Diversified industrial manufacturer Eaton Corporation (NYSE: ETN) posted some great numbers for 2Q 2008. Investors responded by pushing the stock down 8% as a result. Go figure. With the exception of its automotive segment, which saw a modest 2% decline in sales, all other divisions posted double digit sales increases with demand remaining strong going forward. 2Q sales increased 32%, net income increased 35%, while net income on a per share basis increased 24% The company posted these results despite the fact that oil prices increased 40% during the quarter.
The FAA recently awarded a $40 million contract for power quality equipment. The company's Hydraulic Launch Assist technology performed very well in tests on trash trucks. It reduced fuel costs by 25% and significantly reduced brake service costs. With diesel prices showing no signs of decline, demand for this technology will be very strong when it becomes commercially available in late 2008. CEO Alexander Cutter forecasts FY sales growth to be 3% in the U.S. and 5% internationally. FY operating EPS are forecast to grow 12-16%, resulting in EPS of $7.70-$8.00. At this rate of return, the stock is currently bargain-priced around $73.00
I know it doesn't matter at all. Right now we are so stuck on the banking problems and on the companies bleeding from higher energy prices that nobody cares about all of this cash, which will be used to shrink equity. They won't care because the banks, brokers and homebuilders, and the hobbled companies that use oil, have to issue so much equity that you can't see the effect of the equity shrinkage. But it will eventually matter. It has to matter that Deere has taken out 10% of its stock in the last four years. It does matter that Black & Decker (NYSE: BDK) (Cramer's Take) has eliminated almost 20% of its equity. Emerson's taken out 5%, same with Boeing (NYSE: BA) (Cramer's Take). There's just a huge amount of equity being shrunk.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from Alcoa (NYSE: AA) and General Electric (NYSE: GE) kicking things off last week, here's a look at what Wall Street is expecting from many of the companies scheduled to report this coming week.
Analysts surveyed by Thomson Financial are expecting the following companies to report a rise in earnings when compared to the same period of the previous year.
Nucor Corp. (NYSE: NUE): $1.80 EPS (36.6%) on sales of $6.4 billion (+53.0%)
Google Inc. (NASDAQ: GOOG): $4.74 EPS (24.9%) on sales of $3.9 billion (+41.6%)
Nokia Corp. (NYSE: NOK): 56 cents EPS (23.2%) on sales of $19.9 billion (+17.8%)
CSX Corp. (NYSE: CSX): 90 cents EPS (21.1%) on sales of $2.9 billion (+12.8%)
Altera Corp. (NASDAQ: ALTR): 27 cents EPS (18.5%) on sales of $346.7 million (+8.4%)
IBM (NYSE: IBM): $1.82 EPS (+17.6%) on sales of $25.9 billion (+9.0%)
eBay Inc. (NASDAQ: EBAY): 41 cents EPS (17.1%) on sales of $2.2 billion (+18.0%)
AZZ incorporated (NYSE: AZZ) makes electrical products that distribute power to and from generators, transformers, switching devices, and other electrical configurations. It also offers lighting products for the petroleum, food processing, and power generation industries. Its Galvanizing Services segment provides hot dip galvanizing to the steel fabrication industry. Competitors include General Electric (NYSE: GE) and Eaton Corporation (NYSE: ETN).
The company pleased investors late last month, when it reported fiscal Q1 EPS of 82 cents and revenues of $100.0 million. Analysts had been expecting 54 cents and $90.1 million. Incoming first quarter orders set a company record of $106.9 million. The book to ship ratio came in at 107%. Management also guided FY09 EPS to $2.95-$3.05 ($2.43 consensus) and FY09 revenues to $410-$425 million ($400.04M consensus).
After hitting a one-year high of $104.12 in July, the stock hit a one-year low of $66.27 in January. This morning, ETN opened at $87.94. So far today the stock has hit a low of $84.78 and a high of $87.94. As of 11:40, ETN is trading at $84.88, down $3.67 (-4.2%). The chart for ETN looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $100 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in seven weeks as long as ETN is below $100 at August expiration. Eaton would have to rise by more than 17% before we would start to lose money. Learn more about this type of trade here.
MOST NOTEWORTHY: Webster Financial, Eaton and Macrovision were today's noteworthy upgrades:
Keefe Bruyette upgraded shares of Webster Financial (NYSE: WBS) to Outperform from Market Perform on valuation as they feel the company is adequately capitalized and in a position to withstand the weakening credit markets.
JP Morgan upgraded Eaton (NYSE: ETN) to Overweight from Neutral citing bullish management comments at its conference last week.
Piper upgraded Macrovision (NASDAQ: MVSN) to Buy from Neutral citing the closure of the Gemstar deal.
OTHER UPGRADES:
Lehman upgraded U.S. stocks to Overweight from Underweight.
Goldman added Hess Corp (NYSE: HES) and Mosaic (NYSE: MOS) to its Conviction Buy List.
Novo Nordisk (NYSE: NVO) was raised at HSBC to Neutral from Underweight.
Kenexa Corporation (NASDAQ: KNXA) provides software, services and proprietary content that enable organizations to find and retain employees. The company's web-based applications assist clients in successfully addressing such issues as recruitment, skills testing and tracking of employee development. The firm also conducts clients' recruitment and hiring processes for them. Kenexa sells its software products and services to some 4,000 firms, primarily on a subscription basis. The company client list includes ConAgra Foods (NYSE: CAG), Eaton Corporation (NYSE: ETN) and Wachovia Corporation (NYSE: WB).
Kenexa pleased investors last week, when it reported Q1 EPS of 31 cents and revenues of $48.2 million. Analysts had been looking for 23 cents and $48.8 million. The CEO noted that Q1 saw a record number of new preferred partner customers sign with the firm. Management also guided Q2 EPS to 34-35 cents (34 cent consensus), Q2 revenues to $56-$57 million ($53.73M consensus), FY08 EPS to $1.47-$1.50 ($1.39 consensus) and FY08 revenues to $230-$235 million ($221.45M consensus).
TheStreet.com's Jim Cramer says lots of companies now thrive with crude up here.
Oil's not a tax on everything -- it's a tax on the consumer. That's what I come down to when I see the charts this weekend and ponder what's happening in so much of industrial America.
Company after company that I examine -- the new techs, as I call them -- actually benefit from higher oil prices. Or they can pass them on with ease, because of the worldwide demand being so strong.
Take all of the companies involved with making a Boeing (NYSE: BA) (Cramer's Take): Boeing itself, Alcoa (NYSE: AA) (Cramer's Take), Honeywell (NYSE: HON) (Cramer's Take) and Precision Castparts (NYSE: PCP) (Cramer's Take) being good examples. Each of these is necessary because the new Dreamliner burns lots less fuel, and with fuel the biggest airline cost, it stands to reason that higher energy prices make the plane more desirable even at a higher price point.
TheStreet.com's Jim Cramer says there's some reason for caution, but no reason to get out of the market here.
There all right there. Don't you feel it? Hundreds of stocks at resistance. Hundreds have formed a nice base. The Transports and the Dow are moving in synch. The earnings period surprisingly great, with so many companies not stung by the raw costs. Three straight up weeks, with all the commodity stocks showing signs of rolling over; most at crucial "must hold" levels except for gold, which has already crashed, making the inflation case much dimmer in the eyes of the traders.
Yet, you simply can't read the papers. They are too awful. The cost to the consumers for everything from food to gasoline is humongous and going higher, according to all the food execs I had on last week. We are getting nowhere near a bottom in housing. The layoffs, while not significant in the Labor Report on Friday, sure seem endless. The two major presidential candidates from the Democratic side want to tax the oil companies into oblivion, the leaders of the last year. Exxon (NYSE: XOM) (Cramer's Take) blew the quarter. So did GE (NYSE: GE) (Cramer's Take).
Too far, too fast, based on those grim items.
To me, this is the first week since the Bear Stearns (NYSE: BSC) (Cramer's Take) bottom that I think seems aimless.
But perhaps there's a "split the difference" way to approach this week: options expiration.
Parker Hannifin Corporation (NYSE: PH) manufactures fluid power systems, electromechanical controls and related components. Its Industrial unit offers hydraulic systems, filters, sealing devices, pneumatic components and electromechanical instrumentation to OEMs in various production and processing industries. The firm's Aerospace segment provides hydraulic, fuel, and pneumatic systems used in commercial and military airframe and engine programs. The Climate and Industrial Controls division makes refrigeration and air conditioning systems. The company employs more than 57,000 people in 43 countries around the world. Eaton Corporation (NYSE: ETN) and Honeywell International (NYSE: HON) are competitors.
Investors were pleased last week, when the firm reported fiscal Q3 EPS of $1.49 and revenues of $3.18 billion. Analysts had been looking for $1.34 and $3 billion. Management pointed to growth in many key markets, including aerospace. The firm also guided FY08 EPS to $5.40-$5.60, versus consensus of $5.28.
TheStreet.com's Jim Cramer says they can't be profitable with this huge cost – it's time to move on.
Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense. That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.
Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.
I have hated the airline stocks ever since 1985 when I recommended Delta (NYSE: DAL) (Cramer's Take) and my clients promptly dropped 50%. I reiterate that after the tremendous declines these stocks have, they are still worth avoiding. Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.
Eaton, a maker of industrial parts and systems, said that first-quarter earnings rose 5% as demand from international markets pushed sales higher. Net income rose to $247 million, or $1.64 per share, beating Wall Street expectations. Sales rose 12% to $3.5 billion. Eaton shares rose $1.09 in trading Monday to $80.39, but slipped 13 cents in after-hours trading.
J.B. Hunt, which provides truckload and intermodal shipping services, said its first-quarter profit fell 18% because of weak demand and a rising fuel prices. The company earned $36.4 million, or 28 cents per share, missing Wall Street estimates. Total operating revenue rose 10% to $878.4 million. Shares fell 31 cents to $29.15 Monday, and continued to fall in aftermarket trading.
Stanley Furniture, which makes wood furniture for the residential market, said its first-quarter profit tumbled 37%, but beat Wall Street's expectations. The company reported income of $1 million, or 10 cents per share. Sales fell 17% to $62.5 million. Shares fell 15 cents Monday, then plunged another $1, or 9.4%, in after-hours trading to $9.59.
Esterline Technologies (NYSE: ESL) is engaged in the design, manufacture, and marketing of engineered products and systems for application in the aerospace and defense industries. The Avionics & Controls unit makes communications systems, medical equipment, and interface systems for aircraft and military vehicles. The Sensors & Systems operation manufactures temperature and pressure sensors, as well as fluid and motion control products. The Advanced Materials segment makes elastomer products, combustible ammunition components and electronic warfare countermeasures. Boeing (NYSE: BA) is a major customer. Eaton Corporation (NYSE: ETN) is a competitor.
The company surprised investors late last month, when it reported Q1 EPS of $1.04 and revenues of $372.4 million. The Street had been expecting 59 cents and $342.3 million. The CEO noted that quarterly organic growth of nearly 25% was well balanced between the military and commercial businesses. Management also guided FY08 EPS to $3.35-$3.50, versus consensus of $3.17.
As the second quarter earnings crunch begins in earnest this week, the bear market has investors jittery and prognosticators spinning out dire warnings. In the wake of mixed results from 
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