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Despite global debt worries, the global economy is humming like a well-oiled machine. Proof came once again this morning in the form of strongly positive earnings reports from two industrial giants with broad overseas exposure, Eaton Corporation ( ETN - Analyst Report ) and CNH Global ( CNH - Snapshot Report ) .
Diversified manufacturer Eaton offered second quarter EPS which grew 43% year over year, mainly on 12% end-market growth. Eaton's operating earnings per share reached 97 cents in the quarter, beating the Zacks Consensus Estimate of 95 cents and exceeding the high end of the company's second quarter guidance range of 90-96 cents.
The company, which makes and sells a wide range of products to over 150 countries, including electrical power grid components and controls, fluid power systems, and aviation power accessories, believes the year is shaping up to be better than what was forecast in April 2011. Eaton now estimates its overall end-market growth for the full year at 11% versus the previous forecast of 10%.
Given its strong performance in the first half of the year, Eaton expects 2011 to be a year of record sales and profits with 19% growth from the 2010 level and record a 6% rise from its previous annual sales record achieved in 2008.
Based on second quarter results and the revised market outlook for 2011, Eaton has now raised its full-year GAAP earnings guidance by 15 cents to $3.86-$4.06 per share, while adjusted earnings are expected between $3.90 and $4.10 per share.
Dow to 20,000 by 2015 on Emerging Markets
In early June, I responded to James Altucher's crystal ball article on MarketWatch about "Dow 20K" with some fundamental substance to put underneath the prediction. I used Eaton as an example of an industrial beneficiary of Emerging Markets and a stock I had recommended buying at $40 last October. Here's what I wrote in "How Dow 20K?":
"What's driving the stock market recovery -- as much as, if not more than, any extraordinary monetary policy -- is Emerging Markets. Global growth and demand from dozens of countries with emerging middle class populations that want the lifestyles of the West have kept the profits of companies like Caterpillar ( CAT - Analyst Report ) and Eaton brimming as infrastructure development in the BRICs and beyond merely hiccupped during the US banking crisis and then forged on."
Global industrial infrastructure demand aside, if you are going to build big new cities for people to live and work in, there's another area of development you better have figured out: food. Since early 2010, I've been writing about the next ten years being "the decade of food" because of the global dynamic that happens in planetary agricultural demands when 2 billion shift to a Western meat-based diet.
After I attended the World Agricultural Conference in Chicago in May, my awareness of the dynamics was greatly expanded. I was a buyer of the fertilizer, seed, and machinery companies prior to that -- like Potash ( POT - Analyst Report ) , Monsanto (MON), and Deere (DE) -- and I only became more interested after hearing top AG economists and investors talk about the global food puzzle with a world headed toward 9 billion inhabitants by 2050.
The Decade of Food
One thing that stood out at that conference was the surge of Private Equity interest in this space. Here's what I wrote for TheStreet.com on May 10:
"The investible agribusiness universe is estimated to be between $600 billion and $2.2 trillion, depending on how you slice the criteria for inclusion (e.g., what percentage of a company's revenues come directly from ag-related activities). And much of the serious investing that's going on is being done through Private Equity (PE), not public companies.
Bill Goodbar, Managing Director of Agricapital Corporation, noted in his presentation that 63 new PE firms are looking to raise over $13 billion for new investments, both domestic and abroad. This money will pour into farming land, corporate farm development, infrastructure, transportation, chemicals, seeds, and biotechnology, water use and irrigation, machinery, processors, grocers, a dozen other logistical points in the supply chains."
On June 9, I wrote about a small farm equipment dealer, Titan Machinery (TITN), that sells the Case and New Holland brands of agricultural and construction machinery. Titan blew away street estimates by nearly twice expectations with a four-fold increase in profits from the year-ago quarter's results. The article "Farm Machinery Plows Profits," highlights three macro forces of the equipment dealer's success.
Farming on Fire
And today's news from CNH Global only adds more fuel to this fire. The manufacturer of Case and New Holland equipment posted a net income before restructuring and exceptional items of $320 million or $1.33 per share in the second quarter of 2011, which soared from a net income of $140 million or 59 cents in the year-earlier quarter.
Beating the street consensus by 34 cents, CNH shares have been trading up over $4 (11%) for most of Monday, to two-month highs above $41. Net sales of Equipment, excluding revenue from Financial Services were $4.88 billion, up 24% from the year-earlier quarter, driven by a double-digit growth across Agricultural Equipment and Construction Equipment.
On a segmental basis, revenues from Agricultural Equipment were $3.9 billion, up 22% from the year-earlier quarter, led by favorable trading conditions across all regions. Revenues from Construction Equipment were $1030 million, up 30% from the year-earlier quarter, led by improvements in market conditions in all regions, especially the North American markets.
For fiscal 2011, management expects strong demand in the agricultural and construction equipment markets, driven by a favorable environment for agricultural commodity prices and an improvement in the Construction Equipment.
Based on the company's performance, management upgraded its fiscal 2011 revenue guidance to 15%-20%, up from the previous expectation of 10% growth. The company also expects operating margin at the upper end of its previous guidance of 7.1% to 7.9%.
CAT Miss Is Irrelevant
And how is Caterpillar holding up after its profit miss last week? Pretty good, actually. The nearly 6% hit the stock took Friday was extended somewhat Monday morning, but the CAT is clawing its way back to regain the $106 level.
This strength in the face of fears about a potential US debt default is very encouraging. But what likely has real buyers of CAT stock encouraged was the company's strong guidance for the rest of the year. Heres what I wrote on Friday:
"Explaining its earnings miss today, even on record sales and revenues, Caterpillar executives spoke about the slower-than-expected pace of recovery in the second quarter, particularly due to the impacts of the Japan quake devastation.
But, the company also raised guidance for the second half of the year, noting that excluding the impact of the Bucyrus acquisition, they expect revenues in a range of $54 to $56 billion and earnings per share of $6.75 to $7.25, compared with the prior guidance of $52 to $54 billion in sales and revenues and earnings per share of $6.25 to $6.75."
What the World Needs Now is Engines of Growth
After these strong earnings reports from three industrial heavy-weights -- CAT, ETN, and CNH -- all eyes will be on Cummins ( CMI - Analyst Report ) Tuesday for its contribution scheduled after the close. I've been writing about Cummins for months now as a dominant diesel engine maker with its hooks in a wild card industry: natural gas engines for America's trucking fleets -- and its energy independence. See my "Alternative Energy Wars" for more on that dream.
I took the opportunity to sell puts on the stock when it pulled back below $95 in mid-June, shorting the January 90 strike for $10. See a video description of that trade strategy in "Naked Puts: How to Profit from Your Favorite Stocks."
If the global economy is about to buckle from Japan's devastating earth quake, revolutions in oil-rich nations, or the US debt ceiling crisis, you wouldn't know it looking at industrial stocks. Power on.
Kevin Cook is a Senior Stock Strategist for Zacks.com
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