The problem with bitching out the Big 3 and Detroit...

Through the financial crisis I have seen one and only one article that seems to fairly represent what is reality in Detroit. Unfortunately I have no idea where it went, all I know was that it was a Yahoo opinion piece.

The bulk of the argument was that Congress and the public has been slamming the big three for their lack of viable, profitable small cars, yet Detroit has never ever had a small car anchor their company profits. The cars they sell are cheap and costs less than there Japanese counterparts but that is because they have never had a highly profitable small car. Honda and Toyota not only do well with small cars but typically are making $2k-$3k more in profit per small car than the GM, Ford, or Chrysler counterpart.

That being said all three could produce such a car, but it is an uphill battle. Think of an alternate universe where the Japanese government chastises Honda and Toyota for not building vehicles that compete with Suburban XL's and Expeditions (okay Toyota has one, but the idea is the same). It would be difficult for an auto company to turn that niche in the market their direction. First, they would have to build an vehicle that truly convinced the public that their vehicle is the best. Oh and it would need to be at a price point to convince the population to purchase said car. Think about that for a second. This requires a great investment of engineering, production, and advertising on a vehicle that may not really turn a profit in its first 4 years. Meanwhile you will have to change the perception of the auto media and the car buyer that a company known for making questionable quality small cars now makes great small cars. Don't forget your competitors which already are good at making its auto equivalent can release a new, better vehicle a year after which can wipe your products advantages off the map and is known as a quality vehicle (good example is the Chevy Colorado/GM Canyon and then Toyota's release of a new Tacoma a year later). It is a difficult hill to climb.

That hill can be so great that it leads to companies having an easier time creating new niche vehicles than over fighting in a saturated market. These CEO's are not dummies, they are doing what makes sense. What makes the most sense is continuing the success the niche markets that they are strong in (see trucks and large cars), draw a line in the sand on markets they can compete in (see midsized sedans) and create new vehicles when they have been kicked out of a market (see minivans to crossover vehicles). It is really like telling JA Henckel's (the knife maker) to make hand tools. It can be done, it might turn a profit at some point, but it will take a lot of money to make it happen.

To me it was funny, they ripped the CEO's, which rightfully so when they all show up asking for money in posh jets, but beyond that it was nothing more than impressive political sound bites. Believe it or not, automotive production is one of the two last great manufacturing industries that remain in the US (the other being airplane), congress should do everything they can to protect the industry. It is fragile, it did need a scolding, but after that do what is right and save the companies. At least they make a product, a real product.

My own private market update

Well after I lost roughly 46% of what I had put away in my Roth IRA I have been slowly climbing instead of digging with a portfolio shuffle that I think will work for both the short term and long term. I am now firmly only at a 26% lost. That means I have raised my funds roughly 20% from there worst point in the past 2.5 months. How did I do it, mostly buying two stocks that are a couple of the only companies that will do well in this economy Kroger (KR) and Walmart (WMT). Not to mention timely purchases of Baldor (BEZ), Philips Morris International (PM) and Vanguard Total Market Etf (VTI). I am buy no means a savvy investor again (was I ever) but I resolved late last year to make conservative long term purchases in the market. Also, I am going to go forward with an investing strategy which I will explain someday in a later post but the biggest impact is going to be anchoring ETF's like VTI and smaller investments for long term stocks using principals that I have laid out over the past year in this blog.

I haven't even begun adding to my 2008 Roth yet, so a big plop of money is going to get infused soon into my future funds and a close scrutiny of the market will litter my posts once again.

Ticket to Crazytown: Market Thoughts...

Well I haven't updated on stocks recently, but should probably say that I went to all cash except for Baldor (BEZ) Wednesday morning and then picked up one of those two stocks that I have been eyeing Phillips Morris International (PM). I have been thinking a lot about the market and how to make safe money in this our current economy and have come up with a couple of thoughts.

The first being I am going to stay away from ETF's until there are real signs of market improvement. This may sound crazy, ETF's by nature are supposed bring some stabilization, but all the ones that I have held and were eyeballing have been slowly deteriorating in share price. I am negative 20% on my account because of it. When signs truly trend a little better I will buy VTI and PWV again, but for now I am going to wait.

The second being that there is some real values out there right now. If you are a contrarian investor you should be having a field day. I am trying to find some real hard and firm value stocks with good economy proof basics. Baldor is still one of those stocks for reasons that I have spoken about before. Philips Morris International is one that should be both economy proof to the US and also provide long term growth across the world, and because smokers smoke. The others that I have been looking at is Kroger (KR), Intel (INTC), and Ship Finance International Limited (SFL). I am searching for more, but I am looking for a solid long term companies.

I am interested to know what other people think of what has happened with the economy. I have mixed feelings for the government's bailout / takeover / whatever that has occurred this week. On the one hand I am glad that they are doing something, I think that the current financial market dictates that this needed to occur. I don't like that it is my money, but I think that saving us from a complete financial collapse is a good thing. On the other hand, I am pissed that we all didn't do something six months ago when we knew that this was a possibility and when it would cost us a lot less. Beware now of the hidden inflation that will now occur. I am unsure how it will affect the everyday person, but we can't keep throwing money at sinking ships and expect for the return to add value to the economy. I am nervous that is for sure.

ROK looks cheap...

Market had a big fall on Friday and one huge loser was Rockwell Automation (-$3.02 per share). I spoke about them before when I revealed how I found Baldor, and I liked them then and still like them now. ROK stock value has been faultering ever since they missed analysts predicted earnings last quarter. Here is what baffles me the market reacted to analyst's predictions not the company's. If you review their last call you will quickly find out that there was siginificant revenue growth not only in every business category, but in every geographical location as well. Not many companies can say that and yet it has loss over $12 per share since the beginning of the year.

Take a quick look at the charts and it has been nearly three years since this stock has been this low and it is a better company now than it was then. Again the things I like are the good ROA, strong growth, ~2% dividend, extremely robust and strong product (Allen-Bradley Controls), and their firm commitment to the growth of that product by intelligent acquisitions. I should talk about the A-B product a little more, although I did cover it thoroughly before. It is a great product in the current economic climate, the controls are modular and are considered the best in the business. The controls are prodominately used in PLC applications in all sorts of industries from factories to oil rigs to building temperature controls. The whole world is modernizing these industries right now and the modular setup of A-B controls allows both new and old equipment to talk and work more efficiently.

Final thought, I'm buying tomorrow!

Stock Analysis BEZ and ROK

I look for stocks in several different manners, I do screens, I read the news to understand so called expert opinions, and I look for trends. I am definitely a value investor but also have been known to make purchases based on dividend investing (largely influenced by my friend Grant). A past simple example of a trending purchase included Microsoft before it released Vista and Office 2007. The stock was cheap and new programs were coming out that would significantly affect there bottom line. In my mine easy money.

Well a current trend that my own job is closely tied to is the modernization of manufacturing. Over the past 10 years the costs for modernizing a production facility has significantly decreased due the wider availability of new efficient electronic controls. Two companies that should do well going well into the future are Rockwell Automation (ROK) and Baldor (BEZ). These two are interrelated somewhat due to recent sale of Reliance motors and Dodge gearboxes and bearings from Rockwell to Baldor. More on that later.

Rockwell Automation owns a key product that will provide profitable business for years to come, namely Allen-Bradley. Allen-Bradley is the Cadillac of the PLC Factory controls world. They are the most expensive, most well made, most utilized PLC setup for most factories in the US. Their programming is straight forward, their controls are extremely durable, and system is modular by design and easier allows for constant updating of a manufacturing process. So what you say, well based on that ease of use companies are willing to shell out more money for a safe, reliable product. Let's put it this way, you own a factory making 1,000,000 widgets a day. Well every minute that line is under repair you are losing a roughly 700 widgets that could possibly be made. So every minute counts, and when every minute counts an engineer or a maintenance department can justify Allen-Bradley equipment really quickly due to its proven reliability, its wide availability and modular integration (aka less downtime).

Analysis of the stock shows that they failed to meet analysts predicted profit this last quarter and the price of the stock has fallen significantly. Personally, I am sitting back and waiting for the stock to even out. Over the long term this should be a good stock with good ROE 12.5%, nice divided yield 2.10%, and strong international earnings potential. As stated before they sold their Reliance and Dodge brands to Baldor this last year and now should see some benefits from concentrating on the programing and controls part of the business. Also, it previously (before the latest quarter) had shown up on my two favorite screens, earnings momentum and the Magic Formula.

Funny enough, through the analysis of ROK is when I found Baldor. Baldor makes motors, lots of them, in all sorts of useful sizes and types, and most importantly, at high electrical efficiencies. Baldor happened to be the last three motor purchases for my factory due to their competitive pricing, excellent customer and technical service, and a robust, reliable product that is made in the USA. Their acquisition of Reliance and Dodge was an excellent move. They essentially bouught their biggest competitor and doubled their business. Baldor typically made small to medium size motors, Reliance made medium to large size motors, it was a real good fit for both parties with only a little bit of overlap. Additionally, Reliance was known for all of the same things as Baldor (reliability, pricing, service, made in USA). The Dodge gearbox and bearing acquisition was brilliant as well, due to most of these Baldor and Reliance motors being directly fitted up internally with these bearings and to gearbox at the end user's factory.

Why do I think Baldor is great purchase for a long time? Easy, factory conversions from DC Motors to AC Motors. What's that you say? Forget the literal electrical stuff and I will explain it in simple terms. Lots and lots of processes run on variable speed electric motors. Examples of variable speed applications could be belt speeds on a conveyor belt, turning speed of a farm's irrigation system, or rpm speed of a milling machine. A lot of the equipment that is still utilized today were originally designed and built in the 80's and 90's with DC Motors. It was the only option available at the time that allowed for adjustable speed. Consequently DC Motors over time get really dirty and eventually fail. They can be rebuilt several times over, but that can be quite costly, or they can be replaced with new DC Motors which can be quite costly, or they can be replaced with new AC drives and motors which is quite costly. The “drive” is the electrical control that commands the motor, if you switch from DC to AC then a new drive has to be purchased as well. Why a switch from DC to AC? AC setups are 20-40% more efficient electrically and have minimal maintenance costs, usually no more than a bearing change every few years.

Enter Baldor's product line. First they are one of the few remaining companies that produce new DC Motors, and as such, they charge a premium. Second, Baldor and Reliance make high efficiency AC motors and drives that are among the best in the business. These motors and drives are well priced as well (not the lowest and not the highest). Third, the leaders in the drive market is still considered to be Allen-Bradley owned by Rockwell Automation. Well because Rockwell Automation is no longer in the motor business but recently sold the Reliance motors to Baldor, they still sell their AC motor and drive package with Reliance Motors and they charge a premium price. Which should means that Baldor may lose a sale on a drive but should still retain the same profitability of the motor.

To sum up, if you need a DC Motor, Baldor has a strong chance at a sell, if you want to switch to an AC motor and drive, Baldor has high likely hood of at least a new motor sale, and heck if you want to repair your DC motor, Baldor may even be your supplier of spare parts. This is the kind of market that even a Buffet fan would love. This DC to AC motor conundrum will probably continue to occur for the next 3-10 years until the majority of the equipment is AC driven. High usage DC Motors need overhauls every 3-5 years, so every overhaul is a good possibility of money in Baldor's pocket. That will provide a constant stable income for Baldor during these difficult economic situations in just repair sales. When you add that to strong OEM sales, an excellent quarterly reporting last week (23% increase net income), and decent dividend of 2.01%, it looks great for a long term prospect, especially when the economy turns up again. The one bad thing is Baldor's stock has increased ~10% since the quarterly report and may be a little high right now. I purchased shares $27.50 last week and already the stock is at $33.88, but I still think there is room to grow.

Good luck and in this market, happy hunting.