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S&P equity analyst Joseph Agnese said on Nov.12 that Wal-Mart’s October-quarter EPS of 84 cents, vs. 77 cents EPS one year earlier, is 3 cents above our estimate. Agnese said Wal-Mart’s results benefited from increased store productivity and improved inventory management, despite a 0.4% decline in comparable-store sales excluding fuel, below his 1.0% estimate. He expects the company to aggressively price offerings this holiday season in an effort to drive sales growth by utilizing benefits from cost-reduction initiatives.

Due to the slower than expected comparable-store sales growth, Agnese raised his our fiscal 2010 (ending January) EPS estimate only one cent to $3.61 and kept his 12-month price target of $62.

Hewlett-Packard (HPQ)

Kaufman Bros. maintains buy; raises estimates, price target

After the close of trading Nov. 11, HP announced its intent to acquire 3Com for $2.7 billion. In addition, it preannounced upside for both its October and January quarters. On Nov. 12, Kaufman analyst Shaw Wu said he was “somewhat surprised” that 3Com was the networking company HP chose to acquire. “Juniper (JNPR) is viewed as a prized asset and No. 2 to Cisco (CSCO) but its market capitalization at $13 billion and likely acquisition premium are likely a bit daunting, he said in a note to clients. He believes the 3Com deal is a relatively low-risk, “bolt-on” acquisition.

Wu also said HP’s preannounced upside for both the October and January quarters is fairly consistent with his recent industry and supply chain checks and potential for better-than-seasonal trends. For the October quarter, he is now modeling $30.8 billion in revenue and $1.14 in earnings per share (EPS), up from prior forecasts of $29.7 billion and $1.11, respectively. For fiscal 2010, he expects $118.3 billion in revenue and $4.35 in EPS (up from $116.6 billion and $4.30). His new estimates do not include 3Com.

Wu raised his 12-month price target on HP to $57 from $54.

Brocade Communications Systems (BRCD)

Lazard Capital downgrades to hold from buy

Shares of Brocade Communications Systems Inc. fell in premarket trading Nov. 12 amid market talk the maker of networking gear would be hurt by Hewlett-Packard’s acquisition of 3Com. Lazard Capital analyst Ryan Hutchison downgraded his rating on the shares.

Hutchison said the deal dims the prospect of a partnership between HP and Brocade for corporate networking equipment. The acquisition of 3Com will fill “most of the holes” in HP’s networking portfolio, he wrote in a research note.

The worst is behind Elizabeth Arden Inc., SunTrust Robinson Humphrey analyst William Chappell said on Nov. 12 as he upgraded his rating on the shares, citing cost savings and sales opportunities at Wal-Mart Stores.

Chappell said the company’s purchase last year of Liz Claiborne’s fragrance portfolio boosted Elizabeth Arden’s U.S. and international opportunities. “These products not only gave Elizabeth Arden a strong set of top-selling products such as Juicy, Usher and Curve, but they also enabled the company to expand distribution of these products to its international channels,” Chappell wrote in a client note. Continue reading »

Taiwanese companies seeking to diversify might want to follow Simon Lin’s lead. He is CEO of Wistron, the manufacturing arm of Acer that was spun off in 2002 when Acer decided there was no glory in being a contract manufacturer. Wistron still shares with Acer a drab office tower in the low-rent Taipei suburb of Hsichih. The neighborhood is no match for Hsinchu, the giant tech park where TSMC has its digs, but it fits with Wistron’s low-key, low-cost image. The company, which had revenue of $13.5 billion last year, has already expanded far beyond PCs, making TVs and BlackBerry smartphones.

Still, as last year proved, things can turn south quickly, something many Taiwanese tech companies fully understand. So Acer, which last summer passed Dell to become the world’s No. 2 PC company (behind Hewlett-Packard (HPQ)), is moving into products such as smartphones and other mobile devices. Vizio, produced by Amtran Technology—a 15-year-old company that got its start making PC monitors—is now a top-selling brand of flat-screen TVs in the U.S. And notebook maker Quanta Computer is mulling production of devices such as cameras, gaming machines, and medical sensors. “Quanta will become a brand new company from now on,” vows Chairman Barry Lam.
These days, things look far better. TSMC’s plants are humming again, and its Taipei-listed shares are up 41% this year. But Chang is chastened. The era of easy double-digit growth for chipmakers “isn’t there anymore,” he says, taking a puff on his ever-present pipe. “We need to find new areas.” TSMC is stuck in a maturing industry, and its primary business of making chips for other companies is likely to grow just 8% annually in coming years. So Chang wants to boost TSMC’s presence in solar power and light-emitting diodes (LEDs). The two have technological overlap with chip production, but they offer far better margins and more potential. “They are going to be fast-growth industries,” Chang says.

At the depth of the global economic crisis, Taiwan Semiconductor Manufacturing Co. (TSM) was in trouble. With factories operating at just a fraction of capacity, Morris Chang—TSMC’s silver-haired founder—laid off hundreds of staffers, ordered the remaining workers to take unpaid leave, and took other cost-cutting steps such as dimming the lights in hallways. “It was terrible,” Chang says in his office on the eighth floor of “Fab 12,” a vast facility that serves as TSMC’s headquarters.

More ambitious diversification is coming soon. Lin, fresh from a Taipei meeting with Microsoft (MSFT) CEO Steve Ballmer, says the devices Wistron makes in the years ahead will have to connect to the Internet but won’t necessarily be computers. Lin also wants Wistron to develop businesses such as equipment repair and recycling, which is sure to pick up as more governments mandate clean disposal of old tech gear. To that end, Wistron in October invested $8 million in a company that recycles computer motherboards. Within a few years, Lin predicts, Wistron could have a $1 billion business in tech recycling. “No one has a crystal ball to say how long [the PC business] will last,” he says. “But we are not sitting here just waiting for the sunset of the PC industry.”

Executives across Taiwan’s tech industry are making similar strategic shifts. Shi-Wei Sun, chief at chipmaker United Microelectronics (UMC), in August launched a division focusing on solar and LEDs. Peter Chou, CEO of smartphone maker HTC, is reducing his company’s reliance on Microsoft Windows-based handsets, adding more phones using Google’s Android operating system. And Au Optronics (AUO) is plotting a move beyond its traditional LCD displays, which require investments of billions of dollars every few years for companies to stay ahead of rivals. “Coming out of the recession, AUO is a completely different company,” says C.T. Liu, chief of AUO’s consumer display business. First up, he says, will be e-readers and electronic paper, newfangled displays that can be rolled or folded. Both technologies will let AUO capitalize on its display-making expertise.

Why the urgent shifts? While Taiwan plays a vital role in the global tech industry, it is strongest in low-margin businesses such as PCs and components. That has created a dead end for many manufacturers, which face constant pressure from Hewlett-Packard (HPQ), Dell (DELL), Sony (SNE), and other big customers to cut prices. “The business model is kind of hitting the wall,” says Bill Wiseman, a partner with McKinsey in Taipei. So companies are preparing for the post-PC era by diversifying into other, more mobile devices and building up their own brands.

True, things aren’t exactly dire for the island’s tech titans. The Taiwanese benchmark index of electronics stocks is up 76% and, thanks largely to strong demand from China, orders keep coming for more chips, PCs, and other devices. Taipei has become one of Asia’s most livable cities: With so much of its heavy industry now on the mainland, the air is much cleaner than in years past. And with relations between Beijing and Taipei on the mend, increasing travel and trade between the two sides will speed integration and further lift the Taiwanese economy. Taipei’s Songshan Airport, for decades a sleepy terminal for short hops across the island, now buzzes as the hub of direct flights to mainland cities. Chinese authorities “are much friendlier” toward Taiwanese, says HTC Chairman Cher Wang, who recently jumped on a plane in Chengdu at noon and was back in Taipei by 3 p.m. “They feel that we’re brothers who used to have a dispute but now are settling,” she says.

While PCs may rebound next year as the economy picks up and companies upgrade to Windows 7, they will surely be a smaller part of the tech mix as the market shifts. And the island’s electronics makers will thrive in that post-PC era, says Jen-Hsun Huang, CEO of chipmaker Nvidia, who grew up in Taiwan before moving to the U.S. “If every cell phone in the world becomes a mobile computer, if every TV becomes a connected TV,” he says, “holy cow!”

Stocks ended mostly higher Tuesday, after swinging between gains and losses, as an increase in commodity prices and corporate dealmaking abated some of investors concerns about the economy. The Dow Jones industrial average slipped 17 points, after rising 77 on Monday, while broader indexes rose modestly.

On Wednesday, the ISM said its U.S. non-manufacturing index dipped to 50.6 in November, from 50.9 in September. The business activity index was essentially unchanged at 55.2 from 55.1. The employment component fell to 41.1 from 44.3. New orders inched up to 55.6 from 54.2. Prices paid rose to 53.0 after diving over 14 points in September to 48.8. The composite ISM manufacturing and non-manufacturing index was steady at 51.2 from 51.1.

“That’s not quite as good as expected,” said Action Economics analysts in a website posting Wednesday. “[N]evertheless it’s still well off of last November’s all time low 37.4″ reading, analysts said.

Also Wednesday, ADP reported that private payrolls fell 203,000 in October, from a revised drop of 227,000 in September (from -254,000). The goods producing sector lost 117,000 jobs, while manufacturing saw a 65,000 decline. The service sector lost 86,000 jobs.

Investors eager for more information on the battered labor market will get data on weekly jobless claims on Thursday and the government’s employment report for October on Friday.

The latest earnings reports were mostly upbeat. Comcast (CMCSA) reported a 22% increase in its third-quarter earnings. The nation’s largest cable TV operator also said it sees signs the economy is improving.

Media conglomerate Time Warner Inc.) reported a 38% drop in third-quarter profit, but the results beat expectations. The company also boosted its full-year earnings forecast.

Pulte Homes’ (PHM) third-quarter loss widened, but the homebuilder said it has continued to see stabilization in the housing market.

Oilfield services giant Baker Hughes (BHI) reported a third quarter profit of 18 cents per share, vs. a profit of $1.39 a year earlier, as revenues dropped 26%.

Marsh & McLennan Cos. (MMC) posted a third-quarter profit of 41 cents per share, vs. a loss of 2 cents one year earlier, as lower expenses offset a 10% revenue decline at the provider of risk and insurance services.

U.S. stocks finished mixed Wednesday as price gains fueled by the Federal Reserve’s decision to leave interest rates unchanged gave way to late profit taking, particularly among financials and techs.

Earlier, the market had been higher as investors breathed a sigh of relief that the Fed had opted to keep interest rates low for an “extended period,” and that it saw signs of a pick-up in the economy. Continue reading »

Ads in Mobile Apps

But Sterling said AdSense for Mobile was still “fairly undeveloped.” By contrast, he says, AdMob has richer advertising formats, especially ads inside mobile apps. These mini-programs have become enormously popular, and developers have concocted more than 100,000 of them for the iPhone. Software programmers are rushing to create apps for other smartphones, including those from Palm (PALM) and Research In Motion’s (RIMM) BlackBerry. Some 12,000 are available for Android. Ads are seen as the key revenue driver for many of these apps.

At least one analyst compares AdMob to DoubleClick, a company purchased by Google for $3.2 billion last year. DoubleClick serves as a go-between for advertisers and Web sites. “To us, AdMob looks in some ways to be a DoubleClick for the mobile Web,” Broadpoint.AmTech analyst Ben Schachter said in a note to clients. “It should help not only to provide more relationships with mobile ad publishers and buyers, but also to provide a tested technology platform for monetization of mobile inventory and the delivery, tracking, and reporting of mobile ad campaigns.”

Acquiring the team at AdMob, which employs about 140 people, was as important as the technology in accelerating Google’s mobile display ad efforts, Google executives said in an interview. “We got a chance to get an unbelievable engineering team,” says Vic Gundotra, a Google vice-president for engineering. Susan Wojcicki, Google’s vice-president for product management, added that AdMob founder Omar Hamoui is “really a visionary in this space.”

In a move likely to give a big boost to the mobile-phone ad market, Google announced on Nov. 9 that it’s buying AdMob, a provider of mobile ad technologies, for $750 million in stock.

If approved, the acquisition would provide Google (GOOG) with a key set of technologies to expand its advertising business beyond search-related text ads that make up the bulk of revenue. “Google could have built this itself, but this gives them a head start,” says mobile analyst Greg Sterling of Sterling Market Intelligence. “It will thrust Google into the forefront of mobile display ads.” Google has already pushed into the wireless market by backing the development of Android, an operating system used in smartphones such as Motorola’s (MOT) new Droid, carried by Verizon Wireless.

Google’s third-largest acquisition to date, AdMob would give its new owner the ability to serve display ads, the pictorial banners that are the chief revenue source for most Web sites, to cell phones and other mobile devices. Google last June introduced a program called AdSense for Mobile in a bid to land display ads on mobile phones, akin to its AdSense program, which places ads on conventional Web sites. Continue reading »

first see web User say

Kraft as a global food company lacks vision, strategy and gumption. Kraft has always tried to buy growth externally rather than grow organically which is harder but more durable. Whether it is Nabisco or UB or Danone’s biscuit business the argument has always been that size will give it scale & reach, entry to emerging markets or categories with higher margins and after every acquisition the growth of the combined company has slowed down to Kraft’s historical growth rate of 2-3%. The bigger Kraft gets the slower, less focused and less sharper it gets. What is surprising is that neither common shareholders nor institutional shareholders / analysts seem to learn from past experiences and continue to back a stock which for last 8 years has languished below IPO price. Only one shareholder, Philip Morris, the parent company recognized this fact and spun it off as soon as possible.

from A user

Isn’t Kraft (and its parent company) big enough already? If Cadbury is absorbed into this company, it could lose the attributes that have made it successful.

from B user

Cadbury: access to emerging economies

Kraft macaroni-and-cheese may be an American favorite, but it won’t necessarily catch on in China or India. Sweets are different. Around the world, “candy seems to attract consumers who want to try new things,” Van Horn says.

As people in emerging economies earn more, they are eager to try Cadbury’s global brands, which include chocolate bars, as well as Dentyne and Trident gum. Cadbury has built a global business with access to the emerging economies that Kraft wants to penetrate.

The question, however, is how much Kraft is willing to pay for all this. On Nov. 9, Kraft submitted a hostile bid for Cadbury on the same terms as a September offer that was rejected. The offer valued Cadbury at £9.8 billion, or $16.4 billion in cash and stock. But because the value of Kraft’s shares has been falling, the offer of 717 British pence per share was worth about 4% less than it was two months ago.

Cadbury chairman Roger Carr called the offer “derisory.” “The repetition of a proposal, which is now of less value and lower than the current Cadbury share price, does not make it any more attractive,” Carr said in a statement recommending that shareholders reject Kraft’s bid.

Investors in both companies are in a difficult spot. Kraft’s announcement on Nov. 9 begins what could be a long process of posturing and negotiation by executives on both sides.
Shareholder Buffett: Don’t overpay

On the one hand, a Cadbury acquisition would bring benefits to Kraft. But Kraft has said it doesn’t want to pay so much that it risks its credit rating or dividend. On Nov. 9, Standard & Poor’s said that Kraft’s credit rating remains on “creditwatch with negative implications,” due to the bid.

Warren Buffett, chairman of Berkshire Hathaway (BRKA), is a Kraft shareholder. The famous value investor has publicly pushed Kraft not to overpay.

Cadbury’s stock—boosted by Kraft’s bid—could sink again if no acquisition occurs. Further weakening Cadbury’s negotiating strength is the fact that no other bidders have emerged.

Kraft’s bid has encountered resistance in Britain from those who don’t want to see a U.S. buyer for a treasured company. One Cadbury heir has called Kraft “an American plastic cheese company.”

If you boil down the motivations behind Kraft Foods’ (KFT) hostile bid for Cadbury (CBY), you reach an undeniable fact: People all over the world love candy, gum, and chocolate.

They love their chosen confection brands so much that they’re unwilling to accept generic substitutes. “When someone gets attached to a favorite candy or chewing gum, that loyalty lasts for a long time,” says George Van Horn, senior analyst at industry research firm IBISWorld.

People are willing to pay for their treats, even during a recession. Confections are “viewed as an affordable luxury,” says Morningstar (MORN) analyst Erin Swanson.

Because confections have little store-brand competition and sales stay steady even during downturns, food companies such as Kraft envy Cadbury’s profit margins. A further factor makes them envy its growth prospects: Candy travels well.

All this could come down to an argument about size. In the last 12 months, Kraft Foods had revenue of about $40.3 billion while Cadbury had sales of £5.7 billion, or $9.5 billion.

By combining her company with Cadbury, Kraft Chairman and Chief Executive Irene Rosenfeld would achieve the size and global reach to compete with such rivals as Nestlé (NESN). She says the new company could find $625 million in savings and synergies and would help Kraft better access markets in India, South Africa, and Mexico.
economies of scale in food businesses

“Purchasing Cadbury would fast-forward Kraft’s bid to build a larger emerging-market presence and would no doubt offer an infrastructure [in key countries] that would take years to build and perfect on its own,” wrote Stifel Nicolaus (SF) analyst Christopher Growe on Nov. 9.

Size is an advantage in the food business, where economies of scale can be significant, says Steven Rogé, portfolio manager at R.W. Rogé & Co. Size also helps a company negotiate with giant retailers and suppliers. “In an age when you’re trying to sell to the Wal-Marts (WMT) of the world, you need size and scale,” Rogé says.

It’s an argument that has swayed other companies. A year ago, Mars completed a buyout of Wrigley.

In his statement, Cadbury’s Carr made an effort to rebut the big-is-better argument. By itself, Cadbury has “a sharp category focus,” Carr said. A merger “involves the unattractive prospect of the absorption of Cadbury into a low-growth conglomerate business model.”

It could be early in 2010 before Cadbury’s fate is known. “This is simply the first concrete step in what we expect to be a protracted process,” wrote JPMorgan (JPM) analyst Terry Bivens.

The dealmaking will test the future of Kraft’s growth strategy as it determines the value of Cadbury’s global reach and lucrative confection brands. Meanwhile, Cadbury shareholders must decide if they’re willing to risk a loss in stock price to keep the company independent.

PIMCO CEO Mohamed El-Erian highlighted the 10.2% U.S. jobless rate as a confirmation that the economic problem is becoming “deeper and more protracted,” according to Reuters headlines. He said the unemployment report put the jobless issue “front and center” on the U.S. political agenda. PIMCO has been consistent in discouraging the Fed from prematurely exiting quantitative easing and accommodative policy, notes Action Economics. El-Erian warned “It’s not just the increase in the headline number to 10.2%. It’s also about the longer-term nature of unemployment, the increase in underemployment, and the prospect for only a very gradual recovery.”

In company news Friday, Fannie Mae (FNM), the largest provider of funding for U.S. home loans, said bad mortgages and a federal foreclosure prevention program left it with a $18.9 billion loss, forcing it to tap the Treasury again to plug a hole in its net worth. Fannie Mae , seized by the government last year, said the quarterly loss stemmed from $22 billion in credit-related expenses. These included charges on mortgages it bought out of securities as it modified loans under President Barack Obama’s foreclosure prevention plan. The company also boosted its provision for credit losses in future quarters, and said it expects those impairments to increase this quarter and through 2010.

U.S. stock indexes closed higher Friday as investors snapped up industrial and other selected issues after an earlier market decline that was fueled by news the U.S. economy lost 190,000 jobs and the jobless rate hit a 26-year high of 10.2% in October. The late rally drove the Dow industrials above 10,000 for a second day.

On Friday, the 30-stock Dow Jones industrial average finished higher by 17.46 points, or 0.17%, at 10,023.42. The broad Standard & Poor’s 500-stock index was up 2.67 points, or 0.25%, at 1,069.30. The tech-heavy Nasdaq composite index gained 7.12 points, or 0.34%, to 2,112.44.

On the New York Stock Exchange, 15 stocks were higher in price for every 14 that declined. Breadth on the Nasdaq was 14-12 negative. Trading was moderate.

Market watchers cited by S&P MarketScope said some traders discounted the jobs data, while other unwound positions ahead of the weekend.

Starbucks (SBUX) shares gained following its better than expected earnings report and guidance.

General Electric (GE) shares jumped after an Oppenheimer analyst upgraded the conglomerate to outperform from perform.

Shares of home-improvement retailers Home Depot (HD) and Lowe’s Companies (LOW) climbed after Bank of America Merill Lynch upgraded both companies to buy from underperform.

Treasuries were flat after an earlier bounce on the jobs report. The dollar index rose.

December gold futures were up $6.00 to $1,095.30 per ounce in afternoon trading, but down from a record $1,101.90 achieved earlier in the session.

The Labor Dept. reported Friday that U.S. payroll employment fell 190,000 in October, just a bit worse than the 175,000 expected, but the unemployment rate jumped to 10.2% from 9.8%, much higher than the small rise to 9.9% expected by the market. The 190,000 drop in payrolls was concentrated in the goods-producing sector, with construction down 62,000 and manufacturing down 61,000. Government employment was unchanged, but retail lost another 40,000 jobs. Hourly earnings rose five cents (0.3%), while weekly hours were unchanged. The September payroll drop was revised to 219,000 from the 263,000 reported last month.

“Although the market usually focuses on the payroll report, the sharp jump in the unemployment rate will draw most eyeballs today, and probably reverse much of yesterday’s strong [equity] gains,” said Standard & Poor’s chief economist David Wyss in a note Friday.

But market players may have focused on a potential mitigating factor in the report: upward revisions of job losses in September and August.

American International Group (AIG), the insurer bailed out by the U.S. government, posted its second straight profit in the third quarter, helped by recovery in the value of its investments. Net profit was $455 million, or 68 cents a share, compared with a loss of $24.47 billion, or $181.02 a share, in the year-earlier quarter. The results included $1.95 billion in special gains, including from improvement in the value of securities held by AIG Financial Products, the unit largely responsible for AIG’s massive losses in 2008, which led to the U.S. bailout. Adjusted profit, excluding realized gains and losses, was $1.9 billion, or $2.85 a share.

In other economic news Friday, U.S. wholesale sales rose 0.7% in September, and inventories fell 0.9%. The 1.0% rise in August sales was revised up to 1.1%. Petroleum sales increased 1.0% after a 7.0% August increase. Excluding petroleum, sales were up 0.6% in September vs. a revised 0.4% gain in August (was 0.3%). Durable sales were up 0.7% after a revised 1.5% gain in August (was 1.2%). Nondurable sales rose 0.6% from 0.7% previously (revised from 0.9%). For inventories, the September data were mixed. Excluding petroleum, inventories declined 0.9%. The inventory-sales ratio fell to 1.18 1.20 previously. The ratio was as high as 1.34 in January.

The Group of 20 leading nations will agree this weekend it is too early to pull the plug on emergency support for the global economy and launch a new system of checks to help rebalance world growth and prevent future crises. British finance minister Alistair Darling is hosting the third meeting of G20 finance ministers and central bankers this year in St Andrews, Scotland, aiming to put flesh on the bones of agreements made at a leaders’ summit in Pittsburgh in September. Since then there have been growing signs that the world is finally coming out of the deepest downturn in decades and that things may be getting back to normal after a crisis that wiped out some of the biggest financial institutions.

The European Central Bank on Thursday took a first small step towards easing out its crisis steps — ultra-low interest rates and cash injections for the economy — by signaling one-year loans to banks will not be repeated next year. But Darling said it would be premature to declare victory over what has been the worst financial crisis since the 1930s and the extraordinary stimulus countries all around the world had thrown into their economies had to stay in place for now.

Many in February and March were predicting the worst for the economy and financial system, and panicked investors pushed stock values to dirt-cheap levels. Especially hard-hit were equities seen as risky—companies pummeled by the recession or loaded up with too much debt. Having apparently survived their brush with death, many of these companies saw their share prices double, triple, or quadruple. “This a rally that has been led by the risky stuff,” says John Buckingham, chief investment officer at Al Frank Asset Management.

The rally has been very generous to some sectors while it bypassed other areas of the market. For example, according to Standard & Poor’s, the technology sector is up 48% in 2009, and the consumer discretionary sector has jumped 35%. By contrast, the telecommunication sector has languished, down 7% this year, while utilities have gained less than 3%.

Thus, there are wide swaths of the market that have been left behind by the broader market rally. That could be an opportunity for investors looking for stocks set to move higher, Buckingham says. “Investors should be gravitating toward the names that really haven’t had a great performance in the [market] recovery,” he says.
Verizon’s Dividend Attractive

Continue reading »

Developments overseas also bode well for U.S. industry. A weak dollar makes U.S. products more competitive on the global marketplace. (Though a weak dollar can also make manufacturing more expensive by, for example, raising the costs of imported fuel.)

Judging by the U.S. Dollar Index, which measures the greenback against a basket of world currencies, the dollar has lost 16% of its value since its recent peak in March.

Upcoming Earnings Reports

Earnings reports may give investors a better sense of what’s really going on. Conglomerate General Electric (GE), which includes large industrial businesses, reports earnings on Oct. 16. More big industrial names report results the following week. On Oct. 20, United Technologies (UTX) and Caterpillar (CAT) unveil earnings. On Oct. 22, package-delivery giant UPS (UPS) reports, followed on Oct. 23 by Honeywell (HON) and Nucor (NUE).

Investors and economists will be looking to see how strongly these firms are recovering from the recession, and whether it can continue. “The real question is how strong the recovery is going to be over the next several months,” says Keith Hembre, chief economist at First American Funds.

There are a few reasons to be optimistic. Manufacturing is jumping off a very low base. One way to measure that is freight traffic. Longbow Research analyst Lee Klaskow noted Oct. 15 that Union Pacific (UNP) intermodal rail volumes are now up 37.7% from March. For all railroads, so-called originated intermodal volumes are at their highest point of the year.

Since the economic turmoil of late 2008 and early 2009, companies have been liquidating their inventories at a rapid rate. Eventually, those inventories need to be replenished. Deutsche Bank (DB) Chief U.S. Economist Joseph LaVorgna reiterated his case Oct. 15 “about the significant contribution inventories will make to GDP growth over the next few quarters.”

At the very least, it’s clear that U.S. manufacturing has stopped its dramatic decline. That reality is reflected in economic data, recent corporate earnings reports, and especially stock prices.

According to data provider Capital IQ, stocks classified as industrial are up 27% in the last three months, beating the broader Standard & Poor’s 500-stock index by more than six points. Only the materials sector—which is closely linked to industrial activity—and the financial sector have done better over the last quarter.

But though the stock market signal is clear, other data can be muddy. On Oct. 15, the U.S. Empire State index surged from a reading of 18.88 in September to 34.57 in August, much better than economists were expecting. But on the same day, the U.S. Philadelphia Fed index, which measures economic activity in a different region, slipped from 14.1 in September to 11.5 in October.

Economists said the Empire State reading showed manufacturing accelerating the recovery that began in the summer, while the Philly number suggested progress was slowing a bit.

“The U.S. needs to export more and import less, and a weaker dollar will help it do that,” says Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN).

Also, the world economy seems to be recovering from recession faster than the U.S. economy, a good sign for companies like Caterpillar that sell lots of products overseas.

Exports “could be the key sustaining force in the manufacturing expansion,” Hembre says.

Gary Wolfer, chief economist at Univest Wealth Management (UVSP), argues the world—and U.S.—economy is set to bounce back strongly.

“To me, a key indicator right now, besides the stock market, is energy prices,” he says. Oil, which traded up 3.5% to almost $78 per barrel on Oct. 15, is being driven higher not by weather or inventory problems but by “the perception of a very strong global rebound.”
PPG Industries Expects Modest Recovery

An early test of how industry is doing came from an Oct. 15 earnings report from PPG Industries (PPG), which makes paints, coatings, glass, and other products. Though sales were down 24% from a year ago, earnings were 96¢ per share, up from 70¢ a year ago. That pushed PPG’s stock 0.9% higher to 62.08, capping an 88% run since mid-March.

PPG Chairman and Chief Executive Charles Bunch sounded cautiously optimistic about global economic conditions. Translation of currency from abroad to the U.S., Bunch said in a statement, “which had been a headwind for PPG all year thus far, will likely shift to a tailwind,” he said. However, he added, “we anticipate only modest improvement in the overall economy” in the fourth quarter.

The U.S. economy needs industrial firms like PPG, Caterpillar, and UPS to do well, if only because so many other parts of the U.S. economy—from finance to retail to home construction—remain depressed.

Gambera worries the recovery is fragile. “We are all expecting that the recession is over,” he says. But, “if there is not a bit more action in manufacturing and retail, I’m afraid we will continue being on the edge.”

Industrial firms might not need a blockbuster third quarter to keep hopes for an economic recovery alive. But any sign of a weakening in manufacturing demand ahead would be deeply troubling to bullish investors and optimistic economists.

Weak Dollar Helps Exports

Developments overseas also bode well for U.S. industry. A weak dollar makes U.S. products more competitive on the global marketplace. (Though a weak dollar can also make manufacturing more expensive by, for example, raising the costs of imported fuel.)

Judging by the U.S. Dollar Index, which measures the greenback against a basket of world currencies, the dollar has lost 16% of its value since its recent peak in March.

Earnings reports may give investors a better sense of what’s really going on. Conglomerate General Electric (GE), which includes large industrial businesses, reports earnings on Oct. 16. More big industrial names report results the following week. On Oct. 20, United Technologies (UTX) and Caterpillar (CAT) unveil earnings. On Oct. 22, package-delivery giant UPS (UPS) reports, followed on Oct. 23 by Honeywell (HON) and Nucor (NUE).

Investors and economists will be looking to see how strongly these firms are recovering from the recession, and whether it can continue. “The real question is how strong the recovery is going to be over the next several months,” says Keith Hembre, chief economist at First American Funds.

There are a few reasons to be optimistic. Manufacturing is jumping off a very low base. One way to measure that is freight traffic. Longbow Research analyst Lee Klaskow noted Oct. 15 that Union Pacific (UNP) intermodal rail volumes are now up 37.7% from March. For all railroads, so-called originated intermodal volumes are at their highest point of the year.

Since the economic turmoil of late 2008 and early 2009, companies have been liquidating their inventories at a rapid rate. Eventually, those inventories need to be replenished. Deutsche Bank (DB) Chief U.S. Economist Joseph LaVorgna reiterated his case Oct. 15 “about the significant contribution inventories will make to GDP growth over the next few quarters.”

At the very least, it’s clear that U.S. manufacturing has stopped its dramatic decline. That reality is reflected in economic data, recent corporate earnings reports, and especially stock prices.

According to data provider Capital IQ, stocks classified as industrial are up 27% in the last three months, beating the broader Standard & Poor’s 500-stock index by more than six points. Only the materials sector—which is closely linked to industrial activity—and the financial sector have done better over the last quarter.

But though the stock market signal is clear, other data can be muddy. On Oct. 15, the U.S. Empire State index surged from a reading of 18.88 in September to 34.57 in August, much better than economists were expecting. But on the same day, the U.S. Philadelphia Fed index, which measures economic activity in a different region, slipped from 14.1 in September to 11.5 in October.

Economists said the Empire State reading showed manufacturing accelerating the recovery that began in the summer, while the Philly number suggested progress was slowing a bit.

“The U.S. needs to export more and import less, and a weaker dollar will help it do that,” says Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN).

Also, the world economy seems to be recovering from recession faster than the U.S. economy, a good sign for companies like Caterpillar that sell lots of products overseas.

Exports “could be the key sustaining force in the manufacturing expansion,” Hembre says.

Gary Wolfer, chief economist at Univest Wealth Management (UVSP), argues the world—and U.S.—economy is set to bounce back strongly.

“To me, a key indicator right now, besides the stock market, is energy prices,” he says. Oil, which traded up 3.5% to almost $78 per barrel on Oct. 15, is being driven higher not by weather or inventory problems but by “the perception of a very strong global rebound.”
PPG Industries Expects Modest Recovery

An early test of how industry is doing came from an Oct. 15 earnings report from PPG Industries (PPG), which makes paints, coatings, glass, and other products. Though sales were down 24% from a year ago, earnings were 96¢ per share, up from 70¢ a year ago. That pushed PPG’s stock 0.9% higher to 62.08, capping an 88% run since mid-March.

PPG Chairman and Chief Executive Charles Bunch sounded cautiously optimistic about global economic conditions. Translation of currency from abroad to the U.S., Bunch said in a statement, “which had been a headwind for PPG all year thus far, will likely shift to a tailwind,” he said. However, he added, “we anticipate only modest improvement in the overall economy” in the fourth quarter.

The U.S. economy needs industrial firms like PPG, Caterpillar, and UPS to do well, if only because so many other parts of the U.S. economy—from finance to retail to home construction—remain depressed.

Gambera worries the recovery is fragile. “We are all expecting that the recession is over,” he says. But, “if there is not a bit more action in manufacturing and retail, I’m afraid we will continue being on the edge.”

Industrial firms might not need a blockbuster third quarter to keep hopes for an economic recovery alive. But any sign of a weakening in manufacturing demand ahead would be deeply troubling to bullish investors and optimistic economists.

Not that growth managers aren’t finding stocks to buy. “Yes, it is not as easy to find growth these days, but there is still ample opportunity,” says J. Stephen Lauck, chief executive of Ashfield Capital Partners. Lauck, for example, likes technology and semiconductor stocks.

Tech has been a popular and, recently, lucrative investment for growth managers. Asked about the current environment, many growth managers insist that growth stocks will outperform other parts of the market going forward. For one thing, Lauck says, “in a slow-growth environment, growth companies will shine.” Growing companies also tend to generate consistent cash flow, have stronger balance sheets, and often have a presence overseas, where economic growth seems to be stronger than in the U.S.

The explosive stock market rally of the last seven months has had a wide range of effects on growth managers’ performance. Those who did the best were very aggressive managers, who favor riskier growth stocks, says Morningstar (MORN) fund analyst David Kathman. But many of those managers had a terrible 2008.

Millen’s Jensen growth fund favors safer growth names, and so it has lagged during the recent rally. Jensen has “a really good long-term record, but they tend to do poorly in these speculative growth markets,” Kathman says.

Millen says the rally in low-quality stocks could continue for a while, but eventually the market will reward higher-quality names. His fund has purchased stocks like medical device firm C.R. Bard (BCR), which he praises as a steady, consistent grower.

The U.S. economy has spent almost two years shrinking, and Standard & Poor’s 500 corporate earnings have dropped more than 25% in the past year. It’s not an easy environment if you’re an investor looking for growth.

Investors who embrace the value investing strategy have their own problems these days, especially with the stock market up 57% in the past seven months. But the challenges are no less daunting for growth investors, who favor companies that they believe have strong future growth prospects.

The biggest problem for growth is the lack thereof. “It’s safe to assume companies are not going to grow as fast in the next 10 years as in the last 10 years,” says Bob Millen, portfolio manager of the Jensen Fund

Hard to Forecast Markets

Flummoxed by Wild Swings

Health-care stocks have traditionally been a key feature of growth portfolios, DiSisto notes. But many managers are wary because of uncertainty surrounding health-care reform proposals being discussed in Washington. “Until you get some clarity out of Washington what health-care reform is going to look like, managers are taking a cautious approach to that sector,” he says.

Growth and value managers alike have been flummoxed by the stock market’s wild mood swings over the past few years. An individual company’s true value or its growth prospects have been almost ignored in favor of broad economic and financial forces.

Many growth managers are hoping that, eventually, companies with solid, consistent growth will be rewarded. But, in these shaky times, there are no guarantees that will happen.

Other managers may be adopting his approach. “If the economy [grows] slowly, the aggressive stuff won’t do as well,” Kathman warns. Thus, “there is a tendency for a lot of managers to be more cautious going forward.”

Keith Goddard, president of Capital Advisors and manager of the Capital Advisor Growth Fund (CIAOX), also is steering his investments toward more conservative growth stocks. He owns Wal-Mart (WMT) and Procter & Gamble (PG), two well-known companies that are likely to grow but unlikely to give investors any nasty surprises. Stocks like these, which Goddard calls “big, blue chip growth stocks,” have sat out much of the market’s recent rally. To Goddard, that’s a sign they still have room to move higher. “For everyone who is frustrated that they’ve missed this move in the market, there is some solace,” Goddard says. By some measures, the cheapest stocks in the market are also the safest, he says.

No one can be sure the economy will grow slowly in coming years. It could fall back in recession, or the recovery could be much faster than anticipated.

That makes it difficult to forecast market conditions, and it makes predicting profits very difficult. “That’s one of the common themes we [hear] from growth managers, a lack of visibility of earnings,” says William DiSisto, who monitors growth-focused mutual funds for Morgan Stanley Smith Barney (MS). Growth investors are, by nature, focused on the future at a time when the future is especially cloudy.