FOCUS ON THE 15: Better outlook gives Q-C stocks solid boost

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By Jim Victor | Saturday, May 17, 2008 |

Better news from the consumer and better news for the consumer drove stock buying last week. While transaction levels were light, the gains in early week trading lifted more than just consumer stocks. By week’s end, our Quad-City Times Key 15 had finished up 32.09 at 1,414.30.

From the consumer came the gains in April retail sales. The Commerce Department said that excluding auto sales, April climbed a nice 0.5 percent over March. But that may miss the point. We all want to know what we’re doing today compared to a year ago: Are we better off? Are we buying more? Retail sales, excluding autos where gasoline prices slow our buying decisions, are up an impressive 4.5 percent. That reconfirms the surprisingly strong reports from retail chains the prior week, where Retail Metrics posted a 3.3 percent average gain in same store sales. Importantly, this retailing strength comes in the face of headline worries that consumer buying would fade in a slower growth economy.

For the consumer came the latest inflation report. The Labor Department’s consumer price index showed less April inflation than worried on Wednesday. Single-month inflation was just

0.2 percent overall and 0.l percent at the core, excluding food and fuel components. But again we understand yearly numbers better, and perspective is truly important. Overall inflation compared to one year ago is 3.9 percent. But, it’s down from 4 percent in March and 4.3 percent in January. So some improvement is well regarded. Smaller by far is the core inflation rate, up only 2.3 percent over the past year. It’s more inflation than desired by Federal Reserve policy makers, but shows that most of the inflation issue has been confined to food and energy so far.

With better attitudes about the consumer sector, which drives about two-thirds of the nation’s economy, better attitudes about stock followed.

Among Quad-City firms, Deere & Co. (a) (b) posted its single best sales and total profit quarter in company history. For the fiscal second quarter ending April 30, Deere saw total revenues up 18 percent to $8.09 billion. Net income climbed from $1.36 per share last year to $1.74, a 28 percent leap. Like so much of American manufacturing today, this is a global story, and sales outside the U.S. and Canada surged ahead 46 percent.

We’ve spoken before of how global strength is creating growth in spite of some slower U.S. sectors, like residential construction. Deere’s comments that “non-agricultural businesses were solidly profitable in spite of the U.S. economic slowdown,” bear this out.

The profit and profit increase were clearly beyond Deere’s guidance to expect $1.60 to $1.65. But Wall Street consensus estimates had raced even beyond that forecast, leading to some analyst frustration.

Quad-Citians should have no frustration whatsoever in Deere’s upwardly revised sales forecast for the full year. Formerly predicting 28 percent sales growth for its agricultural equipment division, the Moline-based manufacturer has upped that to 35 percent. Clearly, accelerating growth defies any worries about recession for Deere in the foreseeable future. Still, that analyst frustration and Deere’s reminder that if faces rising raw material costs combined to let Deere shares fall $2.78 to $83.53.

Alcoa’s (a) (b) new CEO wasted little time in enunciating his global vision for the company. Klaus Kleinfeld, whose appointment was just one week earlier, said that profitable growth, one of three corporate strategies, includes mergers and acquisitions. Kleinfeld focused on core aluminum operations and spoke about opportunities from the bauxite raw material all the way to finished aluminum and fabricated parts, and all around the world. Alcoa shares were up $4.11 to $43.15.

Tyson Foods, with extensive meat processing here, forecasts that we’ll see less but more expensive chicken supplies this summer. Higher grain prices are to blame. “The lag of higher priced corn is just now coming through the products that we are taking to market,” noted Tyson chief executive Richard Bond. Investors took Tyson shares up 91 cents last week to $18.26.

Ahead lies a week light on economic reports and finishing just ahead of a Memorial Day holiday. Wednesday’s release of minutes from the latest Federal Reserve meeting could be the highlight: an insight into central bank thinking on conditions for the consumer in months ahead.

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

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