A&C shares up nicely, 4Q05

The Control Engineering share price index notched an impressive performance during 4Q, up 6% on average. Even more impressive has been the continuation of gains so far in 2006—up 12% more through mid-February. This portfolio of Automation/Control components companies handily outpaced the S&P500, which gained about 5% during the past 4.

04/01/2006


The Control Engineering share price index notched an impressive performance during 4Q, up 6% on average. Even more impressive has been the continuation of gains so far in 2006—up 12% more through mid-February. This portfolio of Automation/Control components companies handily outpaced the S&P500, which gained about 5% during the past 4.5 months.

Chart shows that A&C stock prices have performed well despite a moderation in the general manufacturing economy, as broadly measured by the Institute of Supply Management's Purchasing Managers Index (PMI). It was the acceleration of manufacturing activity in the 2003-04 period that propelled the A&C group, but since mid-2004, the PMT index has moderated, indicating a steadier, more sustainable pace of general manufacturing growth.

Not coincidentally, the past year of PMI moderation coincided with the Federal Reserve's efforts to push up short-term interest rates to prevent inflation from becoming more widespread. One recent driver of the A&C share price index has been a growing consensus that the U.S. Federal Reserve is in the "late innings" of interest-rate tightening; companies are now concluding it is safe to go back into the water—with refocus on capital spending and business-building acquisitions.

National Instruments was up 30% in 4Q05. These shares may have anticipated the January earnings release, which showed 17% sales growth, best of the year, and 27% earnings growth. Rockwell Automation rose 12% (and has further rallied through mid-February), as investors were excited over the 10% revenue growth and 25% earnings growth in the quarter, led by 25% growth of the Logix PLC product suite.

Automation & Control product growth is driven by capital spending, so we track spending trends and survey major manufacturing companies annually. Last year, we saw capital spending accelerate across 166 companies. In January 2005, these companies forecast 10% capital spending growth, and, in our July 2005 update, this forecast was increased to 12% growth; 2005 capital spending ended up 13%, ahead of plan.

Initial outlook for 2006 capital spending growth again is robust, with 9% growth forecast for 2006. This ongoing capital spending upcycle provides a favorable environment for healthy revenue growth across the Automation & Control universe in 2006. In particular, we think the outlook is particularly favorable for companies exposed to factory capital spending.

For related items, search FTN atop any page at www.controleng.com .

Control Engineering Stock Index

Price ($) at close 9/30/05

($) at close 12/30/05

% chg. in 4Q05

2005 EPS ($)

2006 EPS ($current)

2006 P/E

EPS = earnings per share;
P/E = price/earnings ratio
Source: FTN Midwest Research and Control Engineering

Ametek

42.97

42.54

-1%

1.99

2.32

18.6x

Badger Meter

39.34

39.24

0%

1.88

2.17

26.2x

Baldor Electric

25.35

25.65

1%

1.28

1.44

21.6x

Danaher

53.83

55.78

4%

2.75

3.10

19.2x

Eaton

63.55

67.09

6%

5.39

6.07

11.4x

Emerson Electric

1.80

74.70

4%

3.55

4.22

19.6x

Flowserve

6.35

39.56

9%

1.61

1.11

44.1x

Honeywell Int'l

36.63

37.50

2%

2.12

4%

17.1x

National Instruments

24.64

32.05

30%

0.77

0.78

41.0x

Rockwell Automation

52.90

59.16

12%

2.67

3.16

21.6x

Thermo Electron

26.87

30.90

15%

1.53

1%

19.6x

Tyco Int'l

27.85

28.86

4%

1.86

1.83

14.0x

S&P 500

1,229

1,248

2%

74.28

75.18

17.2x

Nasdaq

2,152

2,205

2%

87.05

87.05

26.4x

Dow Jones

10,569

10,718

1%

484.86

484.86

22.9x


Author Information

Mark Koznarek is industry analyst and managing director with FTN Midwest Securities,




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