In a recent post, I wrote that the US economy is mid-cycle and we need to see signs of capital expenditure acceleration for stock prices to meaningfully advance from current levels (see What equity bulls need for the next phase). One of the clues would be the earnings reports from companies in capital goods conglomerates, like General Electric (NYSE:GE).
GE reported on Thursday and Honeywell (NYSE:HON), another capital goods conglomerate, reported on the same day. The best description of my reaction to both reports is, "Meh!"
GE: Flat top-line growth
The GE earnings report was a solid report for shareholders, but I was not looking at it from a shareholder perspective. Rather, I was using it to look for clues about global, or at least American, capex acceleration. The presentation, which can be found here, left me a little wanting.
In particular, this page, showing the progression of their order backlog was a little disappointing. Backlog growth from 4Q to 1Q was flat, having increased from $23.6 billion to $23.7 billion.
The oil and gas division provided much of the source of capex growth, but that should be no surprise. David Kostin of Goldman Sachs broke out capex by sector and showed that the energy sector had been increasing its share of capex within the S&P 500 for several quarters (via Business Insider). While there were some bright spots in the other GE divisions, there appears to be no broad based capex acceleration on an ex-energy basis.
Little sales growth at Honeywell either
The Honeywell report, which is available here, was also somewhat disappointing. The company beat Street expectations on earnings but missed on sales (remember we are looking for sales acceleration). Sales were up only 1% on an organic basis YoY. The environment in the Defense and Space division was problematic and HON saw good top-line acceleration in Europe from sales of their turbochargers.
The company's expected organic sales growth—my key metric—is 3% in the next quarter and 4% in the 2H2014, ex-Defense and Space. While they did raise earnings guidance, sales guidance was unchanged.
If HON were to be representative of the capex outlook, 3-4% isn't a bad number, but it falls short of a picture of capex acceleration that the Street has been expecting. The same comment would also apply to GE. To top it all off, Bill McBride at Calculated Risk recently highlighted an environment which features a sluggish recovery for US heavy truck sales:
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