Friday, April 18, 2014

CapEx: Still waiting for Godot

In a recent post, I wrote that the US economy is mid-cycle and we need to see signs of capital expenditure acceleration for stock prices to meaningfully advance from current levels (see What equity bulls need for the next phase). One of the clues would be the earnings reports from companies in capital goods conglomerate like GE.

GE reported on Thursday and Honeywell, another capital goods conglomerate, reported on the same day. The best description of my reaction of both reports is, "Meh!"

GE: Flat top-line growth
The GE earnings report was a solid report for shareholders, but I was not looking at it from a shareholder perspective, but using it to look for clues of global, or at least American, capex acceleration. The presentation, which can be found here, left me a little wanting. 

In particular, this page showing the progression of their order backlog was a little disappointing. Backlog growth from 4Q to 1Q was flat, having increased from $23.6 billion to $23.7 billion. 

The oil and gas division provided much of the source of capex growth, but that should be no surprise. David Kostin of Goldman Sachs broke out capex by sector and showed that the energy sector had been increasing its share of capex within the SP 500 for several quarters (via Business Insider). While there were some bright spots in the other GE divisions, there appears to be no broad based capex acceleration an ex-energy basis.

Little sales growth at Honeywell either
The Honeywell report, which is available here, was also somewhat disappointing. The company beat Street expectations on earnings but missed on sales (remember we are looking for sales acceleration). Sales was up only 1% on an organic basis YoY. The environment in the Defense and Space division was problematical and HON saw good top-line acceleration in Europe from sales of their turbochargers.

The company expected organic sales growth, my key metric, is 3% in the next quarter and 4% in the 2H2014, ex-Defense and Space. While they did raise earnings guidance, sales guidance was unchanged.

If HON were to be representative of the capex outlook, 3-4% isn't a bad number, but it falls short of a picture of capex acceleration that the Street has been expecting. The same comment would also apply to GE. To top it all off, Bill McBride at Calculated Risk recently highlighted an environment which features a sluggish recovery for US heavy truck sales:

In short, waiting for a capex revival can still be likened to Waiting for Godot.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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