Is Industrial Goods Sector Playing Smoke and Mirrors?

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 on a go, and many industrial companies have already reported their results for the last quarter. A wide variety has been witnessed in their results. On one hand, the bellwether of the industry, General Electric not only topped the Street’s earnings and revenue forecasts but also achieved an expansion of margins in its industrial segments on a YoY basis. However, on a contrary note, Kennametal missed estimates in an earnings release on Jan. 24. This time around, we have three more industrial players who are expected to announce their earnings in the coming days:

Rockwell Automation (NYSE: ROK)

1Q: According to the consensus estimates, the company is expected to post EPS of $1.27 and quarterly revenue of $1.48 billion. I see some upside to the consensus EPS forecast for Q1. Also, I have assumed that the core sales growth halves y-o-y from Q4 to Q1, even though the y-o-y organic base is 900bps less challenging (organic y-o-y growth dropped to 8% in Q112 from 17% in Q411).

2013 Outlook: Rockwell is expected to reiterate its 2013 guidance of $5.35-5.75, given the solid start to the year in Q1. The management commentary is expected to be fairly cautious on the US given the low single digit sales growth. However, it will sound more bullish on the ongoing improvement in China, where the demand for discrete automation has picked up since September 2012. The recent rally in the stock (the stock moved from $85.5 to $89.4 in the last week) means that the share price might not move significantly if the company manages to beat the consensus forecast on its earnings release on Jan. 30.

Rexnord Corp. (NYSE: RXN)

3Q: The company is expected to post EPS of 20 cents and a quarterly revenue of $497 million. The core sales growth should show another quarter of acceleration, due largely to the easier y-o-y comparison, while margins are likely to be slightly up on a sequential basis.

2013 Outlook: The company is expected to reiterate its guidance of adjusted EBITDA of $412-425 million, with commentary reflecting fairly unchanged demand conditions. Water should see positive y-o-y sales growth in 2H, but this reflects an easy comparison rather than any improvement in the US spending environment. I hope to hear some clarity from the management team on the portfolio outlook at the company, given the press report in December (Bloomberg) that a divestment of WMC is being considered. The stock has been weak on a YTD basis; therefore the earnings might not provide a further ‘leg down’ in the share price, although the rich valuation compels me to recommend a neutral position in the stock. The company will report on Feb. 7.

Ingersoll-Rand (NYSE: IR)

4Q: The company is expected to post EPS of 70 cents and quarterly revenue of $3.46 billion. The company might be able to top analysts’ estimates given that one of its segments, Climate and Residential Solutions, saw decent y-o-y growth in its margins.

2013 Outlook: IR is one of the few names in the electrical equipment industry that are yet to initiate a FY13 guidance; the guidance range is expected to be around $3.50 to $3.65 vs consensus of $3.61. The consensus estimates do not account for a share count drop from 306 million in 2Q13 to 287 million in 4Q13, due to the buyback program. In terms of the current trends, the industrial is expected to see some orders recovery, with relatively little change in the HVAC landscape. The stock has moved sideways since the split-up announcement in December, and a relief around the guidance initiation could cause some share price appreciation. The company will report on Feb 01.

Foolish Bottom-Line

With such a variety of earnings being estimated by different companies in the industrial goods sector, it will interesting to see what these three companies have to announce on their respective earnings releases. 

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