Tuesday, 29 July 2014

Views on earnings reporters: Plum Creek, UPS and Xylem

On another busy earnings day some thoughts on three companies in three different industries. 

I was struck by the timber REIT Plum Creek's observation (whilst reducing their FY guidance) that:

"Residential construction activity in the first half of the year has not increased as initially projected. As a result, Southern lumber production has increased only modestly and sawlog demand and prices have grown at a slower pace than originally anticipated."

Not totally unknown economically but it was enough to push the shares to a one year low. 

I note a previous comment from management that they would be buying stock in the market below US$40.  There's a level to remember.  

Another company cutting numbers was the global logistics company UPS.  Following another tumble back in December I had noted that:

'Global logistics stocks move around on hopes and fears for the global economy but there are some strong themes here.  In short, any material plunge below US$100 is an opportunity.  Worth keeping an eye on' (although I subsequently updated this to c. US$95 after the January 'Christmas trading' profits miss). 

Still, with the shares around US$99 today it is one to think about.  So why are they cutting numbers?  Well it is all about the cost of new investments:

"These initiatives will increase operating expense this year, but will provide financial benefits for years to come.  As a result, we have lowered our expectations for adjusted diluted earnings per share to be in a range of$4.90 to $5.00, a 7-to-9% increase over 2013 adjusted results."

The business actually looks in reasonable shape (continued buybacks too) with shipments up in line with the adjusted results and I am prepared to give them the benefit of the doubt re the new investments.  So US$95 is a level for me:

Xylem the water infrastructure and related solutions specialist did not cut numbers (in fact they raised the bottom end of their guidance range) but did drive numbers via cost cutting to a much greater degree than mix/other:


The water theme is longer-term fantastic but the shares valuation (and I speak as a previous institutional holder when I dreamed of this sort of price) is up with events especially due to the shorter-term growth drives composition.  I am having a look below US$34. 


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