A Tale of Planes, Parts and Pool Products
(Bloomberg Opinion) -- It’s early yet in the industrial earnings season and there’s not much of a trend to talk about. So I wanted to instead draw your attention to three companies, two of which have unique situations that likely separate them from the fray; the third faces challenges that may also spell trouble for others.
First up is Delta Air Lines Inc. Among the biggest U.S. carriers by market value, it’s the only one that doesn’t fly Boeing Co.’s 737 Max, which was grounded last month following two fatal crashes. So while American Airlines Group Inc. warned this week that it hadn’t been able to raise prices as much as it had hoped in the first quarter, Delta posted a strong earnings beat that puts it comfortably on track to hit or perhaps even surpass its full-year goal of $6 to $7 in earnings per share. American Airlines is tentatively scheduled to release its full results on April 25, according to data compiled by Bloomberg. That’s the same day we’ll get numbers from Southwest Airlines Co., which has already said it will take a $150 million revenue hit from the Max grounding and lower leisure-travel demand. The worry point for all airlines is that capacity additions will pressure their ability to raise fares. But Delta’s growing focus on higher-paying business customers and loyalty programs – including a recently extended partnership with American Express Co.— positions it better than most.
Fastenal Co. is another company that appears to be breaking out of the mold. The distributor of factory-floor basics reported first-quarter earnings and revenue that were simply in-line with analysts’ estimates, but the stock still shot up 5 percent. It helped that Fastenal’s gross margin didn’t decline any more than anticipated, given heightened competition from Amazon.com Inc. and rising costs. But what likely cheered investors the most was the contrast in Fastenal’s numbers to rival distributor MSC Industrial Direct Co. While MSC called out a “moderation” of the industrial economy, Fastenal cited strong underlying demand and a growth boost from its new sales initiatives, including vending machines for parts and inventory-management services embedded within customers’ facilities. It’s not a great sign for the broader sector that MSC expects a material slowdown in daily organic sales growth to just 4 percent in the current quarter.
Lastly, there’s Pentair Plc, which pre-announced disappointing first-quarter results this week and lowered its guidance for the full year. Weather was a major factor: cold and wet spells sapped demand for Pentair’s pool products and agricultural-related businesses. But the drop-off in earnings and sales seems too steep to be entirely weather-related, and CEO John Stauch also did cite moderating growth in some of the company’s markets. Pentair now expects organic revenue to be up at most 1 percent this year, compared with an earlier forecast of 4 percent to 5 percent. Higher-than-expected inventory levels in distribution channels could reflect a rush of pre-buying in the U.S. residential sector ahead of price increases, Barclays Plc analyst Julian Mitchell notes. This could foretell a similar sales hangover at United Technologies Corp.’s Carrier unit, he says. Stanley Black & Decker Inc., Johnson Controls International Plc. and Ingersoll-Rand Plc also could feel the pain of the poor first-quarter weather.
After Boeing announced last week that it would temporarily curtail production of the 737 Max, many of its suppliers – including CFM International, Spirit AeroSystems Holdings Inc. and Allegheny Technologies Inc. – said they would continue at the previous 52-plane pace. Boeing is still working on a fix to flight-control software that was implicated in both crashes of the Max, and then regulators would need to bless it. So keeping its suppliers on track could be read as a sign of optimism that the plane will return to the skies sooner rather than later. Indeed, some companies could use the breather as they work through bottlenecks. Boeing officials have reportedly told suppliers that it intends to ramp to its targeted pace of 57 planes per month by September. It’s possible, but the Max also seems increasingly likely to become a political football, making that optimism look a tad aggressive. Southwest Airlines on Thursday said it had removed the Max from its schedule through early August. That’s a pushback from Monday, when it said the planes had been pulled through June 7. With its own reputation on the line, the Federal Aviation Administration is treading carefully; on Friday, it convened airlines and pilots to get their opinions on the Max. That’s separate from the formation of a panel of foreign regulators, many of whom are also performing their own independent reviews. Meanwhile, the U.S. is ratcheting up tensions in Boeing’s long-standing dispute with Airbus SE over unfair government aid by threatening to impose tariffs on $11 billion of European Union goods. The EU is responding in kind. As my colleague Chris Bryant notes, “it looks unwise for the U.S. to step up a commercial dispute when its domestic aerospace champion is reeling and reliant on the goodwill of aviation authorities around the world to help get the 737 Max flying again.”
COMING TO PLANE NEAR YOU
Additive manufacturing was all the rage a few years ago when General Electric Co. announced a pair of 3D printing deals, but it seems to have slipped into the background, along with GE’s now largely defunct plans to become a software company. So I thought it was time to check in on what the company and its rivals were doing on the 3D-printing front. GE spent nearly $1 billion to acquire Arcam AB and Concept Laser GmbH in 2016. While it’s tempting to lump those deals in with former CEO Jeff Immelt’s tendency to throw money at the hot new trend, they seem to be the exception to the rule. GE’s bottom-up approach lets it think bigger and more creatively. It’s using additive manufacturing to reinvent the jet engine in ways that reduce weight, curtail scrap-metal waste and simplify its supply chain. That’s much easier to understand than software that may or may not perform the revenue-boosting and cost-saving miracles that are promised. On the other end of the spectrum is Honeywell International Inc. Most analysts and investors will be surprised to learn the scale of Honeywell’s additive operations. It doesn’t own a printer maker (it buys them from third parties), and its approach for now is to deploy the technology as a working-capital improvement program, using 3D printing to craft parts that already exist but could be improved on or lack a robust supply chain. United Technologies falls somewhere in the middle. The company’s priority right now is deepening its understanding of the technology. 3D printing is likely to be the next revolution in manufacturing, but these three companies see additive fitting into their business in different and interesting ways.
DEALS, ACTIVISTS AND CORPORATE GOVERNANCE
Anadarko Petroleum Corp. agreed to sell itself to Chevron Corp. for $50 billion including debt. It’s one of the biggest oil and gas takeovers of the past 10 years, behind Royal Dutch Shell Plc’s megabuyout of BG Group Ltd. in 2016. Anadarko has struggled in the years since its poorly thought-out attempt to acquire Apache Corp. My colleague Liam Denning calls the company a mini-major: it's both too small to qualify as a true top oil company but too global and sprawling to be grouped with U.S. frackers. That helps explain why Anadarko is willing to accept a takeover price that’s in line with where it traded only six months ago, Liam writes. Intriguingly, Occidental Petroleum Corp. reportedly offered more for Anadarko and included more cash. As it evaluates next steps, it may have other options: Analysts are speculating Anadarko’s Permian Basin neighbors such as Pioneer Natural Resources Co., Concho Resources Inc. and Noble Energy Inc. could be targets, too.
A.O. Smith Corp. agreed to buy Water-Right Inc., a closely held maker of water treatment products, for $107 million. It’s the company’s biggest purchase since buying Lochinvar Corp., a maker of high-efficiency boilers, for $418 million in 2011. The Water-Right deal helps A.O. Smith continue to branch out from water heaters into the lucrative sterilization and filtration markets. There’s some risk: Water-Right works through wholesale channels and most of A.O. Smith’s business is direct-to-consumer or retail-oriented. But the purchase price works out to a reasonable multiple of just under two times the $60 million in annual revenue that Water-Right generates.
Buffett Says Musk Could Improve as CEO, Doubts Merit of Tweeting
Sweet-And-Sour Global Economy Gets Relief Signs, Bleak Forecasts
Uber Is Huge, Sprawling and Still Entirely Unproven: Shira Ovide
Boeing's Crashes Expose Reliance on Sensors Vulnerable to Damage
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
©2019 Bloomberg L.P.