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Tuesday, July 25, 2006

The Goods on Capital Goods

By William Trent, CFA of Stock Market Beat

Summary: The Homebuilder’s confidence index has fallen to levels not seen since the early 1990’s. Mortgage applications to purchase a new home are falling at a high-teens percentage rate, California homes look like a classic bubble, and homebuilder shares are rallying.

PPI data was mixed for capital goods makers. Aircraft engines are getting more expensive.

As are industrial valves.

But construction equipment may be turning down.

Watch List news:
Homebuilder and mortgage banker NVR Inc. (NVR) acknowledged the slowing housing market. Second-quarter profit rose 14 percent year-over-year but gross margins weakened, land values were written down and cancellations increased. For the quarter ended March 31, net income climbed to $190.4 million, or $28.08 per share, from $167.6 million, or $21.42 per share, last year. Consolidated revenue rose to $1.75 billion from $1.28 billion in the year-earlier period. NVR shares rose $31.15, or 7.2 percent, to $466.15 on the news, because, well, it doesn’t take much to get a 4x P/E stock moving.< Other news:
Eaton Corp. (ETN) posted a higher quarterly profit on strong demand in its fluid power and electrical businesses. Sales rose 12 percent to $3.19 billion, compared to a consensus estimate of $3.16 billion. Sales growth was composed of 5 percent from existing businesses, 6 percent from acquisitions and 1 percent from favorable exchange rates. Eaton said its end markets grew about 4 percent and should grow at 4-5 percent for the full year.

D.R. Horton Inc., the nation’s top residential builder by units, said Thursday its third-quarter profit dropped 21 percent due to a tighter housing market that Chief Executive Don Tomnitz says won’t improve anytime soon.

Centex reported a 31% drop in fiscal first-quarter net income and cut its full-year earnings forecast as the homebuilder adjusts to what it called a “supply-driven correction” in the real estate market.

e author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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