When business turns down, companies trim their capital spending. Expanding and investing when the economy is weak is of course not wise. And when companies feel the economy is changing direction, they begin to think of ramping up their capital spending again.
Home Depot, for example, recently announced it would not open 50 stores it had planned, and would cut capital spending from $3.6 billion last year to $2.3 billion this year. Its business is still in the doldrums and evidently the company thinks it will remain there for some time.
But other companies aren't so sure. The National Association for Business Economics' quarterly industry poll, conducted between March 23 and April 1, found that 21% of the companies surveyed expected to increase their capital spending, including 6% that planned increases of 10% or more. This compares with the Association's January survey, which found that only 16% of businesses expected to increase their capital spending, and none of these expected to increase it by more than 10%. In addition, the number of companies which expected to decrease their capital spending went from 44% in January to 37% in March.
Some capital goods makers are seeing signs of life. Heavy equipment maker Caterpillar (CAT) recently reported that sales of excavators in China, an important market, went from about 600 per month before the financial crisis hit last fall, to about five in January, and are now back to record levels. Corning (GLW), the specialty glass and ceramics maker, laid off 13% of its workforce earlier this year, only to start hiring some of them back recently as business picked up.
Of course, the economy is still weak, and I am not one to predict when it will turn around. But the above reports suggest that, while the bottom of the capital goods market may yet to be tested, prospects for the capital goods industry are not quite as bleak as they were a few months ago. For this reason, I started looking at capital goods companies to see if any met the needed criteria of the Guru Strategies I follow. Several did. I want you to be aware of these companies, because they can benefit greatly and quickly when the economy turns around and perks up.
One of these is AAON (AAON), which manufactures commercial rooftop air-conditioning and heating equipment. Wal-Mart is a major customer. This is not a big company (market cap of about $350 million), so do not go chasing the stock if you see a sudden upturn in the price.
One of the guru strategies I follow, which is based on the writings of James P. O'Shaughnessy, thinks AAON is cool and is likely to have a hot stock. It likes the company's size, the fact that earnings per share have increased in each of the past five years, the price-to-sales ratio of 1.25 (1.5 is the maximum allowed) and the strong relative strength of 90 (it outperformed 90% of the market's stocks last year). All of these place AAON among the top 50 stocks using these criteria, which is why the O'Shaughnessy strategy is so excited about the company.
The Peter Lynch Guru Strategy thinks Lincoln Electric Holdings (LECO) is a sharp buy. It manufactures and sells welding and cutting equipment. Lincoln has an acceptable amount of debt, has its inventories under control and, importantly, has a yield-adjusted P/E/G ratio (P/E relative to growth) of 0.66. A P/E/G of 1.0 or less is acceptable, so Lincoln's is strong and suggests those who buy now will be paying a modest amount for the company's future growth.
The last stock I want to tell you about is Graco (GGG), which manufactures equipment that handles fluids. This equipment is used in a variety of industries, including maintenance, manufacturing and processing. The Guru Strategy based on Warren Buffett's approach to investing likes Graco. Graco is known for its strong cost controls and investments in research and development, which give it a competitive advantage. Having a competitive advantage is something the Buffett strategy requires. Other variables in its favor: it can pay off its debt in less than two years, based on the most recent year's earnings; over the past decade, it has had a return on equity of 40% (wow!) and a return on total capital of 42% (wow! again); and the investor can expect an annual rate of return of 15.5% over the next 10 years. This is a strong company, with a strong market position.
All of these companies are subject to the movements of the economy, and if the economy were to turn down sharply in the coming months, these companies could be badly hurt. But if the economy is nearing its bottom, these companies are in a good position to take advantage of an economic turnaround. The Guru Strategies are strongly behind these companies, and I think they deserve your careful consideration.
Published by Globes [online], Israel business news - www.globes.co.il - on May 21, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009