Focused on fee-for-service work, Edmonton-based
Stantec plans, designs, and manages projects in the
North American infrastructure and facilities sector. The
company’s business model incorporates diversity across
regions, end markets, and all phases of the infrastructure
life cycle to manage risk and deliver growth. 2013
marked Stantec’s 60th consecutive year of profitability.
Sustainability — Infrastructure SOLID Q2/14 RESULTS; MAINTAIN BUY RATING AND INCREASING TARGET TO
C$78.00 (FROM C$75.00) Investment recommendation
We are maintaining our BUY rating and increasing our one-year target
price to C$78.00 from C$75.00 following better-than-expected Q2/14
financial results, an increase in our estimates, and as we roll forward
our valuation base by a quarter. We still believe that Stantec’s 5%
targeted organic growth rate for 2014, paired with the strong pick-up in
acquisition activity (closed and announced deals), are supportive of the
company’s long-standing growth targets. In our view, Stantec should
remain a core holding: management has a clear and consistent strategy
and game plan, no lack of opportunities to drive average annual revenue
and earnings growth of ~15% for the foreseeable future, and a long
track record of very disciplined and consistent execution. We also expect
regular annual dividend increases of 10% or more for the foreseeable
We rely on our five-year DCF model (10.5% discount rate) to value
Stantec. Our target price equates to a P/E multiple of 20.0 times and an
adjusted EV/EBITDA multiple of 11.4 times our 2015 estimates. Given
the company’s available growth opportunity and consistent ROE (~18%
level), we view these multiples as supportable, although nearer to the
higher end of the historical range. We are comfortable with this given
current overall momentum, where we are in the cycle, and what we feel
are relatively conservative forward estimates.
U.S. stocks climbed, sending the Standard & Poor’s 500 Index above a closing record, as investors speculated the Federal Reserve will continue to support the economy as central bankers meet in Jackson Hole.
The S&P 500 added 0.1 percent to 1,988.94 at 9:34 a.m. in New York, above a closing high of 1,987.98 reached July 24.
“Markets are looking for some indication from Yellen as to what happens once quantitative easing stops,” Peter Dixon, a global equities economist at Commerzbank AG in London, said by phone. “I suspect she’ll say that it depends on the data. The U.S. economy is in reasonable shape. The task for central banks, and Yellen is at the forefront, is how to wean markets away from almost unlimited liquidity provisions when the economy is recovering but remains fragile.”
The S&P 500 rose 0.3 percent yesterday, closing within two points of a record. The benchmark index has rebounded 4 percent from a three-month low on Aug. 7 as investors speculated central banks will keep interest rates low even as the economy shows signs of recovery.
Minutes to the central banks’ July meeting released yesterday showed that officials raised the possibility that aggressive stimulus will end sooner than anticipated, even as they acknowledged persistent slack in the labor market. The central bank will probably wind up its asset-purchase program at its October meeting, according to a Bloomberg survey of economists.
Data today showed fewer Americans than forecast applied for unemployment benefits last week. Yellen has highlighted uneven progress in the labor market in making the case for further accommodation.
The Fed minutes showed “many participants” still see “a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization.” At the same time, “many members” noted that the “characterization of labor market underutilization might have to change before long,” particularly if the job market makes faster-than-anticipated progress, the minutes also said.
Fed Chair Janet Yellen will speak tomorrow at the Fed Bank of Kansas City’s economic symposium that starts today in Jackson Hole, Wyoming. European Central Bank President Mario Draghi will also speak.
The S&P 500 has almost tripled since its March 2009 low, helped by three rounds of Fed stimulus, coupled with better-than-projected corporate earnings. The gauge has not had a decline of 10 percent in almost three years. It trades at 17.8 times the reported earnings of its companies, near the highest level since 2010.
Investors are betting that a soft touch on monetary policy will continue to suppress stock volatility, pouring a record stretch of cash into an exchange-traded note that rallies as calm returns to equities. The Chicago Board Options Exchange Volatility Index, the gauge known as the VIX (VIX), has lost 31 percent this month, closing at its lowest level since July 23.
Among other economic reports today, data at 9:45 a.m. may show a preliminary gauge of manufacturing slipped to 55.7 this month from 55.8 in July. Another report may indicate existing-home sales expanded at a slower pace in July while the Conference Board’s index of leading indicators, a measure of the outlook for the next three to six months, rose 0.6 percent in July, economists forecast.
Gap Inc. and Salesforce.com Inc. are among eight S&P 500 companies reporting earnings today.
Finning International Inc. is the world’s largest Caterpillar equipment dealer. Finning sells, rents and provides
customer support services for Caterpillar equipment and
engines in western Canada, the United Kingdom and
parts of South America. Headquartered in Vancouver,
British Columbia, Canada, Finning is a widely held,
publicly-traded corporation, listed on the Toronto Stock
Exchange (symbol FTT).
All amounts in C$ unless otherwise noted.
Infrastructure — Equipment Distribution and Rentals GETTING SHAREHOLDER FRIENDLY? REITERATE BUY; TARGET RAISED Investment recommendation
We rate Finning a BUY. In our view, the company could be in a position
by year-end to return a meaningful amount to cash to shareholders,
possibly up to $500 million. Separately, management’s efforts to drive
EBIT and lower invested capital could drive 35 cents in incremental EPS
over 2-3 years. We take our target to C$35.00 (from C$33.50) as we roll
our valuation period forward to 2016E EPS. We maintain a 14x target
P/E. FTT trades at 13.6x 2015E EPS vs. close comps at 14.5x. Investment highlights
Q2/14 EPS was $0.50 (+4% y/y), ahead of our $0.45 estimate and the
Street at $0.46. Revenue of $1.8 billion increased 9% y/y on strong oil
sands deliveries, Product Support growth of 4% y/y, and FX. Gross
margin of 29.6% was 60 bps below our estimate due to the high
proportion of New Equipment sales. SG&A of $388 million (22.0% of
revenue) was down from $392 million (24.2% of revenue) in Q2/13. This
left EBIT at $137 million (7.8% margin), which compares to our $122
million estimate (7.2% margin), and last year at $123 million (7.6%).
Steady backlog of $1.1 billion (flat y/y) affords decent visibility in 2H/14.
FCF was the highlight of the quarter coming in at $123 million vs. $7
million last year on lower capex and better inventory turns. TTM FCF is
an impressive $500 million and the debt/cap should be at the low end of
management’s target range (35-45%) by year-end (currently 41%)
leading us to believe a return to shareholders could be in the cards. We
do not see competing options (M&A, reinvestment) as probable.
I post various economic forecasts because I believe they should be carefully monitored. However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.
As seen in the “Recession Probability” section, the average response as to the odds of another recession starting within the next 12 months was 12.1%; July’s average response was 12.13%.
The current average forecasts among economists polled include the following:
By Barry Ritholtz
Last month, we discussed how we might be on the verge of a correction. We also noted the futility of trying to time the start and finish of such events. What actually matters is how you react — or overreact.
As my colleague Josh Brown has observed, “since the end of World War II (1945), there have been 27 corrections of 10 percent or more, versus only 12 full-blown bear markets (20 percent or worse).”
However, the data show that the distribution of corrections isn’t smooth. Indeed, almost half (45 percent) of the corrections occurred either in the 1970s or the 2000s. Both eras were part of longer-term secular bear markets, characterized by strong rallies, vicious sell-offs and earnings contractions.
It is noteworthy that almost half of the corrections occurred in two out of seven decades. I suspect this fact isn’t a coincidence. From a 30,000 foot view, it may be a key to understanding how likely a more severe correction might be.
Consider the various narratives that have been used as an excuse for a correction. The downgrade of U.S. debt by Standard & Poor’s was going to be a deathblow; it wasn’t. Treasuries rallied on the downgrade, just to prove that no one knows nuthin’. The sequestration of government spending was sure to cause a slow down in markets; it didn’t. Rising interest rates, the Federal Reserve’s taper, earnings misses, and of course, our winter of discontent, were all cited as triggers for corrections. And did I mention the Hindenburg Omen?
The punditry then shifted to valuations: We have heard repeatedly that markets are wildly overpriced, that we are in a bubble. Or if not a broad market bubble, then a tech bubble or an initial-public-offering bubble or a merger bubble. Some advanced the theory that Twenty-First Century Fox’s bid for Times Warner was itself proof of a top.
None of those claims gained much traction. The next set of catalysts for disaster was geopolitical. Russia’s annexation of Crimea was going to cause a spike in oil prices and a crash — only it didn’t. Then came the imminent invasion of Ukraine. UBS’s Art Cashin buried that trope yesterday. The Israel-Gaza war is another source of potential oil spikes and market crashes, which have yet to come to pass.
Now, today’s weak futures are blamed on the threatened U.S. airstrikes on ISIS, dragging America into another Middle East war. Each time I think I have finally put George W. Bush’s misadventures out of my mind, something comes about to remind us how utterly bereft of reason or intelligence the decision to invade Iraq was. It is likely to haunt the U.S. even longer than the disastrous Vietnam War.
But is that what is driving the markets? Probably not.
The simple reality is that corrections come along on a regular basis, and for reasons that are undecipherable or indeterminate. This is the way it is and always has been. Anyone who tells you he can predict when a 5 percent or even 10 percent correction is going to start and end, and do so with any degree of consistency, has something very expensive and mostly worthless to sell you.
Almost 500 trading days have passed without a 10 percent retreat. If you have grown so complacent as to have forgotten this, then you might very well be in the wrong line of work.
Lumber Liquidators is the largest specialty retailer of hardwood
flooring in the U.S. The company offers premium hardwood
flooring products in a wide variety of domestic and exotic wood,
as well as engineered products, laminates, bamboo, cork, and
accessories. Lumber Liquidators assortment is largely comprised
of proprietary brands including the flagship Bellawood brand.
Consumer & Retail — Specialty Retail MOMENTUM VANISHES IN Q2 PUSHING OUR ESTIMATES LOWER Investment recommendation
We are lowering our Q2 EPS estimate from $0.94 to $0.61,
compared with guidance of $0.59-$0.61 and prior consensus of
$0.90. LL reported a Q2 SSS decline of 7.1% on top of +14.9%
versus expectations of +7%. Total customers invoiced declined
5% yr./yr., the steepest decline in three years. LL did not regain
momentum after difficult Q1 weather as we had anticipated, and
management is blaming macroeconomic factors. The 131 stores
impacted by weather experienced a SSS decline of 13%, with
non-impacted stores -2%. We are lowering our FY14 EPS
estimate from $3.35 to $2.70 on SSS -2.5% on top of +15.8% (we
had previously forecast +6.3%). We still project double-digit sales
and EPS growth over the long term, keeping us BUY rated. Given
consecutive quarterly EPS misses and limited near-term visibility,
we think investors will view LL as a show-me stock over the next
few months. Investment highlights An inventory shortfall accounted for $18MM of Q2’s $47MM
revenue downfall versus our estimate. LL expects quality
assurance-related supply-chain issues to resolve in Q3.
We are reducing our price target from $122 to $100 based on our discounted free cash flow model. This is a long-term target, and reflects our belief that LL’s model of better selection, service, and value should enable it to take market share
The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.
Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today inWashington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in health care spending.
Consumers returned to stores and car dealerships, companies placed more orders for equipment and manufacturing picked up as temperatures warmed, indicating the early-year setback was temporary. Combined with more job gains, such data underscore the view of Federal Reserve policy makers that the economy is improving and in less need of monetary stimulus.
The first-quarter slump is “not really reflective of fundamentals,” said Sam Coffin, an economist at UBS Securities LLC in New York and the best forecaster of GDP in the last two years, according to data compiled by Bloomberg. “For the second quarter, we’ll see some weather rebound and a return to more normal activity after that long winter.”
Another report showed orders for business equipment climbed in May, showing corporate investment is helping revive the economy after the slump at the start of the year. Bookings for non-military capital goods excluding aircraft rose 0.7 percent after a 1.1 percent drop in April, according to the Commerce Department.
Demand for all durable goods — items meant to last at least three years — decreased 1 percent, reflecting declines in the volatile transportation and defense categories.
Stock-index futures declined after the figures, with the contract on the Standard & Poor’s 500 Index dropping 0.2 percent to 1,939.1 at 8:55 a.m. in New York.
Economists surveyed by Bloomberg projected a 1.8 percent drop in first-quarter GDP, according to the median of 76 forecasts. Estimates ranged from declines of 0.5 percent to 2.4 percent. The economy expanded at a 2.6 percent pace in the final three months of 2013.
This marked the last of three readings for the quarter. The advance estimate of second-quarter GDP is scheduled for July 30.
The economy will expand at a 3.5 percent rate in the second quarter and average 3.1 percent in last half of the year, according to the median projection economists surveyed by Bloomberg from June 6 to June 11. For all of 2013, the economy expanded 1.9 percent after a 2.8 percent gain in the prior year.
Consumer purchases, which account for about 70 percent of the economy, rose at a 1 percent annualized rate in the first quarter, the weakest pace in five years. The gain, which added 0.71 percentage point to GDP, compared with the previous estimate of 3.1 percent.
The revision reflected a drop in spending tied to health care services. The Bureau of Economic Analysis had estimated that major provisions of President Obama’s signature health care law would boost outlays. A quarterly services survey released this month showed the assumptions were too optimistic. Outlays for health spending actually slowed in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.
Companies boosted stockpiles by $45.9 billion in the first quarter, compared the $49 billion gain previously reported and less than the $111.7 billion buildup in the final three months of 2013. Inventories subtracted 1.7 percentage points from GDP from January to March, the most since the fourth quarter 2012.
Final sales, which exclude inventories, decreased 1.3 percent in the first quarter compared with a previously reported 0.6 percent increase.
Aside from services, consumer outlays on goods also slowed from the end of 2013, rising at a 0.2 percent rate. Demand faltered as the northern and eastern U.S. experienced above-average snowfall from December through February, keeping Americans closer to home.
Since then, households have boosted spending. Cars and light trucks sold in May at a16.7 million annualized rate, the strongest since February 2007, according to data from Ward’s Automotive Group.
The weather earlier this year also hampered production at factories, which had trouble obtaining materials in time. Since then, assembly lines have become busier.
Business investment fell at a 1.2 percent annualized rate, today’s figures showed, compared with a previously reported 1.6 percent annualized drop. Companies reduced their spending on structures at a 7.7 percent pace, and spending for equipment fell 2.8 percent, today’s report showed.
Trade was also a bigger drag on GDP than last estimated. Net exports subtracted 1.53 percentage points from GDP, compared with a prior estimate of 0.95 percentage point.
Improving job opportunities are boosting prospects for the economy. Employers added 217,000 workers in May following a 282,000 gain in April, according to the Labor Department.
Officials at FedEx Corp. (FDX), the Memphis, Tennessee-based operator of the world’s largest cargo airline, are looking for continued economic pickup this year and into next. The company forecast 2.2 percent U.S. growth for 2014 and 3.1 percent for 2015, T. Michael Glenn, executive vice president for marketing development, said on a June 18 earnings call.
“Our expectations for economic growth for the remainder of the year have actually improved somewhat,” Glenn said. “The global economy is recovering from the Q1 setback in the U.S. and slowdown in China and should steadily improve.”
Price pressures remained muted in the first quarter. A measure of inflation, which is tied to consumer spending and excludes food and energy, climbed at a 1.2 percent rate.
Subdued inflation is giving the Fed’s policy making committee room to keep the main interest rate near zero to encourage lending and spur growth. Even so, the Fed announced June 18 that it is paring asset purchases by $10 billion to $35 billion per month, showing that it remains confident that the U.S. economy can make do with lessened stimulus.
The Fed said economic activity “has rebounded in recent months” as the labor market showed improvement and household spending showed signs of rising moderately.
BRUSSELS (Reuters) – Iraq will be foremost in investors’ minds in the coming week as oil price risk has returned to markets, complicating the task for central banks whose policies are beginning to diverge for the first time since the global financial crisis. Renewed concern over inflation
Oil prices neared nine-month highs late last week, touching $115 a barrel, and the rapid advance of militants in Iraq, the second-largest OPEC producer, is destabilising oil markets.
That has implications for inflation in the United States and Europe, as well as Asia’s export-oriented economies that are large net importers of oil.
Investors will be watching a range of data, from German and Japanese consumer prices to first-quarter U.S. GDP, to see how the Federal Reserve, the European Central Bank (ECB), the Bank of England and the Bank of Japan respond.
“Just as oil prices had become increasingly stable, we reckon the risk for an oil price spike is now the highest since the global crisis,” said Christian Keller, an economist at Barclays. “We think a further price spike of 10 to 15 percent from here is not implausible,” he said.
Until now, falling energy prices have partly been responsible for the euro zone’s low level of consumer price inflation, which the ECB considers to be in its “danger zone”.
A rise in the inflation rate would be welcome but economists and the International Monetary Fund believe the ECB still needs to consider U.S.-style money printing to support the bloc.
Euro zone sentiment readings and preliminary purchasing managers’ surveys for June on Monday may give the ECB a sense of how much more help the euro zone economy needs. The recovery from a two-year recession lost pace in April and manufacturing has lost momentum.
Germany’s inflation reading on Friday will give a taste of the euro zone-wide reading that is due the following week.
“Although higher near-term inflation may reduce the likelihood of more ECB easing in the short term, lower economic growth and core inflation down the line would, in fact, support the case for further policy accommodation at a later date,” Luigi Speranza and Gizem Kara of BNP Paribas said in a note.
EU leaders will discuss economic policy at a summit on Thursday and Friday in Brussels.
SOBERING WEEK TO COME?
In the United States, investors will be looking to the third and final reading of U.S. first-quarter GDP figures on Wednesday to see if there is a revision of the 1 percent contraction already printed and which followed disappointing March trade figures.
Federal Reserve chief Janet Yellen cited reasons for optimism about the world’s biggest economy last week, including household spending and a better jobs market. Economists generally agree that the effects of unusually bad winter weather will fade later this year.
Core U.S. consumer prices have risen 2 percent over the last year. If the inflation rate went much higher, it would put pressure on the Fed to consider moving to raise rates.
For now though, the impact of events in Iraq and an oil-driven increase in inflation seem to be less pressing for the Fed.
Yellen said interest rates could stay “well below longer-run normal values at the end of 2016″.
Some of America’s largest money managers interpreted her comments as signalling that rates will remain low throughout 2016.
A speech by Federal Reserve Bank of Philadelphia President Charles Plosser in New York on Tuesday will also be in focus.
“Following last week’s Fed meeting and amid renewed concern over inflation, U.S. news flow might actually be rather sobering,” said Jack A. Bass , wealth adviser with Jack A. Bass and Associates .
There is also talk of additional stimulus in Japan in the coming months. Japan’s annual exports declined for the first time in 15 months in May, hurting the world’s third-biggest economy just as consumption is being crimped by an increase in national sales tax.
This week, much of the focus will be on core nationwide inflation for May and Toyko’s core reading for June as well as the government’s growth strategy, which is under discussion and may be formally decided by Friday.
The Bank of Japan’s monetary stimulus helped weaken the yen by a fifth last year. But the currency has stabilized this year versus the dollar, limiting gains in the value of exports.
Among other big industrialized powers, first-quarter British GDP on Friday will show a different picture.
Economists polled by Reuters expect growth to be revised up to 0.8 percent due to a better showing from construction.
That would bring annual growth to 3.1 percent, the strongest since before the start of the global financial crisis.
The Bank of England could become the first major central bank to raise interest rates since the crisis.
“Markets now more or less fully price in a 25 basis point rate hike by year-end, consistent with our view,” Michael Saunders and Ann O’Kelly at Citi said in a note. “We expect growth will remain strong even while rates rise.”
The Impact of Federal Stimulus Measures on the Price of Gold
Historically, the value of gold and fluctuations in its price have been linked directly to the wider economic performance. As a general rule, the value of gold tends to be most resolute during periods of recession, as investors look to commit their capital into physical assets that deliver genuine financial security.
The most recent statistics underline this trend, with the price of gold set the retreat from a near three-month high in the face of measured stimulus tapering in the U.S. A string of poor data releases had forced the government to initially reconsider their approach to stimulating economic growth, only for the Federal Reserve to reaffirm their commitment to restoring long-term growth.
The Facts and Figures: Gold Values in 2014
It was during the last week that the price of gold hit a three-month high, amid rising global shares and continued economic uncertainty in the U.S. While the Federal government had spoken at length during the first financial quarter about tapering their stimulus measures and laying the foundations for more sustainable, long-term growth, underperformance within the labour market has persuaded them to reconsider their stance. As a result on this, investors were encouraged to believe that the ultra-easy stimulus policy would continue for the foreseeable future.
Incoming Federal Reserve Chair Janet Yellen performed a sharp-about turn this week, however, by reiterating the U.S. Central Bank’s commitment to a measured tapering of its gold-friendly stimulus policy. While Yellen has stated that has a strong belief in the current bullion and monetary policy measures, however, the sudden drop in gold prices has forced many to question the wisdom of her decision making. More specifically, it could trigger a sudden rise in interest rates and force investors to develop a more risk-averse approach in the financial markets.
Does Gold Represent a Good Investment in 2014?
The decision to taper bullion stimulus measures will only serve to undermine the appeal of gold as an investment opportunity still further. While the presence of under-employment may have caused growth in the labour market to slow, investors have continued to disregard this and similar macroeconomic factors as being insufficient to derail the tentative global recovery. This has had a direct impact in reducing the appeal of gold, and the sudden depreciation in value will force a growing number of investors to consider alternative precious metals and commodities.
If it would be fair to say that gold holds minimal investment appeal as we approach the second financial quarter of this year, however, it is worth considering the performance of additional market options such as silver and platinum. The former, which has experienced considerable growth during the last eighteen months fell by 0.3% in the wake of recent events, while the latter gained a respectable 0.1% amid global political issues. The upshot of this appears to be that investors are likely to avoid the precious metal market for the foreseeable future, at least until the U.S. economy has adapted to its new monetary policies.