Fly with Boeing

12/8/10
By Jerry R. Carter

Here is a trivia question.  What manufacturing based industry has one-quarter of the DSO (days sales outstanding) the auto industry has?  Need another hint?  This industry builds gigantic machines that fly in the sky.  Okay, easy enough, it is the aerospace and defense industry.

The largest company by market capitalization is Boeing (NYSE: BA). The company operates divisions in commercial jetliners, satellites, human space flight and of course military equipment.  Other companies of comparison in the business today, from largest to smallest in market cap; Lockheed Martin Corp (NYSE: LMT), Northrop Grumman (NYSE: NOC) and Rockwell Collins (NYSE: COL).  These companies represent the majority of production in aerospace and defense equipment.  Raytheon (NYSE: RTN) and General Dynamics Corporation (NYSE: GD) are two others worthy of mention.  The aerospace industry is more than aircraft.  A diversification into commercial aircraft, communications gear and consulting add revenue streams beyond government contracts for virtually all of these companies.

Boeing closed an acquisition of CDM Technologies (software engineering) on December 7.  Boeing Defense, Space & Security announced the support and growth Boeing will receive in the logistics command and control business division from CDM in a press release. Well publicized delays with the company’s 787 aircraft have hampered the stock price.  The current dividend yield of 2.55% is paying stockholders to wait.  The stock is off its 52-week high of $76.00 reached in April, but off the lows of last December.

Lockheed Martin is also an acquisition machine by comparison.  In the four business segments Lockheed operates, three companies were added in the past year.  Companies of this size often rely on acquisitions to grow.  Boeing’s 2.55% dividend yield looks downright paltry compared to Lockheed’s 4.32% yield at the time of this writing.  Based on fundamentals, several of the companies in this sector outperform Boeing.  The aerospace giant has come back before and is poised to do it again.

Boeing the stock has been beat up.  The company has proven to be resilient to Wall Street reactions in the past.  The sales growth in the trailing twelve months (ttm) has surpassed 4%.  The company’s strongest financial fundamental is ROE.  With a return on equity of 200%, there is no one that reinvests earnings more effectively. Gross margins lag several members in the industry at 19.42%.  The operating and profit margins are what really count in business. Boeing controls operating margin expenses better than nearly three-quarters of the industry.

Boeing will continue to be a volatile stock on earnings releases with a debt/equity ratio of nearly 2.8 times.  The company is subject to headline risk and production delays, so are the competition.  They may also benefit from headlines if tensions between North Korea and South Korea intensify.  Moving forward in the recovery of the worldwide economy will prove profitable for Boeing.  It is difficult to overlook a company trading 14 times earnings with a high ROE.     

Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations.  Copyright 2010 all rights reserved.  All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options.  Past performance is not a guarantee of future results.

Silver and Gold, Who has the Fever?

12/6/10

By Jerry R. Carter

The apocalypse is upon us.  Mad Max is on patrol.  He is on the hunt for escaped criminal minds who pillage small towns searching for fuel at the end of the oil age. (Kennedy Miller Productions, 1979)  Depending on who you ask, the world is far away from this scenario.  If Max is patrolling the streets, he is looking for the inflation monster that is jumping out of back alley brokerage houses screaming, “Inflation!”  Argh!  The inflation monster frightens and torments everyone with fiat currency!

Hard assets, commodities and real estate are all hedges against inflation.  Okay, the real estate has been a problem on the residential side but the farmland values are a different story.  Dan Piller, a reporter with the Des Moines Register (Iowa), wrote of a report from the Federal Reserve Bank of Chicago that surveys 227 bankers on farmland values.  Iowa farmland is up 13% since last year at this time.  The average price for one acre of farmland across Iowa is $4,518.  This is nearing the record high of $5,711 per acre the state reached in 1979, inflation adjusted of course.  Bullish land investors still have a way to go before this becomes out of control in comparison.

http://www.desmoinesregister.com/article/20101205/BUSINESS01/12050343/Why-farmland-is-skyrocketing

Now, the moment everyone has been waiting for, silver and gold.  Late night television is littered with fast talking ringmasters calling for your gold.  Shopping malls have entire storefronts buying gold.  Market pundits are throwing out ratios of silver vs. gold and how many pieces buy a suit and whatever else paints a visual picture to the public.  Few investors may remember the 1980’s attempt to corner the silver market by the Hunt Brothers of Texas.  The Hunt Brothers had a plan to protect their wealth.  They probably had a little bit of the “metal fever” to boot.  The human psyche only provides tunnel vision when commodity markets are red-hot.  Hardly anyone sees a bubble coming.

This is not a call to take risk off the table.  Money has to be invested to earn a return.  Where better to put it than proven hard assets?  The goal now is to protect assets.  If gold and land is a hedge against inflation, what hedge does an investor have for their financial portfolio?  Puts options on the S&P, diversification of holdings?  Investors want to play the game and many turn to the silver market.  Silver is the “poor man’s gold.”  Really, it should be likened more to a $10 stock.  How much can an investor lose, silver is only $30 per ounce.  Surely it is different this time.      

Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations.  Copyright 2010 all rights reserved.  All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options.  Past performance is not a guarantee of future results.

Flowserve Turns on Profits

12/5/10

By Jerry R. Carter

Why is it so difficult to get excited about pumps, valves and seals?  Take one view of a petroleum refinery plant and the excitement will commence.  Pumps, valves and seals galore!  Flowserve (NYSE: FLS) is a $6 billion company by market cap, and they mean business in the diversified machinery industry.

What company outperforms 80% of the industry in ROE (TTM) at 20.72 percent?  Flowserve.  What company outperforms 93% of the industry in EPS growth over the past five years at 71.2 percent?  Flowserve…AGAIN.  The performance can be attributed to the ongoing service the company provides to clients.  There is the sale, and then there is service after the sale. 

The company has an ongoing relationship with several big name companies in the oil services industry.  Flowserve released information regarding a deal with Shell on December 2 to be the sole supplier for control valves and related goods.  The agreement has an option that would make Flowserve the go-to company for Shell over the next 10 years.  A deal announced two days prior with Abu Dhabi Company for Onshore Oil Operations (ADCO), was booked at $7.5 million in pump equipment.  Shell and ADCO are just two of over 10,000 companies Flowserve sells and services to.  Oil and gas accounts for 36% of bookings, power generation 20%, general industries 19%, chemical 18% and 7% in water management. www.flowserve.com

Flowserve is up over 12% this year and closed Friday +$1.98 (+1.81%) at $111.32.  A gross margin of 35.57% is near the top in the industry and leads to 9.45% profit margin.  Using a metric that takes any one-timers out of the equation, ROIC is pretty impressive at 13.69 percent.  Revenues are $4.09 billion for the TTM with gross profits of the comparable time at $1.55 billion.

Time will tell if the purchase of Valbart this past July justifies the $200 million purchase price.  This acquisition intends to expand the company’s sales support.  Flowserve also has no significant payments on its $540 million bank loan until the fourth quarter of 2011.  The company updated its 2010 full year EPS target to $6.70-7.15, slightly revised on the lower end from $6.35.  Currency risk is a known exposure for a global company and Flowserve is no exception.  North American business accounts for 32% of sales/service followed by Europe at 25% and the Middle East, Africa, Latin America and the Asia Pacific totaling 43 percent. 

  Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations.  Copyright 2010 all rights reserved.  All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options.  Past performance is not a guarantee of future results.

Crude Oil is Projected to the Moon

12/6/10

By Jerry R. Carter

Conoco Phillips (NYSE: COP) is not singing “Hold-On” by the unrelated 90’s pop super group Wilson Phillips because times look tough, oh no.  They are poised to hold on to see if oil will catapult well over $100 a barrel.  Goldman Sachs (NYSE: GS) announced oil would average $110 per barrel in 2011.  Morgan Stanley reiterated a day later speaking in a similar tone.  A call-to-arms for a press release!  It is hard to fathom two broker/dealers, who make money if clients trade, would ever call for the masses to jump on the ride, even if it was only mentioned nonchalantly.

Fundamental analysis in the oil market shows a lack of supply heading into 2011, according to Goldman Sachs.  The Energy Information Agency (EIA), who provides data on oil “stocks,” shows and increase of 5.5% year-over-year in crude oil supply.  The oil futures contract was trading $15-20 less per barrel at this time last year.  Today the market is flirting with $90. 

When brokers are screaming to buy oil from the mountaintops, maybe it is time to buy the brokers instead.  Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS) and MF Global (NYSE: MF) are in the business of profiting from the oil trade in two ways.  The first is to have assistance in driving oil futures prices higher by gathering a bullish consortium of market participants, which include retail and commercial traders, and working the market from the buy-side.  Contrary to popular “conspiracy theorist” belief, the brokers do not have enough power behind them to push the market entirely by themselves.  They need sell-side participants to help even out the market orders.  The sell-side orders come from end-users who need to hedge production and attempt to “lock-in” future input costs.  Second in the profit channel is trading for company accounts.  Who is the best at knowing when bullish inflows are drying up?  The brokers who see the order flow would be an educated guess.  When orders on the buy-side cease, the broker/dealers will turn their position to the short side.  They will also take those sell-side order commissions on the way down.

The argument from a broker/dealer perspective, and it is a valid point, is the simple phrase, “free-markets.”  Anyone possessing a trading account is capable of accessing the markets and participating by broker assistance or independent order placing.  This may be true, but several variables exist for every investor.  Take a look at the big picture.  Manage risk, and take a hard look at the brokers.

Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations.  Copyright 2010 all rights reserved.  All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options.  Past performance is not a guarantee of future results.