MorningWord 12/18/13: A number of large industrial companies have provided us with business updates and 2014 guidance in the past week. While industrial stocks have generally performed well in 2013, their outlook for 2014 is a bit subdued, particularly because of stagnant sales. Managements are pulling all the levers they can to maintain earnings growth, but increased sales would be an awfully big help.
So far this week, we’ve had reports from several major multinationals. On the positive side, FDX actually raised guidance to 8-14% earnings growth for 2014, from 7-13% previously, even though Fedex reported a miss for the most recent quarter (1.57 vs. 1.64 expected). While the stock initially traded a couple percent lower, it is now close to unchanged.
However, consistent with what we have heard from many multinationals over the past year, FDX management cited share buybacks and cost improvements as the main drivers of earnings growth over the next year. FDX has grown sales about 4% annually over the past 2 years, and similar growth is expected for the future, so earnings growth will have to come from improved margins, lower share counts, and lower taxes.
Meanwhile, earlier this morning, two auto-related giants, Johnson Controls and Ford, both reduced 2014 earnings guidance, and both stocks are lower in the pre-market. They both cited Asian growth as strong, while Ford expected a drop in North American profit (after a very strong 2013 performance), and JCI expected further weakness in its European unit given continued macro sluggishness.
On the plus side for Ford in 2013 is that sales growth has actually been 10%, substantially higher than the majority of S&P 500 companies. Earnings growth has increased 18%, so improving margins and better sales were both an aid to the overall business. Analysts expect sales to increase 5% over the next 2 years, though the guidance reduces those expectations.
However, JCI has only grown sales 1.5% per year over the last 2 years, far behind its 16% earnings growth in the last year. JCI has benefitted from the usual array of remedies that I mentioned at the start – buybacks, lower taxes, and cost reductions.
As we approach the start of 2014, we’ll be on the lookout for companies that are able to grow both sales and earnings. In our view, those are the stories for which there will be much greater appetite as this bull market approaches the 5 year mark. On the other hand, if earnings are growing without increased sales, we view that as a potential early warning sign to hit the exits.