The earnings season is going on, and it seems like investors have hardly taken the time out from staring at the Apples and Googles of the equity world to focus on a sector like electrical equipment manufacturers. In fact, I probably wouldn't be wrong if I said that General Electric Company (NYSE:GE) is the only company that investors know in this particular sphere. After briefly discussing the expected performance of this industry, I will give a concise earnings preview of three companies that are expected to announce their quarterly earnings in a day or two.
Electrical Equipment Manufacturers
I kept hearing from the sell-side in the September’s earnings season that the investor sentiment is negative currently, but I expected a rally at the year-end. However, nothing of that sort happened. That being said, there are two things that might be in the cards that have sent bullish signals to the market regarding the electric equipment industry.
1) A potential short cycle catch-up
2) Re-acceleration of the Chinese economy
Kennametal Inc. (NYSE:KMT)
2Q: After the shocking miss in Q1 2013, I think that a surprise on that scale is very unlikely for Q2, but I do see some downside risk to consensus for Q2, given that the Street assumes a better trend in December than the -8% November 3MMA orders rate (the Street is assuming -6% organic sales y-o-y in the last quarter).
2013 Outlook: There is a very high probability that Kennametal cuts its EPS guidance range from $3.40-$3.70, towards a range of $3.15-$3.45 (or it may narrow it by $0.10, given we are halfway through the financial year now), due to the very weak first half sales performance. A cut of this magnitude seems now to be embedded in investor expectations. Therefore, only a limited downside to the share price is expected in this scenario.
Dover Corporation (NYSE:DOV)
4Q: Dover is expected to come in at the top-end of the guidance range for 2012 ($4.36-$4.46), with core growth accelerating by 200bps from the Q3 level due to Energy and Printing & ID (this is expected after Danaher Corporation (NYSE:DHR)’s positive pre-announcement relating to its P&ID business, which competes directly with Dover’s).
2013 Outlook: The company is expected to reiterate its 2013 EPS guidance of $5.05-$5.35, and reiterate that the operating margins in Comm Tech are continuing the turn-around evident in Q3 2012. Given the recent run-up in the stock, and several sell-side ratings upgrades in the past few months, I expect a muted share price reaction on the earnings release.