The company provides services to a broad range of commercial, industrial, utility and institutional customers. They report operations in six market segments: (a) electrical construction and facility services within the U.S.; (b) mechanical construction and facilities services with the U.S.; (c) U.S. facilities services; (d) Canada construction services; (e) United Kingdom construction and facilities services; and, (f) Other international services. The electrical construction and facilities segment involves systems for electrical power transmission; premises electrical and lighting systems; low-voltage systems, such as alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines. Mechanical construction and facilities services include systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation, fire protection; plumbing, process and high purity piping; water and waste-water treatment and central plan heating and cooling.

Consensus estimates for sales ending 12/09 are projected to be $7,246.88 million. Consensus EPS estimates for the same period range from $2.28 to $2.65.

Sales growth is 24.8% YOY and EPS growth is 45.1% YOY. The historical five year growth rate for sales is 8.4% and for EPS it is 13.2%. The company reported positive earnings surprises for the quarters ending 10/08 and 07/08.

At its recent price of $20.72, EME is selling at 7.9X next year’s estimated earnings. Operating margins have steadily expanded from 0.9% in 2004 to 4.2% currently. Similarly, net margins have grown to 2.5% from 0.7% in 2004. The company does not pay a dividend.

Our estimate of fair value is $29.97 to $48.96 with a mean value of $41.97. Using consensus EPS of $2.58, EME is valued at 11.6X to 18.9X earnings; the average fair value multiple is 16.27X earnings. The low end of our estimate provides a PRG ratio of 0.88, based on historical growth rate.

Good Article? Pull it from here:
EMCOR GROUP, INC. The Rebuilding Of America

Cisco Systems [CSCO: 26.26, +0.11 (+0.42%)] Recent Price $17.04 Value Range 21.86 – $38.41
Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. Cisco Systems, Inc.’s products, which include primarily routers, switches, and products that the Company refers to as its technologies, are installed at enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. In November 2008, the Company acquired Jabber Inc. In January 2009, the Company acquired Richards-Zeta Building Intelligence, Inc

CSG Systems International [CSGS: 21.93, +0.14 (+0.64%)] Recent Price $15.47 Value Range $21.39 – $28

CSG Systems International, Inc. (CSG) is a provider of outsourced solutions that facilitate customer interaction management on the behalf of its clients, generating approximately 95% of its revenues during the year ended December 31, 2007, from the North American cable and Direct Broadcast satellite (DBS) communications markets. The Company’s solutions also support a number of other industries, such as financial services, utilities, telecommunications, and home security. CSG’s solutions manage customer interactions, such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the client’s field technicians to the customer’s home. In May 2008, CSG completed the acquisition of DataProse, Inc.

Forest Laboratories [FRX: 31.67, +0.30 (+0.96%)] Recent Price$26.21 Value Range$51.57 – $64.09

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription, as well as non-prescription pharmaceutical products sold over the counter. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its sales forces, Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Forest Laboratories, Inc.’s products include Lexapro, the Company’s selective serotonin reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate to severe Alzheimer’s disease; Bystolic, its novel beta-blocker for the treatment of hypertension, and Campral, for the maintenance of alcohol abstinence.

Robert Half International [RHI: 31.40, +0.57 (+1.85%)] Recent Price $18.22 Value Range $26.27 – $30.14

Robert Half International Inc. provides specialized staffing and risk consulting services through such divisions as Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields

Advance Auto Parts [AAP: 42.35, +0.05 (+0.12%)] Recent Price 33.63 Value Range 10.02 – 12.07

Advance Auto Parts, Inc. (Advance) operates within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). The Company is a specialty retailer of automotive parts, accessories and maintenance items to do-it-yourself (DIY) and do-it-for-me (DIFM) customers in the United States, based on store count and sales. Advance operates in two business segments: Advance Auto Parts (AAP) and Autopart International (AI). The AAP segment consists of its store operations within the United States, Puerto Rico and the Virgin Islands, which operates under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly owned subsidiary.

American Eagle Outfitters [AEO: 19.00, -0.02 (-0.11%)] Recent Price 9.64 Value Range 0.63 – $0.75

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates ae.com, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

Bed Bath & Beyond [BBBY: 43.12, -0.04 (-0.09%)] Recent Price$24.00 Value Range $ 8.03 – $9.73

Bed Bath & Beyond Inc. and subsidiaries is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. The Company sells a range of merchandise principally, including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. In March 2007, the Company acquired buybuy BABY. In May 2008, the Company announced the formation of a joint venture with Home & More, S.A. de C.V., a privately held home products retailer operating in Mexico

Brown-Forman Corporations [[BF-B]] Recent Price $48.18 Value Range $8.17 – $10.28

Brown-Forman Corporation manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. Its principal beverage brands are Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia Vodka, Herradura Tequila, Gentleman Jack, Jekel Vineyards Wines, Jack Daniel’s Single Barrel, Jack Daniel’s Ready-to-Drinks, Bel Arbor Wines, Bolla Wines, Bonterra Vineyards Wines, Old Forester Bourbon, Canadian Mist Blended Canadian Whisky, Pepe Lopez Tequilas, Chambord Liqueur, Sanctuary Wines, Don Eduardo Tequila, Sonoma-Cutrer Wines, Early Times Kentucky Whisky, Tuaca Liqueur, el Jimador Tequila, Stellar Gin, Five Rivers Wines and Woodford Reserve Bourbon. The Company’s core brand in its portfolio is Jack Daniel’s, which is a spirits brand and American whiskey brand. Its other brands are Southern Comfort and Canadian Mist. Its largest wine brands are Fetzer, Korbel and Bollab.

CLARCOR [CLC: 34.63, +0.49 (+1.44%)] Recent Price $32.82 Value Range $12.18 -$17.86

CLARCOR Inc. conducts business in three segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment.. The Company’s Industrial/Environmental Filtration Segment centers on the manufacturing and marketing of filtration products used in industrial and commercial processes and in buildings, and infrastructures of various types. The Company’s consumer and industrial packaging products business is conducted, through a wholly-owned subsidiary, J.L. Clark, Inc. (J.L. Clark). In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (BPT), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems. The Company acquired 100% of the Keddeg Company on December 29, 2008

Cree [CREE: 71.66, +0.73 (+1.03%)] Recent Price $21.84 Value Range $4.51 – $6.20

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The Company focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices. The majority of Cree, Inc. products are manufactured at its main production facility in Durham, North Carolina, in a six-part process, which includes SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing Additionally, it packages certain LED components and power and RF products at its North Carolina facilities, its facility in Huizhou, China and in other foreign countries through the use of subcontractors. It also operates research and development facilities in Goleta, California and Hong Kong. In February 2008, it acquired LED Lighting Fixtures, Inc.

Edwards Lifesciences [EW: 98.43, -0.30 (-0.30%)] Recent Price $61.10 Value Range $16.74 – $21.24

Edwards Lifesciences Corporation (Edwards Lifesciences) is a global player in products and technologies designed to treat cardiovascular disease. The Company focuses on specific cardiovascular opportunities, including heart valve disease, critical care technologies and peripheral vascular disease. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into five areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems; Vascular, and through 2007, Other Distributed Products

Interactive Data Corp [IDC: 31.88, +0.03 (+0.09%)] Recent Price$24.42 Value Range $4.90 – $6.34

Interactive Data Corporation is a global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The Company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. It markets and sells its services either by direct subscriptions or through third-party business alliances. Its offerings are developed and delivered to customers through four businesses that consist of its two operating segments: Institutional Services and Active Trader Services. In May 2007, the Company completed the acquisition of the assets comprising the market data division of Xcitek LLC, as well as the market data assets of its affiliate Xcitax LLC. In August 2008, announced the closing of its acquisition of Kler’s Financial Data Service S.r.l. In December 2008, the Company acquired a 79% interest in NTT DATA Financial Corporation

ITT Educational Services [ESI: 114.79, +0.27 (+0.24%)] Recent Price $128.87 Value Range$23.33 – $33.99

ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2007, the Company offered diploma, associate, bachelor and master degree programs to approximately 53,000 students. All of its institutes are authorized by the applicable education authorities of the states, in which they operate and recruit, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). All of its programs were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. As of December 31, 2007, it offered 29 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. In October 2008, the Company announced that it has opened its first ITT Technical Institute in Mississippi.

Makita Corporation [MKTAY: 33.72, +0.2699 (+0.81%)] Recent Price $22.81 Value Range $1.71 – $2.00

Makita Corporation (Makita), incorporated on December 10, 1938, is principally engaged in manufacturing and sale of a range of power tools for professional users worldwide. Makita’s power tools consist of drills, grinders and sanders and portable woodworking tools, primarily saws and planers. The Company also produces gardening and household products and provides parts, repairs and accessories. During the fiscal year ended March 31, 2008 (fiscal 2008), approximately 85% of Makita’s sales were outside of Japan. The Company specializes in power tools manufacturing and sales, as a single line of business, and conducts its business globally. As of March 31, 2008, Makita had over 100 service depots outside of Japan. As of fiscal 2008, 28 of these service depots were located in the United States, and 19 of these service depots were located in China.

NIKE Incorporated [NKE: 70.88, +0.50 (+0.71%)] Recent Price $48.68 Value Range $15.83 – $21.46

NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE sells athletic footwear and athletic apparel. It sells its products to retail accounts, through NIKE-owned retail, including stores and Internet sales, and through a mix of independent distributors and licensees, in over 180 countries around the world. Its products include running, training, basketball, soccer, sport-inspired urban shoes, and childrens shoes. It also markets shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. On March 3, 2008, the Company acquired Umbro Ltd. (Umbro). On April 17, 2008, it completed the sale of its Bauer Hockey subsidiary.

Paychex [PAYX: 32.43, +0.14 (+0.43%)] Recent Price $26.93 Value Range$4.55 – $6.26

Paychex, Inc. (Paychex) is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium-sized businesses in the United States. The Company’s Payroll and Human Resource Services product lines offer a portfolio of products and services that help clients to meet their payroll and human resource needs. Its Payroll services are provided through either its Core Payroll or Major Market Services, and include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex’s Human Resource Services primarily include human resource outsourcing services, which include Paychex Premier Human Resources and its Professional Employer Organization; retirement services administration; workers’ compensation insurance services; health and benefits services; time and attendance solutions, and other human resource services and products.

Raytheon [RTN: 56.84, +0.03 (+0.05%)] Recent Price $47.80 Value Range 12.68 – $19.58

Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of technologically advanced products, services and solutions for governmental customers in the United States and worldwide. The Company operates through six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). During the year ended December 31, 2007, the Company completed the sale of Raytheon Aircraft Company (Raytheon Aircraft) and Flight Options LLC (Flight Options), two former operating commercial aviation businesses. In October 2007, the Company acquired Oakley Networks, Inc., a privately held technology company based in Salt Lake City, Utah, which provides cyber security and data leakage prevention systems. In April 2008, the Company acquired SI Government Solutions. In July 2008, the Company acquired Telemus Solutions, Inc

Rockwell Collins [COL: 60.69, +0.17 (+0.28%)] Recent Price $38.90 Value Range $12.94 – $15.93

Rockwell Collins, Inc. (Rockwell Collins) is a player in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company’s products and systems are primarily focused on aviation applications. Its Government Systems business also offers products and systems for ground and shipboard applications. Rockwell Collins also provides a range of services and support to its customers through its network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. Rockwell Collins operates in multiple countries. Rockwell Collins serves its worldwide customer base through its Commercial Systems and Government Systems business segments. On November 24, 2008, Rockwell Collins acquired SEOS Group Limited. In April 2008, the Company completed the acquisition of Athena Technologies, Inc.

Strayer Education [STRA: 244.07, -2.49 (-1.01%)] Recent Price $222.04 Value Range $15.89 – $23.60

Strayer Education, Inc. is a post-secondary education services corporation. The Company offers academic programs through its wholly owned subsidiary, Strayer University, Inc., both in traditional classroom courses and through Strayer University Online. The Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 47 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, D.C., via the Internet through Strayer University Online, providing its working adult students a program offering over the Internet. It also owns Education Loan Processing, Inc. (ELP), which was organized to administer the Company’s student loan portfolio. As of December 31, 2007, the Company had more than 32,087 students enrolled in its programs.

- Ronald Sommer

Disclosure: This article was taken from the website Measured Approach with the permission of the original author.  Please refer to the original author for disclosure information. We hold a position in FRX.

Shares slid on the day of the initial 787 delay by 6.46%. On the day of the Integrated Defense Systems’ falter, the stock fell an additional 5.81%. While this article is being written during a closed market, when we have not seen the activity resulting from the Qantas cancellation, I’d imagine shares won’t be off more than 4% more. Point being: Boeing’s sell off has created an opportunity for investors… but what kind of opportunity?

Investment research firms are all over the map on this one!

June 23rd:

• FTN Equity Capital: Neutral Rating, No Price Target
• Stifel Nicolaus: Buy Rating, $59 Price Target
• Credit Suisse: Neutral Rating, $39 price target
• Jesup & Lamont: Hold Rating, No Price Target

June 24th:

• Barclays Capital: Overweight Rating, $60 Price Target
• Broadpoint AmTech: Neutral Rating, $39 Price Target
• Gabelli & Co: Buy Rating, No Price Target
• Oppenheimer & Co: Underperform Rating, $40 Price Target
• Sanford C. Bernstein: Market Perform Rating, $40 Price Target
• Jeffries: Buy Rating, $52 Price Target
• UBS: Sell Rating, $30 Price Target
• Morgan Stanley: Equalweight Rating, $50 Price Target
• BAS-ML: Buy Rating, $60 Price Target

June 25th:

• Jyske Bank: Buy Rating, $69 Price Target

This makes 14 rating adjustments over the past three days: 6 Holds, 4 Buys and 2 Sells with the average target coming to just under $49/share. Put simply: nobody knows whether this stock is cheap or headed much much lower.

The Bear’s Case

Boeing no longer has any credibility with investors or myself in its ability to come through. I have been watching this company delay its 787 Dreamliner for years, and management was nearly certain to debut the first flight at the Paris Air Show last week or on Tuesday at the latest. Not being able to accomplish this small feat was astonishingly horrible for the firm, and has prompted calls to fire McNerney… which at this point I am not at all opposed to. It is always better to delay than release a bad product, but enough is enough.

After interviewing a few current and former employees of Boeing, things sound very, very grim. Workers are turning on their own company, even following the deadly workers strike that few seem to remember in a post-recession world. By outsourcing the manufacturing end of the work on Boeing’s flagship Dreamliner, the company took a gamble to break from tradition and potentially enjoy cost savings. Now, workers bicker that this mishap is another example of why BA “should have stayed American” in their operations. This is a  company that used to pride themselves on building strong wings in particular. By producing planes known for their stability, Boeing was able to make some of the strongest machines ever built. Now, this area of expertise has been undercut and challenged by computer modeling that failed to identify a weak point in the fuselage. This weak area could be a potentially major repair costing Boeing months more time.

Once a company is no longer able to meet quota, order cancellations start to appear as we have seen just a few hours ago with Qantas. While I do not forecast many more cancellations due to the delay, and was honestly quite a bit surprised by the move by Qantas, I could easily be proven wrong… and Boeing’s luck has yet to change. Knowing all the bad that has happened to the company over the past week, its tough to imagine shares falling less than the $10 that they have fallen.

The Bull’s Case

Jim Cramer stepped in to endorse shares of Boeing a week or two ago at $51/share. Later, after the stock briefly dipped to $50 before exploding higher, Cramer had remarked that investors had that brief window to buy… locking in a fantastic gain. Now that the stock trades in the low-$40s, Cramer fans are left wandering the streets in utter confusion. However, I stand by Jim Cramer and reference my last post on the aerospace industry which I think is truly recovering. Despite this uncontrollable and company-specific news, we can be sure that there are many factors that can drive aerospace higher. To reiterate, a few reasons include:  lower jet fuel prices, better hedging scenarios, historically-low inventories, old machinery in need of repair and promising increases in orders.

Boeing was cheap before, and is cheaper now. Despite the fact that management has lost all credibility, we will still see a bounce when the Dreamliner does finally come out. Until then, the company will enjoy strength in bookings from their defense unit. Keep in mind that BA is actually a 52% defense company, with 45.9% coming from commercial aerospace. With guaranteed government revenues, they are trading at an unbelievable discount to their industry peers Lockheed Martin (PE 10.5x) and Raytheon (PE 10.9x). They have a too-high 4% dividend yield, with a PE at just 8.75 times earnings. While debt stands at $7.5 billion, Boeing does hold an A+ credit rating, has $3.3 billion in cash on hand and has refinanced so that most of their debt doesn’t mature until 2012.

Boeing is a classic American company that I am convinced will eventually make good on their word. A major positive for the firm would be a management shakeup, though it could be short-term disruptive. With a nice 65% increase in aerospace durable goods orders yesterday morning, it’s very hard to say that the aerospace trend isn’t happening.

Bullish Bankers’ Boeing Thesis

While many other analysts have their new opinions in place, there is much to know about aerospace that people end up ignoring. For the bulls, it is typically a case of “look at how high they were trading a year ago” syndrome that simply doesn’t work anymore. For bears, it is the sheer volume of bad news that is pouring in on a daily basis. In reality, Boeing should be bought at or under $41. Personally, and for the sake of full disclosure, I have limit orders in place at just above $40. In my mind, this is a “can’t lose” scenario once shares drop to these March-low levels.

You don’t need technical analysis to make this trade. The future is very bright at Boeing. The defense space alone suggests honest stock price appreciation… and I think that the aerospace unit comes back to life before Airbus, their main competitor, is able to put their competing A380 in the air with any success. The world is waiting for a new, lighter and more flexible plane; with any luck, Boeing will deliver the goods.

-Jim Regan

Disclosure: At the time of this writing, the author holds unexercised limit orders for Boeing (BA) at $40/share. Should the stock price reach this level, the author will be long Boeing and the future success of aerospace.

When we consider economic troughs, it is important to invest in companies with major exposure to the early-cycle. Our greatest conviction buy from the industrial sector of the market has been in 3M Corp. [MMM: 82.18, +0.52 (+0.64%)], an industrial conglomerate that manufactures everything from Post-It Notes to eco-friendly plasma television components. Companies like 3M with order books typically running a short 30-day time span will have major success through recovery periods, periods that typically propel equities higher for 3-4 months. To fully capture gains, it is prudent to look to companies like 3M for exposure to upside momentum in trading.

Invest When No News Is Bad News

We continue to value shares of MMM as “Buy” rated due to the fact news seems to no longer impact shares to the downside. After missing 1Q2009 numbers handily, posting a $0.74 gain against analyst expectations of $0.85, 3M went from “bad” to “worse” by lowering their profit guidance on the year. What happened to shares? They traded up 5% on the day. With this in mind, we believe that as investors no longer respond to bad news from the company, we have seen a fundamental shift in the investment thesis… with investors unwilling to sell shares of MMM.

Now that the “bad news” on the company’s books seems to be out, we are faced with very beatable numbers for the year. In fact, upon running a discounted cash flow analysis, we find that the economic environment could show zero improvement from this point and the lower-end of guidance would still be reached.

Good News is Just Around the Bend

After 3M’s disappointing first quarter showing, Chairman George Buckley indicated that the company is seeing a bottom set in by the second-half of the year, more than likely late in the next quarter. Furthermore, although numbers missed our expectations across the company’s six business segments, we saw the company post stronger than anticipated operating margins to compliment its relatively strong pricing power. Underlying decay in the weakest segments, namely in Display and Graphics, seems to be subsiding. If the bottom is truly in place, 3M is going to be riding pretty from here on out at an attractive 13x multiple.

The Global Recovery Starts With China

Our final point in making a bet on 3M is its powerful 25% exposure to the Asian markets, predominantly China. Despite obvious currency risk, we anticipate sales from China to recover before other nations. In our opinion, in-house stimulus will outweigh declines in U.S. imports in China and around the world to compliment 3M’s healthy 65% of sales from international markets. The Chinese stimulus package delivers an interesting opportunity for companies with exposure to deliver strong numbers regardless of real economic progress.

With shares of conglomerate powerhouse 3M now trading at a discount to the industry at a mere 13x earnings, we find ourselves faced with a fundamentally strong company at bargain-basement levels. After increasing its dividend, we continue to favor shares of 3M for early-cycle exposure at an attractive entry point on the backs of its beatable guidance, exposure to China, and oncoming strength.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

- Jim Regan

Disclosure: None.

Why Industrials Lost Their “Mojo”

Over the length of the past stock market rally, industrial names enjoyed tremendous gains from the March lows. As one of the sectors to bounce back the strongest, many names like 3M (up over 40% from its lows) [MMM: 82.18, +0.52 (+0.64%)], General Electric (popped over 115%!) [GE: 18.04, -0.03 (-0.17%)] and Caterpillar (over 80% increase) [CAT: 60.22, +0.77 (+1.30%)] have been the darlings of the bulls. Some of the largest gains off of the 2-month stand have been made in industrial names… while similar gains were to be had in financials, information technology, energy and materials. If all of these groups have momentum, why has a shadow been cast on industrials?

Financials have valuation on their side. Investors feel that because names in the sector have traded at “$X” in the past, they deserve to rebound strongly and command a better trade in any upward push. Energy and materials are both tied to the commodity markets that, again, many have felt are lying too low… even in the current state of things; aggressive ag./oil & gas traders are going to pull this group higher. Then we have IT, which is the darling of the rally that many think should be leading the pack higher. Finally we come to industrials. With this group, rather than suggest a higher “worth,” most analysts are downgrading names on valuation calls saying that they have “gotten ahead of themselves” (the subject of this thesis).

I wouldn’t disagree, but there are overlooked names in the aerospace market that are escaping public eye and could be leaders in the next leg-up!

Why 2010 could be BIG for Aerospace

One group we are very bullish on here at Bullish Bankers is aerospace. This late-cycle play could pay out in spades if the markets turn. As opposed to the early-cycle names that took advantage of the earlier rally because of their cyclical nature, the major aerospace conglomerates have been left out of the party… and continue to present artificially-low valuations as of today’s close. With the markets getting “no worse,” the theme continues to be improvement in the second derivatives, which suggests margin improvement and an eventual recovery in the group.

In 2010 in particular, many airlines are projected to return to profitability. With jet fuel costs stabilizing, the negative effects of hedging (specifically over-hedging in the commercial markets) could finally work their way through the system. Previously frowned upon business jet spending seems to be seeing renewed buying interest according to representatives from General Dynamics’ [GD: 74.98, +1.27 (+1.72%)] Gulfstream Jet unit.

The most important indicator to note? Airplane manufacturers are running out of spares in their inventories at alarming rates. As we continue to see inventories drop, I anticipate a quick rebound in buying power with the primary beneficiaries being the parts-producers we will now name. With flight hours (yoy) improving in China and around the developing world… it shouldn’t be long before international aerospace conglomerates begin to see their patience pay off.

Industrial Names that Remain Attractive

Below are three industrial conglomerates that will benefit from a turnaround in the aerospace market, as well as a broad market rally. When pit against their industry brethren, the bounce from early-March lows has been relatively weaker than we have seen from the sector.

Honeywell [HON: 42.91, -0.12 (-0.28%)]
Honeywell is my top pick for getting into a bullish position now. At current levels, Honeywell offers a meager 9.2x multiple, despite their strength and conservative management. Estimates have been dropped by the firm to a level that they should be able to beat next quarter should nothing improve, while any uptick in the economy should allow for an easy beat. In addition to aerospace, HON has a nice exposure to automotive markets with their Turbo Technologies unit… and volumes seem to be bumping along at trough levels, which could produce much upside to current levels. They’ve shored up their balance sheet behind CEO David Cote, who actually said he was “embarrassed” by the EPS outlook. Adding to this, Honeywell has a great stake in Asian markets, which should lead aerospace beyond the current trough. Clearly, management feels they can do better, and we hold an upbeat view on shares even in a rough time.

Ametek [AME: 39.71, -0.08 (-0.20%)]
Ametek is a virtual private equity firm when you get right down to it. They are labeled a small electrical components provider (among other things), and have direct ties to European aerospace markets. However, one great feature of this mid-cap international conglomerate is that they are a growth company by way of “bolt-on” acquisitions. Despite slow M&A markets, AME once again completed dozens of acquisitions in 2008 and is on the prowl in 2009. While the company released “in-line” earnings for the most recent quarter, a cautious drawback in guidance sent investors running for the hills. However, their current trading range severely undervalues the future prospects of this bull market poster child… and they remain one of the few with a PEG under 1 (industry average is 1.25x). The story is still here, and I like shares at $31.

Boeing [BA: 69.38, +0.66 (+0.96%)]
Boeing has been a name which has been picked up by the likes of Goldman Sachs (recently upgraded) and other investment firms. However, the market has yet to give Boeing the benefit of the doubt behind their infamous 787 Dreamliner. Now, it seems that when CEO Jim McNerney claims that the heavily-delayed plane “will fly in June,” he is speaking the truth. Though this has been said time and time again, only to get pushed back, a successful first test flight has this stock on the hearts and minds of investors. Making a quick trade in anticipation of this June release could be a great short-term move, though I like the company for the long run as well. Defense spending remains strong; though there have been cutbacks, Boeing now has something that they didn’t have before: ample financing for interested customers. With this in mind, the uptick in aerospace will see a trade executed for Boeing, while shares are still being pulled down from the Dreamliner and defense budgeting.

The industrial sector commands many attractive valuations while hedge funds take profits off of the table from earlier-cycle plays. Please note that there are quite a few opportunities available in the sector. However, the aerospace market has seen a unique underperformance to  the broad sector that we feel should soon show signs of reversal.

-Jim Regan

Disclosure: The mutual fund that this author is associated with is long AME.

Consumer Discretionary – [APOL: 64.01, -0.64 (-0.99%)] YTD: -25.52%, [MCD: 66.38, +0.31 (+0.47%)] YTD: -11.69%, [COH: 38.23, +0.41 (+1.08%)] YTD: 25.32%, [XLY: 32.57, +0.16 (+0.49%)] YTD: 11.22%

Our consumer discretionary sector has lagged thus far in 2009, and this was mostly due to having two very defensive and conservative type plays in Apollo Group and McDonald’s.  Coach has been a great surprise this year with consumer spending down so drastically, but the fundamentals at year end were much healthier than the stock price and as you can see from the price appreciation it was a screaming buy.  McDonald’s has reported good earnings and carries a solid dividend but hasn’t kept pace up to this point, but that is likely to change if the recession is prolonged through the end of this year.  As more people are laid off each month, Apollo stands to benefit from individuals going back to school for new skills who are looking for an affordable education.

Consumer Staples – [SJM: 60.23, +0.43 (+0.72%)] YTD: -5.41%, [KR: 22.44, +0.15 (+0.67%)] YTD: -17.38%, [WMT: 55.92, -0.07 (-0.13%)] YTD: -10.56%, [XLP: 27.94, +0.12 (+0.43%)] YTD: -4.65%

Consumer staples has been one of the quieter sectors this year after it steadily outperformed the market in 2008.  Smuckers has been in line with the composite while Kroger has fallen sharply due to competition with other grocery stores like our third pick, Wal-Mart.  Wal-Mart was getting very expensive at the end of last year, but there is a premium on the cash flows of a company that is arguably the most stable and consistent in the world.  Our consumer staples is another sector that would benefit from a sustained recession.

Energy – [NE: 43.72, +0.27 (+0.62%)] YTD: 40.07%, [NOV: 44.66, +0.56 (+1.27%)] YTD: 47.46%, [APA: 106.18, +1.53 (+1.46%)] YTD: 14.13%, [XLE: 59.06, +0.64 (+1.10%)] YTD: 8.52%

One of our best performing sectors has been energy.  After oil and natural gas prices dropped more than 70% from their highs, it was very evident that many of the names in the sector were oversold, especially the smaller names and the names in the services sub-sector.  Noble and National Oilwell Varco both fall into this category as companies with excellent free cash flow that were oversold when the markets priced in oil staying at $30 for a sustained time period.  Apache bring excellent Southeast Asian natural gas exposure to the table, and the companies recent earnings and the rebound in natural gas prices has done wonders for the stock.

Financials – [GS: 176.64, +0.45 (+0.26%)] YTD: 65.41%, [MS: 30.28, -0.03 (-0.10%)] YTD: 78.26%, [TRV: 52.99, +0.14 (+0.26%)] YTD: -14.12%, [XLF: 15.92, +0.191 (+1.21%)] YTD: 3.99%

By far our best sector relative to its benchmark has been financials, and this has been due to our index having no exposure to the big banks.  Goldman Sachs and Morgan Stanley both passed the stress tests with flying colors and are in line to be two of the first companies to pay back the TARP funding when the government allows firms to capitalize privately again.  Travelers has outperformed many of its insurance peers as their real estate exposure is less toxic than its competitors.

Healthcare – [ABT: 54.50, -0.18 (-0.33%)] YTD: -15.21%, [TEVA: 59.94, -0.40 (-0.66%)] YTD: 3.43%, [GILD: 47.18, -0.29 (-0.61%)] YTD: -13.94%, [XLV: 32.15, +0.01 (+0.03%)] YTD: -3.62%

Another sector that has lagged in 2009 is healthcare, although this could turn around very quickly.  Teva is the world’s largest generic company and stands to benefit a lot under President Obama’s new healthcare spending plans.  Abbott and Gilead are both leaders in their respective sub-sectors, and any rebound in healthcare will see these names outperform some of their smaller peers.  Gilead’s work on HIV drugs has been groundbreaking, and its exposure to this market will help them to be one of the fastest growing large healthcare companies for years to come.

Industirals – [NOC: 64.90, +0.27 (+0.42%)] YTD: 12.21%, [FLR: 46.20, +0.35 (+0.76%)] YTD: 0.67%, [AME: 39.71, -0.08 (-0.20%)] YTD: 9.47%, [XLI: 30.83, +0.05 (+0.16%)] YTD: 0.38%

The industrials sector took it on the chin in 2008 but is starting to show the signs of an early recovery in 2009.  Some of the rebound was due to President Obama’s stimulus plan, as seen with Fluor, while another portion of the rebound was due to fundamentals sitting at historically attractive levels.  Ametek’s strategy of using acquisitions for growth obviously won’t play out in 2009 but in the near future the company could find smaller competitors at extremely cheap valuations.  Northrop Grumman remains one of the big four defense contractors and has a number of reliable government contracts to help its revenues remain steady over the next few years.

Information Technology – [CERN: 87.40, +1.79 (+2.09%)] YTD: 48.32%, [SY: 47.10, +0.30 (+0.64%)] YTD: 32.66%, [WU: 16.80, +0.62 (+3.83%)] YTD: 24.83%, [XLK: 22.97, +0.07 (+0.31%)] YTD: 10.90%

Information technology has been one of the best sectors to be in during 2009.  The rebound in IT started before all of the other sectors and has only slowed recently.  Our index had exposure to many smaller names that have skyrocketed in 2009 because of their exposure to niche sub-sectors.  Cerner stands to benefit tremendously from President Obama’s healthcare plans and could see growth rates well over 25% for years to come.  Western Union has safe revenues from transaction services and Sybase excels in their small niche as demand increases for mobile information solutions.

Materials – [PX: 82.04, +1.45 (+1.80%)] YTD: 23.25%, [GEF: 53.84, +0.87 (+1.64%)] YTD: 47.29%, [AGU: 72.28, -0.39 (-0.54%)] YTD: 32.43%, [XLB: 33.96, +0.19 (+0.56%)] YTD: 17.85%

By a wide margin the best sector so far this year has been materials, which coincidentally was one of the worst performing sectors in 2008.  This is another sector where depressed commodity prices led to valuation that made no sense even in a severe recession.  Packaging company Greif gave our index exposure to a small portion of the composite that well outperformed its peers in 2009 based on fundamentals alone.  Praxair is one of the two most profitable companies in the gases space and Agrium has made aggressive moves in 2009 to boost shareholder confidence.

Utilities – [WGL: 34.40, +0.19 (+0.56%)] YTD: -5.51%, [ED: 44.51, +0.03 (+0.07%)] YTD: -2.03%, [FPL: 48.02, +0.17 (+0.36%)] YTD: 13.57, [XLU: 30.40, +0.10 (+0.33%)] YTD: -6.13%

Even with their lofty dividends, the utilities stocks were able to keep pace through the first third of 2009.  WGL and Consolidated Edison have chugged along steadily, but Florida Power and Light has been the real star this year.  They are owners of the most envious wind generation portfolio in the country and have extensive build-out plans over the course of the next few years.  Again, this is a company that will no doubt benefit from President Obama’s stimulus plan and his plan to move to renewable energy sources as quickly as possible.

Outlook

We will continue to track this picks for the rest of the year and by no means are chalking this one up as a win just yet even with our hot start.  At this point we remain cautiously bullish on our companies and fairly neutral on the market over the short term mainly because the rally has occur so quickly.  If you want to read extremely detailed analysis about these 27 companies you can visit the following link and download our newsletter free of charge.  We will be releasing a new newsletter later this week entitled “Stocks For An Economic Recovery” that will highlight stocks that stand to benefit the most when the economic data begins to turn around.  Lastly, we would like to thank all of our readers and newsletter subscribers for their continued support through these tough economic and financial times.  Best of luck investing!

- Charles W. Petredis

Disclosure: The mutual fund the author manages has long positions in MCD, WMT, NE, APA, GS, XLF, ABT, TEVA, GILD, FLR, AME, CERN, PX, ED, and FPL.  The authors family has long positions in MCD, WMT, NE, NOV, APA, ABT, CERN, XLY, XLP, XLE, XLF, XLV, XLI, XLK, XLB, and XLU.  The author has long positions in APA, and NE.

Construction and engineering companies saw an early run-up in 2008 as energy prices skyrocketed until the commodities bubble had burst. It then took a deserved beating as businesses curtailed spending to keep up with the decline in consumer expenditure. To do this, the first thing companies wanted to do was to cut their expansionary plans for a rainy day. Construction equities like Flour Corporation [FLR: 46.20, +0.35 (+0.76%)], Jacobs Engineering [JEC: 44.43, +0.46 (+1.05%)], Foster Wheeler [FWLT: 27.50, -0.34 (-1.22%)], and McDermott Int. [MDR: 25.60, -0.07 (-0.27%)] were decimated due to the expected cuts in future orders and customers backing out of their contracts, which would kill the companies’ backlog orders. In 2008, the industry showed some resilience and recorded year-over-year double-digit growth in the backlog category, as Flour’s and Jacobs’ backlog orders grew 10.2% and 22.9% respectively.

What has investors worried now is this expected decline in backlog orders is on the verge of taking place. McDermott estimates that 2009 and 2010 backlog orders will fall 51% and 74% from 2008 highs. The rationale here is that falling energy prices will deter oil companies from beginning new projects. On average, 54% of construction and engineering companies’ revenue comes from the oil industry, so why would anyone want to expose themselves to an industry with a terrible macroeconomic outlook? Because these expected cuts in new orders are already priced into the industry’s stock prices. Investors understand that this industry won’t return to the glory days of 2007 and 2008 until oil prices rise once again. Oil prices have now stabilized, and oil is trading roughly around $50 per barrel. This is significantly higher than many oil companies have anticipated, yet  still lower than the threshold of $60 per barrel that companies oil companies would like to see. Regardless, this new stability will result in fewer cut backs in new infrastructure projects. Oil price stability will also allow construction companies to be able to increase, or at least maintain, expected profits that will now be driven by other customer groups.

Customer diversification will now be the key for companies to outperform their peers. Relying too heavily on one customer can be detrimental to profits when the economy is injured. With one of the most diverse client bases in the industry, Jacobs Engineering would be the most likely candidate to gain new contracts. They have made it clear through their mission statement and their repeating business that they are able to maintain strong relationships with their customers. Jacobs is also extremely likely to become a major target of infrastructure spending from the stimulus package. The US government has allocated over $111 billion from the $787 billion stimulus passed earlier this year. With leading market positions in transportation and water industries, there is a high probability that Jacobs will be alloted many of these pending contracts.

While the industry might not return to the glory days for quite some time, it has been heavily discounted due to the lower energy prices and curtailed spending. I still believe that a company like Jacobs will be able to outperform the market during a recovery. For those of you with the long-term buy-and-hold strategy, picking up an E&C company at such a discount will undoubtedly result in extreme capital gains in the future if for no other reason than that energy prices will once again increase. Additionally, a construction company like Jacobs, who has international exposure in Asia, Europe, and the Middle East, will definitely be able to capitalize on the higher-growth economies like China and India. When the world is ready for a turnaround, the construction and engineering sector will be ready to begin rebuilding.

-Derek Stevens

Disclosure:  None

The Thesis for Investing in an Anticipated Recovery

Pushing through a trade in these markets might appear to be more of a “leap of faith” than a prudent investment, yet I am seeing the next leg down off recent highs as a perfect opportunity for long-term portfolio strategy. Why? There are many fundamental reasons that you should invest in global growth, and I would suggest having a gander at industrial conglomerate names with big international revenue inflows as a base for your recovery portfolio.

Rationale #1: Trade Back to International Portfolio Exposure
After seeing strong growth from the European markets and BRIC nations through 2007, we have seen a fundamental American trade back to our domestic homeland. Over the past year and a half, investors have favored American companies with American revenues. Let’s have a look at the chart below for some evidence of this trade, as we compare the U.S. industrial conglomerate Danaher [DHR: 77.41, -0.57 (-0.73%)] with globally-active Caterpillar [CAT: 60.22, +0.77 (+1.30%)]:

As Danaher outpaced Caterpillar by a resounding 30% over the past year, it should certainly be evident that there was a sense of domestic-exclusivity in 2008/09 trading. Logically, this can be seen as a reversal of the de-coupling theory… as many investors had previously been hoping to blanket a poor U.S. market by doubling down on European exposure. When this ideal fell through, the shift of investment psychology was alive and well, and we have our trade out of anything with global exposure.

There are literally dozens of reasons for this trade to reverse. Thinking fundamentally, the sell-off seems to be overkill… as the powerful growth in China and international stimulus spending should be enough to push these global performers higher. Looking at China alone, we saw its PMI increase dramatically, as its confidence interval jumped to match the upbeat sentiment. Mean reversion should prove to be a handy tool when analyzing beaten stocks with ordinarily resilient bookings.

Rationale #2: Better Cost Synergies from Currency and Commodity Exposure
There are two huge benefits for international conglomerates going forward that need not be overlooked: a more favorable currency exchange, and cheaper access to commodities. Let’s have a look first at the exchange rate between the Euro and US Dollar with the yearly chart below:

As we can see, the Euro has virtually collapsed against the U.S. Dollar. Better yet, a recent rally could create huge cost savings in global industrial names that find a large amount of their revenues coming in overseas. As it would happen, many industrial companies live and die by the currency environment that they exist inside. Accordingly, finding the Euro at a trough versus the USD could present an attractive entry price in stocks that are more tied to global wealth.

Next, it is clear that the unusual trading activity in commodities has scarred many industrials at home and abroad. After the mid-2008 bull market in most commodity names, we are now at historical lows across the board. While many companies made the unfortunate mistake of locking in poorly-hedged contracts in 2008, many internationals will have another crack at these spot price agreements over the next year. With this, we should see a large benefit to earnings for industrial conglomerates, which typically rely on high volumes of materials to do business.

Again, we see a collapse in the price of most commodities, this time in the Dow Jones-AIG Commodity Index, which typically transfers into added cents on company’s bottom line. Any time we see even a few extra pennies on earnings, we can expect quite a different reaction from the market. Don’t be surprised if several international industrial giants post surprising results in 2009 earnings.

The Early Cycle Trade: How to Play It

Now that the general thesis is outlined, we can see that despite historically low valuations, there is room for improvement. I would suggest that things really aren’t as bad as the markets would make them out to be among the industrial names. Because of the extraordinary efforts by the Chinese government to sustain growth, I point to names with Chinese exposure as primary benefactors of the recession. However, as other nations lend their own liquidity to the globalized economic recovery, it would be wise to get any amount of exposure that you can stomach and add to your positions on the way down to build your recession-rebound portfolio.

3M [MMM: 82.18, +0.52 (+0.64%)]:
My favorite play for the global recovery that we anticipate is in industrial conglomerate 3M. This is a company that has historically thrived at economic inflection points, and is a best-of-breed name that shouldn’t have a problem turning things around within the next 12-months.  The management team at 3M is reason enough to look toward this company, as they have historically been ahead of the curve in growing past economic turmoil and run a conservative Six Sigma system to improve efficiencies.  MMM has built up a solid 4.5% dividend yield on the back of a lower float relative to other industrials that can lead to some quick moves to the upside. Not only this, but they it has a solid balance sheet and has been active in cranking out new products even in hard times. 3M has a nice exposure to China, as well as other international revenues, and should be one of the first to benefit there. The near-term is a bit cloudy, so invest in stages on the way down for this one.

Caterpillar [CAT: 60.22, +0.77 (+1.30%)]:
There is no doubt that Caterpillar has seen tough times before. This is another name that will be a primary benefactor from China’s doubling-down on its economic condition, and CAT has been absolutely slaughtered by an unkind market in 2008/09. Management has come out and announced job cuts after job cuts, and I like the fact that the business is ultra-conservative. CAT is the kind of bellwether that will see new signs of life once the global economy shows a hint of recovery, and is a prudent investment in the low-twenties. With a confident management team that understands the task at hand and has been improving efficiencies throughout the year, this should be a long term consideration on the upswing. Keep in mind that things are still gloomy, as machinery sales alone dropped off 27% in February, so I would recommend keeping an investment horizon slightly longer than that of 3M.

Honeywell [HON: 42.91, -0.12 (-0.28%)]:
HON is a favorite play for a weaker dollar, as it has been holding up well in its earnings calls to date… if it weren’t for the strong dollar. Once this starts to fade away, the overseas business should prove more profitable and may introduce huge upside into Honeywell’s earnings. The great notion about Honeywell is perhaps the fact that it has been the most upbeat of the industrial group. Specifically, HON has been seen raising its dividend and claiming that its bookings are “holding up” despite a global decline in demand. Despite all of this, it has gotten crushed by the market and still has an unfavorable aerospace end market. However, HON makes for a great international turnaround story once the global scene improves, and I would consider a buy if the price is right.

United Technologies [UTX: 72.19, -0.21 (-0.29%)]:
Recent releases by United Technologies were certainly eye-openers for the entire industry, as growth deteriorated from all but their Sikorsky helicopter unit. Normally, UTX had been able to ride out any economic storm by relying on a balanced business model that wouldn’t see many units under-performing at the same time. When all but one unit lacks growth, the stock gets slammed. Still, UTX (along with Honeywell) is a phenomenal play for a weaker US Dollar, and could be seeing a pickup in business once stimulus spending begins to filter through the system. Invest, again, with caution; however, don’t give up on this package deal.

Bottom Line: The industrial names have struggled through the last two years of trading. While in the short term, it would seem that industrial conglomerates hit their stride in the third quarter of 2008, there is certainly still room for growth if spending in China (among other nations) begins to combine with the other factors (Forex, spot prices, etc.) outlined in this investment thesis. Grabbing these early-cycle industrial plays should be a prudent move for any investor looking to play the turnaround. While things still may look a bit gloomy on the international front, there comes a level where MMM, CAT, HON and UTX should begin to start up a fresh cycle of industrial profit.

-Jim Regan

Disclosure: None.

There are no two bits about it, General Electric is far off of its historic highs in the low $40s, as shares closed Tuesday at a mere $7.01 (after falling to a low of $6.85 intraday). Perhaps we can admit that much of the sell-off was for good reasons. Heck, we can fairly classify the company as a sub-$15 equity holding in this environment. But is GE under $10 a case of severe pessimism that should be largely regarded as a buying opportunity and a blessed valuation from a pained market? Or are we simply facing yet another value trap?

To answer this, let’s have a look at the short-term and long-term prospects of holding GE:

The Bull Case:

The only problem with General Electric in this market is that it has lost some of its “street credit” by moving 40% of its revenue stream toward GE Capital. In fact, if we wanted to value the entire unit at $0, we should still reach an intrinsic valuation above $8 a share. First things first, is GE Capital really in such bad shape? After all, the unit made a hefty $8.6 billion in 2008 and is projected to pull in another $5 billion in 2009, even through this environment. Most of its assets are long term regardless… so should we really hold the company to the same standards that we do Citigroup [C: 4.05, 0.00 (0.00%)]?

Management under CEO Jeffrey Immelt should be considered a driving factor for holding the firm above the puny 4.0x P/E multiple that shares are currently commanding. General Electric has essentially two credit woes that have been highlighted in the news as of late: the dividend and the credit rating. Last week, GE announced a plan to trim the dividend payout to $0.10 a share starting in the third quarter of 2009 (the first quarter it can do this based on an old dividend plan). This is a net positive as far as I’m concerned, since it shows that management is more focused on shoring up the books than appeasing the few shareholders that still regard a dividend payout in high esteem (regardless of the fact that a $30 stock is now practically trading on the pink sheets). Additionally, while Moody’s has made it clear that GE’s AAA credit rating is still under review, a cut to AA wouldn’t materially affect the debt structure, because this is where GE’s unsecured debt issues have already been priced.

Because GE is on pace to alleviate the bad asset exposure over time, with a long-term financial restructuring plan that seems to be well on track, should investors not be turned to the future? With more than half of its bookings coming from industrial companies, where there is a backlog of $51 billion in equipment and $121 billion in service agreements, General Electric is making money. Furthermore, President Obama’s stimulus plan could lead much of GE’s “Ecomagination” unit in particular to big jumps in profit, as the energy efficient focus will drive revenues through Obama’s electric grid among other projects.

Under $10? Let’s get serious. Unlike the banks that GE trades with, it is making billions in profit every quarter… and this train shows no signs of slowing. Clearly, there is a disconnect between reality and trading activity. Buy GE.

The Bear Case:

Does it really matter what General Electric does anymore? The answer: probably not. Investors in this environment are taking extremely bearish positions on shares of GE. As we discussed options trading above, it is clear that many investors are willing to take bets to drag shares lower on speculation. No longer does it matter where long term investors price GE’s assets, because we seem to be experiencing a virtual “run on the bank” for a company that has too much financial leverage for its own good.

On the one hand, General Electric is making strides to shore up its balance sheet. However, let’s consider that the strategy includes restructuring much of the debt in such a way that has the company promising $133 billion of debt maturities coming due in 2009. Additionally, while General Electric’s fourth quarter conference call marked leverage ratios at 7:1, with a targeted 6:1 by the end of the first quarter 2009, we can have a look at its long term debt position of roughly $523 billion and call out a leverage number closer to 60:1. Sure, the company has reduced its exposure to commercial paper, but it still has around $70 billion lurking on its books.

The problem of trust is yet another issue. A large disconnect between what Immelt asserts, and what GE’s actions later yield, is becoming almost too much to bear. Example one lies in the assertion that the dividend was “safe,” until management ended up announcing plans to eliminate most of the yield one month later. The problem many investors have with GE is that nobody knows when the bad news is fully out and accounted for. After issuing profit warnings two times between its 3Q08 and 4Q08, it still missed consensus estimates for the most recently reported. Moreover, General Electric has very suspect markings for “goodwill” and other intangible assets that far outweigh tangible items. Finally, a dangerous exposure to financing in Eastern Europe could very much blow up in its face, and it would lose much of its receivable bookings on potential defaults.

Under $10? Don’t be surprised. The fact that its financial unit is still largely an enigma to accountants around the world and that traders have a vice-grip on this company’s shares (intent to sell them lower), leads me to believe this firm still merits a short position. Sell GE.

The Victor?

I am under the conviction that while shares of General Electric are highly susceptible to a bear market bounce, we will see the company consolidate to the downside over the next month. When hedge funds and leveraged short sellers are pouring capital into this downward-momentum trade, it is tough to bite the bullet and begin building up a long position. However, I remain convinced that this all-American conglomerate will see recovery starting in the second half of 2009. The victor may be different depending on whether you take a short or long term view on investing in the stock. For the short term, GE is more than likely going to continue its volatile path; however, I would be cautiously building up a holding in General Electric anywhere under $10 a share and adding on the way down for longer term success.

-Jim Regan

Disclosure: None.

If you want the “pure play” on this plan, one needs to look beyond the larger companies and focus on the smaller market cap, more niche, investments in infrastructure. Having a look into the “water” space can yield some big winners as the global water shortage scare starts to take effect in the face of huge capital injections into deserving companies. Small market cap companies in the stock market could have big advantages as money starts to pour into the system.

The Problem with Large Cap Companies

When most investors consider stocks that will be “plays on the stimulus package,” they often mis-represent the relative exposure that is obtainable. In most recommendations, we find companies like Caterpillar [CAT: 60.22, +0.77 (+1.30%)]. Caterpillar is a fantastic construction giant… and they do indeed have exposure to highway infrastructure among other infrastructure building projects. The downside to investing in a larger company like Caterpillar is that you need to deal with all of the excessive business segments of the company… areas that build cranes and erect commercial buildings, for example. More than likely, if you are looking for a “pure play” stimulus stock you want to be able to focus on a specific niche area of the plan. Now I’m not saying that big construction companies like Caterpillar, or safer engineering & construction companies like Jacobs Engineering [JEC: 44.43, +0.46 (+1.05%)] and Fluor [FLR: 46.20, +0.35 (+0.76%)], aren’t worth your while. However, if you want to bet big, you better have a specialist!

Plays on Water Infrastructure

You may have heard recent “doomsday” forecasts of a global water shortage. The global demand for water has tripled over the past 50 years, and the U.S. government has projected that 36 states will run into water shortages in less than five years. Indeed, the way that we distribute water in the United States and around the globe leaves much to be desired. In fact, the amount of money that it would take to repair the U.S. piping infrastructure is actually less than the cost of leaving things as they are. Pipes break, and the water waste has already wreaked havoc on our agriculture and plumbing efficiency. Because problems will likely only accelerate, the stimulus package makes it a no-brainer… and a play on water infrastructure is a fantastic play on the stimulus.

Infrastructure and Fluidics
One of the top water infrastructure plays for the year comes from a leader in “fluidics” systems and components for everything from medical to fire & rescue. I’m talking, of course, about IDEX Corp. [IEX: 32.80, +0.23 (+0.71%)]. IDEX is a company with a solid 9% growth in orders over 2008, and one of the few not laden with bad news. They trade at a premium 13x multiple, but may be worth your while. Dipping down into the even smaller market cap companies, we find Layne Christensen [LAYN: 28.90, -0.24 (-0.82%)], who produces water infrastructure as 75% of their business. One thing that is a net positive about Layne is that they have about 85% of their sales coming from the U.S., where stimulus packages are plentiful. The problem here is that Layne faces huge pressures from falling State and local budgets for water infrastructure in the face of the stimulus package that could weigh on earnings.

Fluid control has been an interesting niche area inside of water infrastructure. Since we waste so much of our water, companies specializing in pressure and control can really help us thwart a drought. Have a look at companies like Gorman-Rupp [GRC: 25.88, +0.13 (+0.50%)] and Mueller Water Products [MWA: 4.88, +0.12 (+2.52%)] for a little taste of the control equipment business. This is a space where there have been significant headwinds thus far, as temporary plant shut downs and pay cuts at Mueller echo throughout the industry. If you have an appetite for risk, have a look in this niche.

Profits Buried in Your Backyard
One of the more positively viewed areas in water (in my opinion) is investing in the companies making the actual pipe. Northwest Pipe Co. [NWPX: 20.12, -3.90 (-16.24%)] and Ameron [AMN: 66.23, -0.40 (-0.60%)] have been solid performers for the year, and now command valuations sometimes 2x the industry P/E (in the case of Northwest Pipe). This high-pressured steel infrastructure can be used for many practical purposes, such as drinking water, and have high prospects with a dire need for a domestic re-haul. In fact, a new “trenchless replacement technology” may advance these names even higher. Essentially, we don’t need to dig up the actual pipe any longer. With trenchless replacement, you simply dig through to the start and finish of the pipe, and fit a smaller pipe inside of the old one for a seamless repair. Great ideas build great investments, so keep these companies on your watch list for a more attractive buying point if the valuations scare you.

Agriculture Irrigation
Lindsay Corporation [LNN: 42.10, +0.01 (+0.02%)] puts through a self-propelled irrigation system infrastructure, primarily used in agriculture. Irrigation can be a big theme going forward, and I wouldn’t be surprised if the next scare is properly feeding our nation’s crops with water. Problems with the agriculture space include the commodity price collapse of late, but an increasing need for bio-fuels could send Lindsay higher with the ag. companies.

Bottom Line: The Barack Obama stimulus package has investors speculating like mad on companies even remotely tied to bailout spending. However, most analysts are missing the “big picture” in my opinion. What does this mean? You can capitalize on these small cap names if you can stomach the volatility because they are proportionally quite a bit more involved in all of the right spaces. At any rate, many of these water infrastructure plays make a serious case for premium P/E trading multiples.

-Jim Regan

Disclosure: None