Dow Jones MarketWatch, May 10, 2018 article: "Boeing, Caterpillar and Deere stand out in select group of industrial winners | They’re among 16 companies that are boosting profitability and sales per share" [Analysis focused on a company's competitive success in producing goods and services]

Source: Dow Jones MarketWatch, May 10, 2018 article

Boeing, Caterpillar and Deere stand out in select group of industrial winners

Published: May 10, 2018 8:40 a.m. ET

They’re among 16 companies that are boosting profitability and sales per share

Bloomberg

Shares of Caterpillar dropped during the company’s first-quarter earnings call, but the company has increased sales significantly while improving its gross profit margin.

Philip

van Doorn

Investing columnist

Some investors have been jittery about large U.S. industrial companies this year, but we found more than a dozen that have widened their profit margins and increased sales per share.

A screen of the S&P 500 industrial sector produced a list of 16 companies that have put up impressive numbers. That can be a starting point for your own research if you would like to invest in the sector.

The industrial sector’s performance is in the middle of the pack for the S&P 500 Index SPX so far in 2018:

Total returns
S&P 500 sector	2018 through May 8	2017	3 years	5 years	10 years
Consumer Staples	-13.4%	13.5%	8%	36%	132%
Real Estate	-4.8%	10.8%	14%	32%	80%
Telecommunications	-11.9%	0.0%	5%	9%	58%
Materials	-4.3%	23.8%	19%	57%	64%
Utilities	-4.4%	12.1%	26%	49%	86%
Industrials	-2.9%	21.0%	35%	84%	126%
Health Care	-2.4%	22.1%	15%	83%	208%
Financials	-0.6%	22.2%	46%	94%	59%
Energy	4.0%	-1.0%	1%	6%	10%
Information Technology	8.7%	38.8%	74%	158%	259%
Consumer Discretionary	5.8%	23.0%	43%	100%	281%

S&P 500 index	0.6%	21.8%	34%	82%	137%
Source: FactSet

A funny thing happened during and after Caterpillar’s first-quarter earnings conference call April 24. The construction-machinery company’s finance chief, Bradley Halverson, provided a thorough review of the company’s financial results, business plans and outlook. He said he expected the first quarter’s adjusted profit to be “the high-water mark for the year,” in part because of a typical “slow start for project spend[ing]” during the first quarter.

That remark, taken out of context, helped push down Caterpillar’s shares 6% that day, while the S&P 500 industrial sector was down 3%.

When an analyst asked for more information about the expected “high-water mark” for this year’s quarterly earnings, Caterpillar director of investor relations Amy Campbell said the company expected the cost of materials to rise faster than product prices as the year went on, because the relationship between the two was “very favorable in the first quarter.”

The price action that day showed how fickle investors can be, even when a company announces strong results in its core business of producing goods and services.

And that’s what the following list focuses on. Starting with the 70 companies in the S&P 500 industrials sector, 16 have increased their sales per share for the most recent quarter and 12-month period while also improving their gross profit margins for both periods.

First, sales per share:

Company	Ticker	Industry	Sales per share - most recent reported quarter	Sales per share - year-earlier quarter	Increase in quarterly sales per share	Sales per share - past 12 reported months	Sales per share - year-earlier 12-month period	12-month increase in sales per share
Jacobs Engineering Group Inc.	JEC	Engineering and Construction	$27.55	$18.92	46%	$92.34	$83.80	10%
Caterpillar Inc.	CAT	Trucks/ Construction/ Farm Machinery	$21.15	$16.56	28%	$80.82	$66.01	22%
Parker-Hannifin Corp.	PH	Industrial Machinery	$27.62	$22.92	21%	$102.82	$84.48	22%
Deere & Co.	DE	Trucks/ Construction/ Farm Machinery	$20.75	$17.59	18%	$94.23	$84.14	12%
Boeing C.	BA	Aerospace & Defense	$39.20	$33.81	16%	$158.61	$147.55	7%
Fortive Corp.	FTV	Electronic Equipment/ Instruments	$4.91	$4.37	12%	$19.42	$18.01	8%
Union Pacific Corp.	UNP	Railroads	$7.02	$6.30	12%	$27.23	$24.48	11%
Eaton Corp.	ETN	Electrical Products	$11.89	$10.75	11%	$46.79	$43.54	7%
Roper Technologies Inc.	ROP	Industrial Conglomerates	$11.54	$10.54	10%	$45.51	$38.70	18%
Norfolk Southern Corp.	NSC	Railroads	$9.50	$8.79	8%	$37.06	$34.11	9%
TransDigm Group Inc.	TDG	Aerospace and Defense	$16.78	$15.62	7%	$65.43	$59.99	9%
Lockheed Martin Corp.	LMT	Aerospace and Defense	$40.41	$37.76	7%	$178.88	$164.64	9%
Dover Corp.	DOV	Misc. Manufacturing	$12.23	$11.52	6%	$50.39	$44.52	13%
CSX Corp.	CSX	Railroads	$3.24	$3.09	5%	$12.64	$12.05	5%
General Dynamics Corp.	GD	Aerospace and Defense	$25.02	$24.22	3%	$102.49	$100.57	2%
Source: FactSet

We looked at sales per share rather than raw revenue because the per-share numbers reflect any issuance of stock to fund acquisitions or to raise money for other purposes. If a company issues a large amount of shares to fund a purchase, shareholders’ ownership stakes are diluted, but it may seem “worth it” if sales per share increase.

For example, Jacobs Engineering, the company on the list with the largest increase in quarterly sales per share, increased its average quarterly share count by 17% from a year earlier to provide some of the funding for its December acquisition of CH2M.

The next table shows how the companies’ gross margins have improved. A company’s gross margin is its sales, less the cost of goods or services sold, divided by sales. It provides an indication of how well a company has maintained its pricing power. Ideally a company can increase its sales while also increasing prices. If the gross margin declines steadily, it’s a sign that a company is “stuffing the channel” with deep discounts to juice sales or lowering prices to defend its market share.

Company	Ticker	Gross margin - most recent reported quarter	Gross income margin - year-earlier quarter	Gross margin - past 12 reported months	Gross margin - year-earlier 12-month period
Jacobs Engineering Group Inc.	JEC	19.65%	18.21%	18.51	16.90
Caterpillar Inc.	CAT	32.34%	29.52%	31.17	26.09
Parker-Hannifin Corp.	PH	24.91%	23.91%	24.62	23.57
Deere & Co.	DE	28.97%	26.94%	29.20	25.81
Boeing C.	BA	19.49%	17.70%	18.97	15.05
Fortive Corp.	FTV	50.03%	48.46%	49.92	49.03
Union Pacific Corp.	UNP	40.27%	40.00%	42.45	41.42
Eaton Corp.	ETN	32.03%	31.81%	32.67	32.24
Roper Technologies Inc.	ROP	62.41%	61.46%	62.40	61.41
Norfolk Southern Corp.	NSC	30.73%	30.02%	34.12	31.11
TransDigm Group Inc.	TDG	55.65%	53.82%	55.17	52.87
Lockheed Martin Corp.	LMT	14.25%	10.43%	11.72	10.72
Dover Corp.	DOV	37.02%	36.69%	37.28	36.58
CSX Corp.	CSX	34.32%	30.85%	34.36	31.54
General Dynamics Corp.	GD	20.50%	20.37%	20.01	18.96
Source: FactSet

Any stock screen is only that — a starting point, rather than a recommendation. These companies are showing good numbers for their core businesses. Other factors, such as overhead and leverage, are not reflected in the margins. If you do your own research, you may develop a conviction that one or more of these companies will trounce its competitors over the next decade.

Philip

van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.