Thursday, 23 July 2015

US Thursday earnings fest #1: GM, 3M and CAT

Far too many earnings out today...but a few observations on some of the numbers that caught my attention.

First General Motors (GM) who showed a good combination of metrics in their Q2 numbers with positive pricing, great cost control control and ok volumes...

...but then slightly blotted the copybook with higher incentives against both their internal prior comparisons as well as industry peers.  That's not so good. 

The stock is off its one-year lows today.  I talked about a US$30-40 range for the stock back in January (link here) and that still feels about right.  All the profitability is still coming just from the North American division so a x7s prospective EV/ebit multiple is not an absolute bargain.  Watch. 

 Turning to the industrial conglomerate 3M.  They squeezed down their organic local currency sales growth hopes and the top end of their EPS range.  A disaster?

Well I am not sure about that.  Organic growth and positive pricing is still apparent even if the headline results are blighted by FX translation issues (as are many US reporters).  

I think the issue with 3M is just pure valuation.  Near x15s EV/ebit is a little full given the range of other good industrial-centric conglomerates out there (see write-ups on companies like Honeywell and GE here for example).  Something closer to the one year low is a bit more interesting for this nevertheless quality company. 

Finally, Caterpillar's numbers were actually not terrible in terms of composition.  Of course there was a large volume decline...

 ...but pricing was positive and cost control solid.  Perhaps more striking was the statement about how they perceive their underlying markets currently. 'Modestly positive' for the United States and 'relatively stagnant' for the rest of the world is hardly a super exciting backdrop and that is also reflected in the other comments about their key mining/construction sector customers.

So easy to be cautious but on a contrarian basis the stock is signalling positively given its fall below US$80 - which has been an area of support over recent years.  Given their continued share buybacks and strong underlying market share position I would rate Caterpillar - which like any cyclical is not statically EV/ebit / P/e ratio cheap (c. x15-16s on both metrics) as the most interesting of these three names reviewed here at the margin. 

(Of course Caterpillar shares were <US$30 in early 2009 but my perception is that it remains a relative medium-term winner in the space given its market share, balance sheet and shareholder remuneration orientation).  

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