8.14.14: The Industrial Sector – Taken A Beating

When we wrote the weekend earnings update and linkfest, Industrials were one of the more oversold sectors, and we promised an update on the group to readers.

Industrial’s are roughly 10% of the SP 500 by market-cap weight.

Here is both a history of the last 8 quarters of Industrial earnings growth, as well as the estimated earnings growth for the next 5 quarters:

Estimated (as of 8/8/14):

q2 ’15: +10% (the 10% is down slightly from the July ’14 +11.5)

q1 ’15: +13% (the current growth estimate up from the 12.3% on July 1)

q4 ’14: +12% (the 12% estimate for q4 ’14 has been constant all year, since Jan 1 ’14)

q3 ’14: +9% (the q3 ’14 estimate also has been flat all year, in the 9% range)

q2 ’14: +11.1% (highest growth rate since Oct 1 ’13, which was 9.7%, upside surprise for q2 ’14 with most Industrials having reported)

Actual (as of q2 ’14):

q1 ’14: +3.9%

q4 ’13: +14.2%

q3 ‘3: +8%

q2 ’13: +1.4%

q1 ’13: +3.1%

Q4 ’12: -4.5%

Q3 ’12: +5.3%

Q2 ’12: +14.8%

Avg: +5.77%

The fact that GE is labeled an Industrial has always fascinated me, with the majority of its assets being financial-related, so I often wonder given GE’s$260 bl market cap, how the earnings impact the sector reports. (Need to find that out).

As the numbers fall out currently, although they are always subject to revision, the expected growth is looking above average for the next 5 quarters, versus the historical 8 quarters.

For client portfolio’s currently, we have a neutral weight in Industrials, but the stocks have pulled back nicely the last three months, despite the healthy quarterly earnings growth.

In my opinion, the drop in crude oil is a positive for the sector, any prolonged strength in the dollar would be a negative.

The revenue growth for Industrials is +2%, towards the lower end of the distribution range for the SP 500’s 10 sectors.

We’ve been adding some Industrial names this week, and am not finished yet, so I cant be more specific for readers. Clients always come first.

Remember, Transport’s were rolled into the Industrial sector about 10 years ago. Trannie’s are a big oil decline beneficiary. (Frankly, I think SP 500 could add Basic Materials, and the Auto OEM’s to Industrial’s, although I understand why the auto co’s are Consumer Discretionary. )

We’ll have more over the weekend.

The bottom-line or short conclusion is that I think Industrials are a global-growth play, and that there is value in the Industrial sector today. Basic materials, too.

Thanks for reading and stopping by. Hope this helped your investing a little bit.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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