Why Are These Stocks Neglected by Investors?

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The earnings season is going on, and it seems like investors have hardly taken the time out from staring at the Apples and Googles of the equity world to focus on a sector like electrical equipment manufacturers. In fact, I probably wouldn't be wrong if I said that General Electric is the only company that investors know in this particular sphere. After briefly discussing the expected performance of this industry, I will give a concise earnings preview of three companies that are expected to announce their quarterly earnings in a day or two.

Electrical Equipment Manufacturers

I kept hearing from the sell-side in the September’s earnings season that the investor sentiment is negative currently, but I expected a rally at the year-end. However, nothing of that sort happened. That being said, there are two things that might be in the cards that have sent bullish signals to the market regarding the electric equipment industry.

1)      A potential short cycle catch-up

2)      Re-acceleration of the Chinese economy

Kennametal (NYSE: KMT)

2Q: After the shocking miss in Q1 2013, I think that a surprise on that scale is very unlikely for Q2, but I do see some downside risk to consensus for Q2, given that the Street assumes a better trend in December than the -8% November 3MMA orders rate (the Street is assuming -6% organic sales y-o-y in the last quarter).

2013 Outlook: There is a very high probability that Kennametal cuts its EPS guidance range from $3.40-$3.70, towards a range of $3.15-$3.45 (or it may narrow it by $0.10, given we are halfway through the financial year now), due to the very weak first half sales performance. A cut of this magnitude seems now to be embedded in investor expectations. Therefore, only a limited downside to the share price is expected in this scenario.

Dover Corp (NYSE: DOV)

4Q: Dover is expected to come in at the top-end of the guidance range for 2012 ($4.36-$4.46), with core growth accelerating by 200bps from the Q3 level due to Energy and Printing & ID (this is expected after Danaher’s positive pre-announcement relating to its P&ID business, which competes directly with Dover’s).

2013 Outlook: The company is expected to reiterate its 2013 EPS guidance of $5.05-$5.35, and reiterate that the operating margins in Comm Tech are continuing the turn-around evident in Q3 2012. Given the recent run-up in the stock, and several sell-side ratings upgrades in the past few months, I expect a muted share price reaction on the earnings release.

Honeywell (NYSE: HON)

4Q: Honeywell is expected to post a strong Q4 EPS (at the upper end of its guidance rage of $1.07-$1.12), helped by solid incremental margins in its ACS (Automation and Control solutions) segment.

2013 Outlook: There seems to some scope for the FY 2013 EPS guidance range to be raised slightly (~$0.05) from the current $4.75-$4.95 guide, as the organic sales growth should accelerate in Q1 2013 from the flattish rate in Q4 2012, particularly in the Aerospace and ACS segment. The stock has performed in-line with large cap conglomerate peers in recent weeks, and appears a popular long among investors. Therefore, I do not expect much movement in the share price following the earnings release.

Foolish Bottom-Line

The electrical equipment industry seems to be an area that has been quite neglected by investors, which should not be the case in light of a re-accelerating Chinese economy, which will see these stocks flying high.  


AnalystX has no position in any stocks mentioned. The Motley Fool recommends Kennametal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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