by Traders Reserve | October 2, 2012 8:01 am
Forget about the fiscal cliff and start thinking about the industrial cliff.
Do you wonder why the Federal Reserve would spit in the wind of inflation with its QE Infinity program? The answer is because the macro economy has already fallen over the industrial cliff. You just don’t know it yet.
The Federal Reserve does and in response announced an unprecedented and unlimited program to buy mortgage and other securities in an attempt to soften the landing.
Investors have cheered appearing oblivious to the coming train wreck, but make no mistake a train wreck is coming. The economy hit a brick wall this summer. As a result third quarter earnings especially those industrial companies that sell goods overseas are likely to disappoint.
We are already seeing glimpses of such with the poor results from Federal Express (NYSE:FDX) and an earnings warning from Caterpillar (NYSE:CAT). Last Thursday we learned that durable goods orders fell by 13% in August.
That sort of steep drop does not come without consequences and each day that comes along we see more and more evidence of the damage being to individual companies.
The latest comes from specialty chemical maker HB Fuller (NYSE:FUL). That stock is down 5% after reporting earnings results for the quarter ending August 31, 2012. The company met estimates for earnings, but revenues missed. More importantly the company reduced guidance for the current fiscal year.
Get used to those poor reports when earnings season begins in earnest in Mid-October.
Here are 5 stocks ready to fall over the industrial cliff:
Mining company Joy (NYSE:JOY) is a disaster waiting to happen. Heavily reliant on the global economy, the company is seeing its business deteriorate on a quarter to quarter basis. The Caterpillar news does not bode well for Joy Global.
The company has missed expectations in 3 of the last 4 quarters missing estimates by 6 cents per share in the most recently reported quarter. While estimates for the quarter ending September have come down over the last 90 days they have not fallen far enough. I’m looking for a washout here and shares to plunge as a result.
Engine maker Cummins (NYSE:CMI) has had a great run beating earnings estimates over the last year. In fact, the performance has not been close to what has been expected. That’s about to change with the quarter ending September. Analysts have been reducing estimates sharply heading towards the end of the quarter. 90 days ago the expectation was for the company to make $2.95 per share.
Today the estimate is for a profit of $2.28 per share. The results are likely to be even worse. Cummins trades for 10 times current year expectations of profits that are likely to be much lower when all is said and done. This one is a stock to sell before the news breaks.
Chemical maker Eastman Chemical (NYSE:EMN) is trading near its 52-week high. I doubt that will be the case when it reports results for the quarter set to end September 30, 2012. In fact, there is no sign from investors of impending doom. That oblivious state will be shattered when earnings show that the company fell over the industrial cliff. For now all seems rosy. Analysts have actually increased estimates by a penny per share over the last 90 days.
The expectation is for the company to make $1.42 per share. For the full year analysts have Eastman generating a profit of $5.28 per share. Those profits are expected to grow by 18% in 2013. The table is set for a big disappointment. Look for the company to reduce profit expectations for 2012 and 2013. If so shares will fall by at least 5%.
Another industrial stock that is seemingly performing well is 3M (NYSE:MMM). The global industrial company trades near its 52-week high. Solid growth and a dividend to boot helps support current share price, but what happens if guidance is reduced.
We know that China’s economy is slowing greatly. 3M derives much income from that important market. 3M barely beat the analyst estimate in the last reported quarter. For the quarter ending September, investors should expect much worse. Analysts expect 3M to report a profit of $1.65 per share. That’s 2 cents per share lower than 90 days ago. The reduction is not enough in my opinion.
I expect 3M to miss by a wide margin and reduce guidance going forward. This one is an easy 5% to 10% loser after the news is released if I am right.
All the warning signs are there for United Parcel (NYSE:UPS), but investors can’t seem to believe them. FedEx should have been a clear signal that all was not well with the global economy. Why then is United Parcel trading near its 52 week high?
The short answer can be found in the belief that QE Infinity will save the day. That Kool-Aid only works for so long. When reality comes in the form of earnings the reaction can be quite sharp. Analysts expect UPS to make $1.07 for the quarter ending September. The estimate is lower than 90 days prior, but might not be low enough. UPS missed estimates in the last 2 reported quarters and I expect another miss this period. With the stock trading for 16 times current year estimated earnings there is plenty of room for this one to drop when it reports earnings in October.
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