A Promising Start, But . . .
I’ve been hearing a lot of chatter rationalizing the weak market the past few weeks – as well as euphoria for yesterday’s rally. I must take issue with much of the econ-blather coming out of my screen lately:
Seasonality? It’s been a no show. Pre-empted by the overextended Q4 rally, it certainly has not helping lately;
Mutual fund inflows? Also MIA. Institutional buying and overseas appetite for U.S. equities are similarly missing;
Earnings? While 15.55% year-over-year earnings gains is respectable, it’s the unintended beneficiary of high Oil prices from energy firms – back out that sector (Energy sucks the air out of the room for every other group) and the S&P500 gained a mere 10% Y-o-Y. While that’s not bad, it represents a broader negative trend. Either a 10 or 15% profit gain reveals the continued deceleration of earnings momentum. This is foreboding for equities 12 months out;
Non-existent inflation? Hardly. Inflation is by any measure rising – commodities are in the midst of a 2-year rally; Producers are being squeezed – and they have been having a hard time raising their prices, squeezing margins;
Lower long-term rates: The fact the long term rates have been stable while the Fed tightens only tightens the yield curve -- and that is hardly a good thing.
The bottom line is that the above reasons are not why the market hasn't gone higher since 2005 began – they, are instead, an explanation as to the longer risk factors to the markets in the back half of 2005 and into 2006.
As to yesterday’s bounce:
It was NOT particularly impressive. Internals were only fair, with the OTC A/D a mere 8/7, and up/down volume barely over 2 to 1. NYSE, A/D was 17/15. up/down volume even less impressive 7/5. Volume was similarly lackluster.
I am not yet convinced yesterday's rally (and today’s follow through) is the end of the downward action. While I continue to expect a lift off the lows in late January/early February, I would prefer to see much broader participation (i.e., advance decline), a significant volume thrust, and much, much stronger volume.
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Excerpts from Dover's conference call clearly show that, viola, steel prices are slowing being passed on. Below is the complete CC excerpt from Dow Jones, steel prices being passed on is the second to last question. Note the ending comment on passing on steel prices "...we have been successful pushing a significant percentage of it and it's increased more and more each quarter." Doesn't bode well for no inflation. Also, are not the iron ore miners negotiating 90% price increases? This I got from news releases on RIO (Brazil's and one of the largest ore miners in the world).
DJ Excerpts From Dover's 4Q Earnings Conference Call >DOV
Dow Jones News Services
(Copyright © 2005 Dow Jones & Company, Inc.)
The following are edited excerpts from Dover Corp.'s (DOV) fourth-quarter earnings conference call. The transcript for the Wednesday morning call was provided by CCBN StreetEvents.
The New York industrial manufacturer reported fourth-quarter earnings of $97.1 million, or 48 cents a share, compared with $76.3 million, or 37 cents a share, from a year ago. Revenue rose 19% to $1.42 billion from $1.20 billion from a year ago.
Participating on the call were Chief Executive Thomas Reese, Chief Financial Officer Rob Kuhback and Chief Operating Officer Ron Hoffman.
On the company's acquisition activity in 2004:
REESE: Dover completed eight acquisitions totaling $514 million in 2004, our third-highest total in history, and each of these will be additive to existing companies or platforms. These larger acquisitions bring solid management team and synergy opportunities to drive future growth. Our subsidiaries also made tough decisions to divest six companies during the year that were not providing long-term growth for our shareholders. As I take the reins of Dover I am enthusiastic about the opportunities and challenges that lie ahead. We have just implemented the first reorganization of the company in roughly 20 years. We have now aligned into six subsidiaries, which provides the management capacity and responsiveness to drive increased results for the future.
KUHBACK: I would simply add that the full-year 2005 impact of these 2004 acquisitions should be accretive at about 8 to 10 cents to EPS.
On the company's free cash flow:
KUHBACK: Turning to some general data, free cash flow for 2004 was 364 million or 7% of revenue as compared to just over 381 million or 9% of revenue in the prior-year period.
On pushing higher steel prices to its customers:
HOFFMAN: I think all year long we've seen these steel price increases kind of come in waves, but there has been just a number of price increases that have hit our companies over the course of 2004. As we mentioned other conference calls, each quarter each month we are pushing more and more of that to our customers in either price increases or surcharges. It is really easier to do that where you have shorter cycle times to the customer distributor oriented businesses than it is where you are locked into longer-term contracts. I think we have been diligent in honoring our price contracts where we can. I think if you look to steel suppliers, they have not honored their contracts; those costs have been pushed immediately. I think if you look at the year-end total, though, we have been successful pushing a significant percentage of it and it's increased more and more each quarter.
On the company's options-related expense in 2005:
KUHBACK: I would say it's in a range of 7 to 9 cents, well 5 to 6 cents because it is only a half a year. It is probably closer to 8 to 10 cents on a full-year basis. And that's consistent with the footnotes that we have been disclosing for the last several years that sort of give you the numbers. So we pretty much indicated where we are in that area already.
(END) Dow Jones Newswires
Posted by: Milton Heath | Jan 26, 2005 11:27:27 PM
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