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Strategies & Market Trends : Sharck Soup -- Ignore unavailable to you. Want to Upgrade?

To: Softechie who wrote (14323)	4/2/2001 5:24:51 PM
From: CAPTAIN MORGAN	Read Replies (1) \| Respond to of 37746

Dow Manufacturers Could Warn by Sacha Lichtenstein 9:22:00 AM April 02, 2001 GMT -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The slowing economy huffed and puffed and blew the market down. But that doesn’t mean all is lost. We look at the Dow industrials -- some of which do in fact make materials that would be tough to blow down -- and note which offer the best shelter from the stormy market, and which have a greater chance of caving in to earnings warnings. It’s the economy, stupid. It’s causing the earnings shortfalls and the subsequent equity drops. Initially it looked as though the US was poised for an upswing in the third and fourth quarters after a verifiable slowing down in the first and second, but signs of economic recovery haven’t been as forthcoming as initially expected. Below we examine seven of the Dow’s industrials and their prospects over the next few months. Alcoa [AA:NYSE] shares are off 2.8% over the last 52 weeks. In February, aluminum production fell to 1.6m metric tons from 1.68m metric tons in February 2000, while it also fell in January this year from the same period a year ago. Aluminum shipments in January in the US fell 4.4% this year. Analysts have lowered their expectations by 9% in the last three months and we believe that adequately reflects the risk of declining demand for aluminum. Alcoa has met or surpassed analysts’ estimates in the last five quarters. Its upside surprises are relatively limited, keeping Wall Street’s predictions equally conservative, and so we don’t believe Alcoa will warn. It will report Q1:01 results April 19, and is expected to earn $0.79 per share. Boeing [BA:NYSE] is involved in a cyclical business, and the cycle peaked in Q2 2000. Though Boeing has sold 100% of its capacity for 2001, Wall Street believes Boeing’s projections for 530 aircraft in 2002 is overconfident – higher oil prices, and the possibility of a slowing world economy for all of 2001 could significantly reduce demand. A reduction in expectations can be expected to hurt the stock, eventually. We’re wary on Boeing. We believe it will hit its Q1:01 earnings target of $0.85 per share when it announces on April 19. But the rest of the year is in jeopardy because of the high expectations. Caterpillar [CAT:NYSE] already warned on January 18 that its first-quarter earnings, to be released on April 5, would miss expectations. The company is not only the leader in most of its markets (machinery for construction and mining), but it’s also moving into energy supply -- which could help offset any further difficulties the slow US economy might cause the heavy machinery industry. However, should economy appear unable to recover in the second half of the year, the forecast of profits down 5%-10% from last year that Caterpillar has issued may prove insufficient. If in the next few months, however, there are signs of an economic turnaround, we believe Caterpillar will make its numbers. Not only has diversified manufacturer General Electric [GE: NYSE] outperformed the economy for the last 25 years, the company confirmed its commitment to its first quarter and double digit revenue growth in 2001. No need to be wary when it comes to GE. The shares’ recent decline since GE announced its purchase of Honeywell [HON: NYSE] has priced in much of the economic weakness already seen. We maintain confidence that GE will meet its numbers this year, even if a slowdown lasts the entire year. A sizable long-cycle business backlog, built up in the heady days of 1999 and 2000, should sustain the company through the year. GE will report Q1:01 results April 9, and is expected to earn $0.30 per share. Minnesota Mining & Manufacturing, better known as 3M [MMM:NYSE], derives 53% of its sales from overseas, which the company hopes will help offset the not-so-happening US market. 3M’s other strategy this year is to cut costs, which includes a realization of $500m in savings over the next three years. At the beginning of March, 3M reiterated its commitment to 6% volume growth, double-digit earnings growth, and a mid-single digit revenue increase for 2001. The company also restated its goals of reaching 11% revenue growth by 2003, and earnings per share increases of 13%. This ambitious plan, we believe, is predicated on some strength in the economy by the last quarter of the year. Should the economy not recover as expected, 3M will be in trouble. 3M reports its Q1:01 in April 25. It’s expected to earn $1.16 per share. Surprise, surprise: International Paper [IP: NYSE] warned on its first quarter last Thursday. This comes just two days after analysts said 2001 would be a particularly bleak one for the paper industry. Now International Paper says it’ll earn $0.05 per share, below the $0.15 per share expected and considerably below the $0.60 per share the company earned in the year-ago quarter. IP said the overall economic slowdown has put pressure on pricing, while the company has also had to deal with higher wood prices and production difficulties at some its plants. Given that a turn around in the industry is not on the menu for the foreseeable future, as well as a 30 P/E and average expected earnings growth of 7% for the next five years, we’re not confident the stock can stay at current valuations, or that further warnings will not be necessary. Providing there isn’t a worldwide economic slowdown, United Technologies [UTX:NYSE] is well positioned to see 15% earnings growth in 2001. About 55% of its revenues come from international sources. This year, those sources are expected to account for 70% of its profit gain. The company said it isn’t seeing any weaknesses in its industrial or commercial spare parts orders, which are usually sensitive to economic fluctuations. Our belief is that management is banking on strength overseas for the entire year. Should Europe or Asia slide into economic malaise, guidance will be certainly be lowered. This will be more crucial to the outlook for United Technologies than whether or not the US economy recovers in the second half of the year.