For after the correction, think industrial stocks: Market history says this is their time
Are you in the right sectors of the stock market for this point in the economic recovery? (Yes, despite the stock market correction, we are still in an economic recovery.)
Solid data stretching back to 1945 argues that certain industries and sectors outperform during specific stages of any economic recovery. (The best work on this subject comes from Sam Stovall, the chief investment strategist for Standard & Poor’s Equity Research Services. His 1996 book Sector Investing is still the best resource on the subject to my mind.)
My first rule of investing is “Put every trend you can on your side.” Neglecting what we know about what sectors thrive when is in my opinion wasting an asset that could help you make bigger profits.
Stovall divides the economic cycle into four stages.
Update Johnson Controls (JCI)
Sure, Johnson Controls (JCI) beat Wall Street estimates by a huge 14 cents a share when it announced first quarter fiscal 2010 earnings before the stock market opened on January 22.
But the big news, the news that had the stock up 4.5% for the day as of 2:30 in New York, was the company’s blow out guidance for all of 2010. Johnson Controls now sees 2010 revenue of $33 billion. That’s up from the company’s earlier projection of $31 billion and well above the Wall Street analyst consensus of $31.7 billion. Earnings for fiscal 2010 will be in the range of $1.70 to $1.75 a share. The company had projected earnings of $1.35 to $1.45 a share. The Wall Street consensus was $1.53.
Update Johnson Controls (JCI)
You certainly can’t say that Johnson Controls (JCI) has turned the corner. But it does look like the corner is in sight.
Before the market opened on October 27 Johnson Controls reported earnings of 52 cents a share for the company’s fiscal fourth quarter of 2009. That beat the Wall Street consensus by a penny a share.
The problem is that the beat came from more successful than expected cost cutting rather than from increases in sales. Even though it came in $40 million above analyst projections, revenue, in fact, fell by 15.5% from the fourth quarter of fiscal 2008.
Revenue dropped in all three of the company’s business segments. Sales in what Johnson Controls calls the Automotive Experience segment (auto interiors) dropped by 14%. Power Solutions (aka batteries) showed a drop in sales of 14%. And the Building Efficiency unit (air conditioning and build energy management) witnessed a 16% drop in sales.
But units that had been in the red, such as Automotive Experience, returned to the black in the quarter even with the drop in sales thanks to aggressive cost cutting. And units that had been profitable saw margins, such as Power Solutions, saw operating margins increase.
The stock dropped on the earnings news, however, because the company issued what Wall Street decided was disappointing guidance for fiscal 2010. Earnings for the upcoming fiscal year will be $1.35 to $1.45 a share rather than the $1.54 Wall Street had projected. Revenue will be, the company projects, $31 billion. Analysts had been predicting $31.1 billion.
As I write the stock this at 2:15 p.m. (ET) is down 4.8% for the day.
I think that’s excessive and I’d use the day’s sell off to add to positions.
Update Johnson Controls (JCI)
I’m actually surprised (and maybe a little disappointed since I’m still building my position in these shares) that Johnson Controls (JCI) fell only 2.4% after issuing disappointing guidance on October 13.
The company told Wall Street analysts that it will earn 40 to 42 cents for the fiscal fourth quarter that ended on September 30. Sales will come to $7.9 billion. The earnings number was a scant one to three cents above analyst expectations.
But it was the guidance for fiscal 2010 that was most disappointing. The company said sales will climb just 9% to $31 billion and earnings to $1.45 a share. Analysts had been expecting numbers only slightly below those figures at $30.2 billion and $1.44 a share.
Those numbers aren’t what analysts who are expecting an economic turnaround in 2010 wanted to hear.
The problem seems to be in the company’s automotive interiors business. (Johnson Controls is the world’s largest maker of automotive interiors.)The company said revenue there will climb 13% in fiscal 2010 but margins will be just 1.3% to 1.6% instead of the 3% to 4% expected.
Buy Johnson Controls (JCI)
The long-term future for Johnson Controls (JCI) is in batteries for hybrid and electric cars, and systems for building-wide energy efficiency. Not that the near-term future is so bad. What with the recovery, slow though it might be, in the global auto industry. Johnson Controls knows how to make auto batteries. Lots and lots of them at once while keeping costs under control. The company has a 35% share of the global lead acid auto battery market after all. And that’s important, as important as technology, when it comes to grabbing a big share of the next generation lithium-ion batteries that will power the hybrid and electric cars of coming decades. Not that the company has ignored technology: it’s joint venture with the Saft Groupe adds key experience in lithium battery systems. Batteries currently make up about 15% of sales, while building efficiency systems account for another 37% of revenue. In the company’s fiscal third quarter, reported in July, Johnson Controls swung to a profit after two consecutive quarters of losses on the strength of cost cutting. Gross margin climbed to 14.9%. The company also told Wall Street to expect stronger profits sequentially in the fourth quarter in both the battery and building segments. As of September 8 I’m adding shares of Johnson Controls to the Jubak’s Picks portfolio with a target price of $31 a share by July 2010. (Full disclosure: I own shares of Johnson Controls in my personal portfolio.)
