Is a Boom Ahead for Exporters?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oil prices have been falling, and natural gas prices, while well above its trading range of six months ago, is still well below its historical range. While these trends have wreaked havoc on energy companies, drilling companies, and to a lesser extent utilities, there is plenty of good news from what is certainly a paradigm shift of energy prices in this county.
Henry Hub natural gas prices have been trading recently at about $2.70 per mmBTU. It has been under $3 nearly all of 2012, and even spent a few weeks under $2 per mmBTU. In late September 2011, it was selling a little under $4 per mmBTU, at just over $4 at the same time of 2010, and as high as $7.50 per mmBTU on January 7, 2010. Among the results of this domestic price collapse, gas prices in Europe and Asia have been ranging from $12 to $18 per mmBTU.
Oil prices are largely homogenized, with grading of the petroleum the one main variable. That is why an argument like the Keystone XL project will drive down North American energy prices are absurd, because the very point of that pipeline is to bring product to the Gulf Coast for refining and easy shipping to other parts of the world. So while the pipeline may make a dent in worldwide prices, it will not favor American prices in particular. So too coal prices have been retreating as domestic utilities are scheduled to retire 55 older coal plants this year, with an aggregate nine gigawatts of generating capacity. A combination of energy conservation, alternative energy, and natural gas is replacing the retired generating capacity.
But the relaxing energy price situation in America might have real benefits to certain export industries of the economy. Reuters released a report that energy costs, plus worker efficiency issues will make U.S. manufacturing costs 15% below Germany's, and 21% below Japan's by 2015. A resulting burgeoning export market would create up to 5 million domestic jobs by 2020 due to this uptick in exports. The companies best situated to take advantage of this are those with already healthy export revenues of well-regarded products.
One company fitting this bill perfectly is Caterpillar (NYSE: CAT). Its overseas sales have struggled of late due to a weakening of Chinese growth. But despite that, growing North American revenue drove the company's second quarter results to a 22% jump in revenue to $17.4 billion, and profits up by 67% to $1.7 billion, or $2.54 per share. A part of the sharp increases has to do with a difficult second quarter of 2011 stemming in large part from parts shortages attributable to the Japanese earthquake and Tsunami. Management also raised its 2012 profit forecast by a dime to $9.60 per share.
Caterpillar is among my favorite big industrial companies. It has a niche and brand known and respected worldwide. Management reported continued double digit sales growth through the summer, all but guaranteeing an excellent third quarter. It has a 5 year PEG of a tiny 0.55, and I believe Caterpillar has tremendous upside looking forward, especially if the Chinese economy reboots its growth.
General Electric (NYSE: GE) is also in a position to benefit greatly from inexpensive manufacturing costs and efficiencies. Two thirds of carbon pollution comes from energy generation and land transportation. GE has cutting edge products such as locomotive engines and jet engines as well as a leading domestic operation as a wind energy company. But the best news is that its big finance division, while not as big as it used to be, is still an important part of the company. In 2007, its assets were about 40% of GE's balance sheet; now it is about 30%. Earlier this year, after halting dividend payments to its parent while absorbing $32 billion in losses, the finance unit returned to health well enough to pay a one-time, $4.5 billion dividend, along with quarterly payments equal to about 30% of finance earnings, which will mean continuing payments of between $450 and $500 million. That is not a bad position for GE to be in, taking in close to $2 billion annually before manufacturing anything.
GE's energy division is the largest division of the company, and it was the world's sixth largest wind energy company by volume, with 3.17 gigawatts installed in 2011. The company's turbines have generated 12 gigawatts in the division's brief history. More wind power is a certainty, and that, combined with GE's leading gas turbine offerings, puts the company in a fine position looking ahead. So too, its new, fuel efficient jet engines and locomotives are state of the art, and so expensive as to often require financing, benefiting GE Capital as well.
GE has returned 47% to its shareholders in the past year, driving up its price to earnings ratio and giving it a 5 year PEG of 1.18. It has issues including problems with its new jet engines and the possible changes to tax preferences for wind energy, but there is never a bad time to buy a premier company.
Another company that is building sophisticated products with global reach is, of course, Boeing (NYSE: BA). Its business is balanced between civilian aircraft, where it is neck and neck with European Airbus, and its military division. The latter recently had a nice announcement of a $1.9 billion surveillance aircraft order from the U.S. Navy.
For the most part, it has been and will continue to be full speed ahead for Boeing. Second quarter earnings came to $967 million, or $1.27 per share. This was a three percent advance from last year's second quarter, but it handily beat analysts’ expectations of $1.13 per share. Partly on the strength of the quarter, management upped its expectation for the year by $0.25 per share, to from $4.40 to $4.60 per share.
Boeing will have issues from the same engine troubles that have General Electric's attention. But it will also manage to deliver between 575 to 600 commercial aircraft this year, taking back the crown that Airbus has held the past several years. Boeing's 4,000 aircraft backlog also inspires a great deal of confidence in its future.
Boeing stock has been stuck in the mud, sliding from the mid 60's to mid-70's thus far this year. It has a 5 year PEG of 1.41, but this is the unquestioned domestic leader of an industry that is working to meet airline needs of more fuel efficient aircraft, and Boeing has developed aircraft to fit the bill. Analysts like the company with a mean rating of 1.8, and I like the company as well as a core holding for most investors.
Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in the Fool’s brand new report. Just click here to access it now.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.