Taking Stock

Tony Crowell

Tony Crowell

Hits, Misses  & Forecasts

Quarterly earnings reports fell upon a stock market ready to react. Which way to react was unclear as what seemed as favorable news sometimes provoked selling while missing estimates occasionally prompted buying. Wall Street analysts exaggerate this scenario of reports measured against estimates since they make the estimates and often have to steer away from their prior predictions. Company forecasts are more reliable although they tend to be on the conservative side.

Apple’s forecasts are traditionally guarded and its recent outlook showed a softer outlook for the current June quarter than Wall Street had expected. It also predicted slightly lower profit margins. Offsetting these, iPhone and iPad sales beat expectations; it increased its dividend by 15% and announced a massive stock buyback.

All this left Apple around $410, a resulting price to earnings ratio of only 10 on revised Wall Street estimates of $40 earnings for 2013. In the event that it comes up with no innovations, this valuation will probably stick for a while. I think that unlikely and am looking to the Apple developers conference in June for an energy boost. Nervous investors should remember that the stock now yields 3% and that annual 15% increases would double its dividend in five years.

After backsliding into a correction, the market is showing a firmer tone. Reactions seem erratic. Yum Brands reported profits down 26% but its stock popped up five points on its forecast that KFC sales in China would resume their growth later this year. Proctor & Gamble (PG-$76) reported increased earnings but lowered its outlook for future sales and its stock dropped five points. I picked up some shares of PG on this dip. Like Apple, it yields 3% and is quite reasonably valued.

Despite a continuing diet of unsettling headline news, the market continues to show a firmer tone. With expectations in the air of a fourth straight spring swoon, stocks might be defying this widespread belief and anticipating a cyclical economic recovery later this year. Goldman Sachs recently forecast improving business activity accompanied with increased CEO and investor confidence. It bases this on recent positive surprises in employment, manufacturing and retail sales. Its new target for the S&P 500 is 1625, up 2.5% from today’s level.

Should these conditions develop, it is likely that investors will place a higher valuation on earnings from cyclical sectors like manufacturing or materials. “Defensive” stocks like health care and utilities that have been strong so far this year may step back.

Global food demand will increase, strengthening the results for DuPont (DD-$53), Syngenta (SYT-$82) and American Vanguard (AVD-$29). I am adding Valmont Industries (VMI-$145) as a new buy recommendation. The company is a global provider of engineered products for infrastructure and for mechanized irrigation equipment. Its irrigation segment holds particular promise in a world where droughts and limits to water availability drive increasing demand for improving farm production and more efficient water usage.

Valmont recently reported overall sales for the first quarter up 14% with operating income up 43%. Of its quarterly sales of $820 million, the irrigation segment accounted for 28% and for 42% of operating profit. Utility support structures were up 25% and sales for use on in highway safety, lighting, industrial systems and other infrastructure increased 10%. Quarterly earnings were $2.89, up from $1.96 last year. Estimates for all of 2013 are $10.70, up 22%, and the company’s own forecasts confirm increasing earnings guidance.

The company has increased its dividend for eleven straight years. Even though the current yield is less than one percent, investors who buy and maintain positions in higher quality stocks like Valmont and Apple can anticipate increasing income together with growth in their capital. They will certainly beat those who try to predict the market or who rely on “tips.” Successful investing, like most worthwhile pursuits, demands informed effort and discipline. These work well.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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