FOCUS ON THE 15: Investors find lots to like in projections

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By Jim Victor | Tuesday, June 03, 2008 |

Faster-than-expected business growth was a recurring theme that investors read last week, and they responded. In a Memorial Day-shortened week, investors bid broad markets upward. Our Quad-City Times Key 15 finished the week with a 39.80 gain to close at 1,399.98.

Faster growth in durable goods orders was Wednesday’s message from the Commerce Department. While the single month order rate slipped due to the monthly volatility of big ticket transportation items like ships and aircraft, the core rate climbed with surprising strength. Core capital goods orders rose 2.5 percent for April and are up 5.2 percent compared to one year ago, the best gain since late 2006. Today’s orders become tomorrow’s manufacturing. So, this “leading indicator” suggests more manufacturing ahead. Some sectors showed absolutely amazing growth, like machinery orders up 11 percent over a year ago. In this category is the construction and farm machinery made by Deere (a) (b), where the latest report showed strong international sales.

Faster growth in the nation’s total output also was reported by the Commerce Department. First quarter gross domestic product, or GDP, climbed at a 0.9 percent annualized pace, even after stripping out the effects of today’s higher inflation. That “real” growth rate at 0.9 percent is faster than the earlier estimated 0.6 percent rate. More importantly, it is growth, rather than receding or recession. Capital spending by businesses helped. Imports fell, but exports continued to climb.

Both of these themes were clearly in play in Quad-City business reports. Consider Heinz, which posted better-than-expected results. With Muscatine, Iowa, food processing, Heinz posted fiscal fourth-quarter sales up 11 percent to $2.69 billion, helped by a 4.5 percent pricing increase. This helped overcome higher ingredient costs, lifting Heinz profits by 11 percent to 61 cents per share. Heinz initiated a two-year forecast, raising its outlook on growth in earnings per share each year to between 8 percent and 10 percent. Introducing new products and accelerating growth in emerging global markets for “annual sales growth in the high teens” is Heinz’s plan.

Not stopping, Heinz increased its shareholder payout by 9.2 percent to 41.5 cents per share per quarter. Heinz climbed to a new 52-week high of 50.09 last week, gaining 3.36 for the full week to close at 49.91.

Deere & Co. had a list of developments, all in the vein of global growth and machinery demand. First, Deere says it will expand East Moline combine production, spending $35 million to improve output capacity by 30 percent. Second, Deere says it will increase its shareholder payout by 12 percent to 28 cents per share per quarter. That dividend is payable Aug. 1. Third, Deere will use corporate cash to increase its buyback of company shares by another $5 billion. That is in addition to the company’s 40 million share buyback plan from May 2007, under which just 23 million shares have been purchased so far. Finally Deere will increase its presence in irrigation systems, having just completed the acquisition of T-systems International, headquartered in San Diego. T-systems is global, marketing in more than 60 countries, and will become part of Deere Water Technologies. Investors counted four growth announcements in four days. Deere shares gained .92 to 81.34.

Archer Daniels Midland (a) (b), with extensive and growing grain processing in Clinton, Iowa, also had growth announcements for shareholders. ADM announced plans to offer up to $2 billion of “equity units.” “Each equity unit has a stated amount of $50,” says ADM, which reports it will use the proceeds for general corporate purposes including debt reduction. Shareholders let ADM shares fall 3.47 to 39.70.

The new week and the new month begin with the manufacturing sector purchasing managers telling us whether activity is increasing, quite an insight. Tuesday brings the latest on new factory orders, which will be an additional leading indicator for the months ahead. Watch carefully.

Jim Victor is senior vice president-wealth management and financial advisor for Smith Barney, Davenport. Smith Barney is a division and service mark of Citigroup Global Markets Inc. and its affiliates and is used and registered throughout the world.

The information contained herein has been obtained by the writer from sources believed to be reliable, but he does not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. a) The firm is a market maker in the publicly traded equity securities of this company. b) Within the past 3 years, Citigroup or its affiliates has acted as manager or co-manager of a public offering of securities of this company.