Bad news goes down easier when you're floating in your own pool

Industrial Strength

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Something about earnings season just hits differently when there's a pandemic, you're nearly five months into the great work-from-home experiment and it's approximately 10 billion degrees outside. Absent a vaccine, fresh government stimulus and a concrete recovery in jobs and the economy, what would really make things better is a pool. For most of us, that means revisiting our childhoods with pools of the inflatable variety. Others have decided now is the time to splurge on a real cement pond or upgrade their current set-up.

"People started to focus again on, 'How do I get a quality of life with what I have versus maybe vacationing and going elsewhere?'" Pentair Plc Chief Executive Officer John Stauch said on a call this week to discuss second-quarter results for the maker of pool pumps, cleaners and automated control systems. "So we saw that demand come in very, very strong and it continues to be strong." At Pentair, this demand hasn't yet translated into sales pop; that's because distributors of pool supplies mostly sold down existing inventory rather than buying new products from manufacturers. Supply-chain disruptions were also a hurdle. But order trends should put Pentair on track for a sales spike later this year. That gave Pentair enough visibility to reinstate its adjusted earnings outlook at a range of $2 to $2.20, even as its commercial and industrial-facing flow technologies and water treatment businesses continue to struggle.

Interestingly, Pentair said it's seeing interest in both remodels and new pool construction. Lockdown ripple effects aside, the new pools can take multiple quarters to complete and that isn't the kind of investment one typically makes on expectations for a prolonged economic slump. So are we making progress on a pandemic recovery? It depends on who you ask. 

There were other bullish signals in the batch of manufacturing earnings this week: Dover Corp. also reinstated 2020 guidance amid resilience in gas-station pumps and products for the pharmaceutical industry. The company is calling for sequential revenue improvements in the second half of the year with upward arrows for all of its main divisions, noting that overall profit in June was double what it was in April. Dover will also lift a suspension on share repurchases. Elsewhere, railroads Union Pacific Corp. and CSX Corp. said they had begun recalling furloughed workers, with the latter citing a nearly 20% bounce-back in volumes since Memorial Day. Honeywell International Inc., meanwhile, said it had actually added $250 million in capital investments not previously in its budget to advance higher growth areas such as personal protective gear and the Intelligrated warehouse automation business. Intelligrated saw $1.2 billion of orders in the second quarter, up triple digits from a year earlier, amid a surge in e-commerce activity. Honeywell said it would buy back at least enough stock to make up for any dilution in the share count and was open to more aggressive repurchases as well as M&A later this year. 

There's plenty working against that upbeat narrative, though. While Honeywell is stepping up spending in some areas, it's cutting in others, with overall sales expected to slump another 15%-plus in the third quarter after an 18% slide on an organic basis in the most recent period. The company expanded its cost-cutting program for 2020 by $200 million to roughly $1.5 billion, with about two-thirds of that intended to be permanent. Honeywell might take the cake on euphemisms to describe job cuts with "census reductions" and "repositioning." Dow Inc. was more direct: the chemical company this week announced it will trim its global headcount by 6% and exit less profitable businesses amid an "uneven recovery." Industrial distributor W.W. Grainger Inc., whose results can often be a good proxy for manufacturing activity, is still seeing depressed sales of non-pandemic items through July, notes Jefferies analyst Hamzah Mazari. American Airlines Group Inc., Southwest Airlines Co. and United Airlines Holdings Inc. confirmed that a nascent rebound in air travel is fizzling out, forcing the carriers to rethink their schedules for August and September. 

We'll get a more complete picture when the likes of Boeing Co., 3M Co., Eaton Corp., and United Parcel Service Inc. add their results to the pile next week. But one way to read what we've seen so far is that overall visibility is getting better as CEOs start to understand the ways in which the pandemic is reshaping the world and their particular businesses. Unfortunately, for many companies, what's visible just isn't all that attractive. And that kind of message goes down a lot easier when you know you can at least float around in your pool. 

Chevron Corp. 
is buying Permian Basin-producer Noble Energy Inc. for $13 billion including the assumption of debt, in the first major oil and gas deal since the coronavirus pandemic forced a stark drop in demand. Some analysts questioned the economics of shale M&A right now, but the takeover is certainly more digestible than the roughly $50 billion purchase of Anadarko Petroleum Corp. that Chevron attempted last year before ultimately walking away. It's also cheap: the all-stock deal values Noble at a discount to where it traded as recently as June and is below the price analysts on average expected the stock to reach over the next year. Pressed by analysts on why he was willing to sell the company at such a bargain price, Noble CEO David Stover cited Chevron's strong equity currency and the opportunity for shareholders to benefit from its dividend. But there also may not have been much competition. Few oil companies have the financial wherewithal that Chevron does to go shopping in the oil patch, no matter how cheap targets have become. 

Global Eagle Entertainment Inc., a provider of in-flight and at-sea Wifi, filed for Chapter 11 bankruptcy this week. The company, which gets a fifth of its revenue from Southwest Air, was struggling even before the pandemic under the weight of a large debt load and slowing sales growth. But now its challenges have become particularly acute as air travel has slowed to a trickle and cruise operators have been forced to dock their ships through at least September. Global Eagle joins a growing list of coronavirus-linked bankruptcies, from Hertz Global Holdings Inc. to Chesapeake Energy Corp. and Ann Taylor-owner Ascena Retail Group Inc. The company is seeking to sell itself to an investor group that includes Apollo Global Management Inc., Eaton Vance Management and certain funds managed by BlackRock Financial Management Inc. in a deal that values it at $675 million. The lender group has also agreed to provide an $80 million bankruptcy loan and $125 million in exit financing that would include the assumption or refinancing of that loan. 

Lockheed Martin Corp. CEO Jim Taiclet, speaking on a call this week to discuss better-than-expected second-quarter results, said any downturn in defense spending may have "silver linings" for the company if it presents an opportunity for M&A. Odds are there won't end up being cuts to the defense budget. Spending decisions historically are linked more closely to the geopolitical environment than economic or deficit woes, and threats abound from China to Russia to North Korea. That makes defense stocks look like a bargain right now, regardless of who wins the upcoming presidential election. But Taiclet, who officially took over the CEO post in June, has a history of dealmaking in his prior position as the head of wireless infrastructure company American Tower Corp. In an interview with Bloomberg News, he ranked M&A ahead of share buybacks, which he views as a last resort "that means I didn't have a better use for my cash." The dividend and R&D spending are the first priorities. One thing he will not be buying is a commercial aerospace business, no matter how cheap they may be right now. He may, however, draw on his experience as a telecommunications executive and look slightly outside of the typical defense purview to things like artificial intelligence. 

Elon Musk's Space Exploration Technologies Corp. is in talks to raise $1 billion in new funding at a price of $270 a share, people with knowledge of the matter tell Bloomberg News. That would imply a valuation of about $44 billion, before taking into account the new capital, making SpaceX one of the most valuable venture-backed companies in the U.S. SpaceX has outperformed Boeing Co. in the quest to develop commercially-manufactured aircraft capable of ferrying humans to space. A SpaceX capsule succeeded in delivering astronauts to the International Space Station in May, while a rival offering from Boeing encountered a software glitch and had to cut its flight short. The National Aeronautics and Space Administration earlier this month touted the benefits of SpaceX's approach to software development — with engineers taking more "ownership" of the final product — over the more traditional but siloed method used by Boeing. 

Books! It's a big month for the publication of books focusing on the industrial sector. "Lessons From the Titans" by Melius Research analysts Scott Davis, Carter Copeland and Rob Wertheimer looks at leadership success stories (Honeywell, Danaher Corp. and Caterpillar Inc.) and failures (Boeing and General Electric Co.). For more on what went so tragically wrong at GE, Wall Street Journal reporters Thomas Gryta and Ted Mann have published "Lights Out: Pride, Delusion and the Fall of General Electric."Lastly, former Honeywell CEO Dave Cote in late June published "Winning Now, Winning Later," a leadership bible on managing for both the short and long term. I haven't had the opportunity to read these yet, but I am looking forward to doing so post-earnings season. 

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