit went to the Freeport LNG project in Texas, a joint project of Freeport LNG Investments, ZHA FLNG Purchaser, Dow Chemical subsidiary Texas LNG Holdings and Turbo LNG, a subsidiary of Japan’s Osaka Gas. The permit will allow Freeport to export up to 1.4 billion cubic feet to gas a day. Subject to environmental review and final regulatory approval, Freeport plans to begin exports in 2017.

The permit went to Freeport, but I think the immediate profits will go to Chicago Bridge and Iron, the engineering company most likely to win the bulk of work on Freeport.

Like Cheniere Energy’s (LNG) Sabine Pass project in Louisiana, the first project to get an export permit, Freeport began its life back in 2005 as a terminal to import liquefied natural gas into the United States. With the U.S. boom in natural gas from shale, the flow has reversed. A total of 19 other projects are waiting for permits. Without a permit companies can export liquefied natural gas only to a short list of countries with which the U.S. has signed free trade agreements. That list doesn’t include big markets such as Japan. Two Japanese companies Osaka Gas and Chubu Electric had signed agreements in 2012 to acquire production from the first train at Freeport beginning in 2017. Freeport’s current plans call for spending $10 billion to build three production trains with a capacity of 1.9 billion cubic feet a day.

I don’t think this approval has a negative effect on Cheniere Energy. If anything it puts a time line on how long a lead Cheniere has in this market. Right now it looks like Cheniere will have two years when it has the U.S. LNG export market pretty much to itself and then an even longer period before enough U.S. competitors get their capacity on line and begin to depress LNG prices in overseas markets. Right now natural gas sells for $4 per million BTUs (British Thermal Units) in the United States, $10 per million BTUs in Europe, and $15 per million BTUs in Japan.

The big winners in the Freeport announcement—for investors anyway since they can’t invest in Freeport itself—are the engineering and construction companies, Chicago Bridge and Iron (CBI), Jacobs Engineering (JEC), and Fluor (FLR), for example, that will build these LNG plants.

The company in that group that benefits most from Freeport itself is Chicago Bridge and Iron, which worked on the front-end engineering and design for the plant and is a front-runner for a big share of additional contract work. (About $4 billion in total, I’d estimate.) Chicago Bridge and Iron has one of the sector’s biggest weightings toward LNG—the source of about 33% of the company’s profits now. Estimates put total capital spending on LNG in North America at about $30 billion from 2015-2020. The company has also formed joint ventures to work on liquefied natural gas projects in Australia and Papua New Guinea.

As of May 20, I’m adding shares of Chicago Bridge & Iron to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ with a December 2013 target price of $74 a share.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Cheniere Energy as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Moving to a higher target price on my stock pick Toyota Motor

Toyota Motor (TM in New York and 7203.JP in Tokyo) blew through my $120 target price on May 10 and kept going. The New York traded ADRs (American Depositary Receipts) traded at $127.26 just before the close on May 17.

As of May 17, I’m increasing my target price to $151 for the ADR. Toyota Motor is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . This stock pick is up 28.7% since I added it to the portfolio on February 5, 2013.

I added Toyota Motor to this portfolio as a way to play the decline in the Japanese yen being engineering by the Bank of Japan and the Abe government in Tokyo.

My reason for holding onto this position and increasing the target price is my belief that the yen at today’s close of 103.24 to the dollar isn’t the near the end of the drop in the yen. The consensus on Wall Street is that we’re headed through 105 to 110 by the end of the year. I think that’s conservative and that we’re likely to see 120 or so by the end of 2013.

But whatever your exact year-end target, a falling yen moves Toyota Motor higher in three ways. Read more