In Their Own Words

5/8/2017


In their own words

More than halfway through the March-quarter earnings season, two themes have emerged from companies' conference calls with analysts. First, executives continue to explore acquisitions to supplement growth but are concerned about overpaying. Second, rising inflation is increasingly apparent, pushing up costs for wages, fuel, and raw materials. Many companies seem confident they can recover the higher costs through price hikes.

Below, we look at how executives have addressed these topics.

Deal activity

Laboratory Corp. of America ($141; LH) has resumed its steady diet of small deals, spending about $150 million on acquisitions in the March quarter. Management says the deal pipeline remains "very robust," adding that recent softness in its contract-research organization unit "doesn't in any way diminish our enthusiasm for continuing to grow the CRO business." In recent months, LabCorp has reportedly explored acquiring a privately owned CRO in a deal potentially worth more than $8 billion.


When considering acquisitions, Mohawk Industries ($230; MHK) says, "We buy the management as much as we buy the assets." It expects to spend a total of $270 million on four acquisitions in the June quarter that should boost 2017 profits by $0.15 per share. The deals include two ceramics manufacturers in Europe, a mine for its U.S. ceramics business, and a carpet nylon polymerization plant in the U.S. Management expects the acquisitions to lower production costs and give Mohawk more control over its raw materials.


Ingersoll-Rand ($89; IR) has earmarked a combined $1.5 billion for stock buybacks and acquisitions this year. It has already spent $417 million on share repurchases and completed one small deal to expand its climate business. Management says it seeks deals valued at $300 million to $500 million.


Both Amgen ($164; AMGN) and Lear ($136; LEA) continue to explore deals, though elevated valuations are limiting their options. Conversely, D.R. Horton ($32; DHI) says seller expectations on price are becoming more reasonable as the company actively pursues potential deals with homebuilders.

Inflation and pricing

Owens Corning ($60; OC) appears to be effectively managing rising inflation, announcing its second round of price hikes this year for roofing and insulation products. If asphalt costs continue to rise, management may consider raising prices further in the second half of 2017.


Mohawk announced broad price hikes for the June quarter after being caught off guard by rising inflation affecting virtually every part of its business: labor, energy, wood, glue, and polyurethane. Management expects the price hikes to entirely cover rising costs by the September quarter. Encouragingly, Mohawk said it wouldn't experience any adverse effects from the proposed U.S. tariff on Canadian softwood because it uses hardwood and buys locally to minimize freight costs.


For the year, Ingersoll expects higher prices to more than offset rising costs for raw materials, such as steel and aluminum. Ingersoll's engineers are testing ways to change the alloys and thickness of materials that go into its products, which could help keep costs down.


Rising wages and fuel prices cut into profits at Alaska Air Group ($87; ALK) and Southwest Airlines ($58; LUV). Citing progress on modernizing its fleet, Southwest said capacity grew faster than fuel consumption last quarter. Southwest expects fuel prices to decline in the second half of the year.


Both J.P. Morgan Chase ($87; JPM) and Zions Bancorp ($41; ZION) said they have seen little pressure to raise interest rates on deposits, allowing the banks to keep costs down even as the Federal Reserve raises the federal funds rate.


Celgene ($123; CELG) and Amgen credited higher volumes — not price hikes — as the primary driver of their sales growth last quarter. Celgene said volume growth represented 15 percentage points of its 18% higher product sales.

Celgene, Lear, Mohawk, Owens, and Southwest are rated Focus List Buy and Long-Term Buy. Alaska Air, Amgen, D.R. Horton, J.P. Morgan, and Zions are rated Buy and Long-Term Buy. Both Ingersoll and LabCorp are Long-Term Buys.


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