Can US results tell us which UK companies are performing well?
This week marked the start of the second-quarter earnings season in the US.
I've always found this to be a valuable source of ideas and insight into how companies and sectors were performing here in the UK. Here's what caught my eye...
A good week for semi-conductor manufacturers
Chip manufacturers are usually seen as good early cycle indicators. The theory runs that manufacturers run down their inventory/sales ratio until they have to buy new chips in order to meet growing demand. This point of inflexion is usually seen as an early turning point in the recovery. If so, then the global economy is in better shape than many would believe.
Intel and rival chip maker AMD both produced numbers that beat revenue and profitability forecasts. Intel, which posted its best results ever, talked about the current state of the inventory cycle:
"One quick word about the status of inventories. Across the supply chain, we're very comfortable with the levels of inventory. In the channel, we saw a marked decline in inventories as currency volatility caused distributors to cut back on orders, so inventories in the channel are very lean."
This suggests that there is scope for further revenue gains for Intel, provided sales hold up. A similar conclusion could be drawn from what AMD said...
"Europe first. It's hard to know what's going to happen. I can tell you what the mood among partners is. Number one, due to the caution driven by macroeconomic concerns, there's a hesitance to put a lot of cash into inventory. Therefore the supply chain is being managed very tightly... we're still pretty optimistic that China's going to be a growth engine for us both in the back half of this year and frankly for many years to come."
And a good week for chip suppliers
Intel and AMD obviously mean it, because they appear to be ramping up their capital expenditure. Novellus and Dutch company ASML (they both supply chip manufacturers) both posted results that beat estimates. Novellus, when asked about its customers said:
"I think they are all cautious from the standpoint of their worry that demand in Europe is going to cease and that somehow that's going to have a negative impact on their business. But one of the things in these conversations that we find is that the place that demand is really the strongest and the most surprising is in China and in developing nations."
It appears that a theme of customer caution on Europe -- possibly as a consequence of sovereign debt fears -- has been holding back some spending, but Asia is doing fine.
Some UK companies exposed to similar profit drivers include CSR (LSE: CSR), Wolfson Micro Electronics (LSE: WLF), ARM Holdings (LSE: ARM),and Cookson Group (LSE: CKSN).
Mixed news for industrials
AAR Corp missed estimates and mentioned that its commercial markets were "not as brisk as expected". I believe UK stock Umeco (LSE: UMC) could be exposed to similar trends.
Similarly, Swiss inspection and testing company SGS missed estimates and reported revenue growth of just 1%. It maintained its forecast for a 'solid' year but the market wasn't impressed. One of the company's biggest competitors is Intertek Group (LSE: ITRK).
Aluminium manufacturer Alcoa cheered the market by beating estimates. Unlike most people, I'm less convinced about the company's status as a 'bellwether' stock. Nevertheless, it does give good insights:
"Automotive, the next segment here, global production is expected to rise to around 66 million vehicles that is +15%. The growth is in pretty much every region, except in Europe and Europe is pretty much driven by the strong incentives that pulled demand forward. European sales are down, but exports have risen for European companies by 40%. So it is interesting to see that European production, due to that rise in exports, is expected to be around 3.8%
US sales are expected to be around 11.7 million vehicles, so around a 7% to 12% growth rate. That is what we see here. In China, up 10% to 15%"
This augers well for the likes of GKN (LSE: GKN), Tomkins (LSE: TOMK) and also Victrex (LSE: VCT). On a rather less positive note, this might not be great news for Rexam (LSE:REX)...
"In beverage can and packaging, the market is up modestly"
Korean steel giant Posco gave an upbeat presentation along the same lines, whereby it slightly upgraded domestic auto production forecasts. However, it also significantly upgraded domestic shipbuilding forecasts. This could benefit Hamworthy (LSE: HMY).
Did you spot any similar good or bad news for UK companies? Let us know in the comment boxes below...
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