Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The equity markets have faltered a bit in August, giving back some of the gains registered earlier in the year. Even so, the Value Line Arithmetic Average still increased 1.6% for the six-week period covered in our latest Industry Price Performance rankings (July 9th to August 20th) and is holding onto a year-to-date gain of 22%. Interestingly, 2013 has hardly been kind to the name at the top of this week’s industry rankings.
The Precision Metals group advanced 24.9% over the past six weeks, but year-to-date returns tell a very different story. For instance, two of the hottest stocks in the group have been Barrick Gold (ABX) and Goldcorp Inc. (GG), which have risen roughly 40% and 30%, respectively, since early July. These moves were no doubt helped along by a rally in gold prices, which appeared to benefit from increased physical demand for the metal, particularly in Asia. The commodity’s price, though, has yet to fully recover from an even more-pronounced swoon in the June quarter. Thus, even following this recent surge, ABX stock is down more than 40% on the year, while GG shares are off about 15%. These equities, and most of the others in our coverage of the industry, are likely to remain volatile. In particular, the financial markets are likely to keep a close watch on the U.S. Federal Reserve’s plans to taper its bond buying program. The expectation of this seems to have played a role so far in 2013 in reducing the appeal of precious metals as a safe haven from the possible erosion in the value of other assets.
Volatility is also a hallmark of the Heavy Truck & Equipment Makers Industry, which holds down the seventh spot in this week’s industry price performance rankings. Reflecting the cyclical nature of the industry, most of 16 stocks we follow get below average marks of Earnings Predictability and Stock Price Stability. For the last six weeks at least, these stocks have generally enjoyed strong support from investors, rising 6.4% as a group.
One stock that has been key to the industry’s lofty status in this week’s rankings is Oshkosh Corp. (OSK). Oshkosh, which makes its home in the Wisconsin town of the same name, manufactures military trucks and a wide variety of specialty commercial, fire, and emergency apparatus. The defense segment accounted for nearly half of the company’s $8.2 billion revenues in fiscal 2012, with access equipment (34%) representing the next biggest slice of the pie. (Fiscal years end on September 30th.)
OSK stock has made impressive strides over the past year, rising from below $20 a share last summer to a recent 52-week high of $47. During late 2013, Oshkosh was the subject of an unsolicited $32.50-a-share tender offer by activist investor Carl Icahn. Mr. Icahn abandoned these efforts in December, but OSK shares have continued to push higher amid an improving profit outlook. Its latest surge is largely a reflection of the market’s enthusiastic response to the company’s June-quarter results.
Oshkosh continued to report rather anemic top-line results, as revenues inched ahead 1%, with continued weakness in the Defense business offsetting gains elsewhere, particularly in the Access Equipment segment. Share earnings, though, doubled, to $1.67, easily beating our estimate of $1.07. Wider operating margins, reflecting a favorable product mix, improved pricing, and successful cost-reduction efforts, were responsible for much of the improvement. The final tally for fiscal 2013, which ends on September 30th, will likely show big gains, as well. In all, we look for profits to reach $3.75 (slightly ahead of the company’s guidance of $3.60-$3.70), representing an increase of 63% from fiscal 2012.
Looking further ahead, though, fiscal 2014 figures to be a challenge in our estimation. The defense market, in particular, will likely remain a trouble spot in the year ahead, likely causing earnings to dip 5%-10%, to $3.45.
In all, OSK stock will likely appeal primarily to momentum investors for now. The fiscal 2014 setback should prove temporary, allowing annual earnings to push higher in subsequent years and reach $4.30 by 2016-2018. A key to this scenario is continued success in executing the company’s MOVE strategy, which emphasizes increasing market share, optimizing cost and capital structures, developing new products, and expanding deeper into emerging markets. Still, at the current valuation, 3 to 5 year price appreciation potential appears limited. Moreover, this equity won’t interest income-oriented investors. The company previously paid a modest dividend, but suspended it during the last recession, and we don’t envision a resumption of the payout at least until the latter stages of the decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.