Skip to main content

Durable Goods report supports cautious stance on Communications Equipment

Goldman Sachs just came out with a call indicating they have turned cautious on the communications equipment sector.

With this sector comprising one of the buckets of data available in the U.S. Census Durable Goods report (M3 Survey), I thought I'd take a look at the government data that came out yesterday and see if it was consistent with Goldman's view.

In particular, I looked at New Orders and Shipments for the communications equipment category including both defense and non-defense manufacturing.

In yesterday's Durable Goods report, it appears that January's New Orders number was revised down slightly to $5.106 billion from the previously released $5.186 billion. This has the effect of making the January to February increase in New Orders 6% rather than 4.3%. Similarly, January's Shipments number was revised downward from $5.376 billion to $5.341 billion. This has the effect of making the January to February increase in Shipments go -0.3% rather than -0.9%.

In general, though, the numbers don't look too bad.

For example, in the last sixteen years, New Order growth in the January to February time frame has been higher only seven times. Over the last five years, the current level of growth in New Orders is right in the middle of the pack.

The chart below plots the New Orders and Shipments numbers from January 2006 through February 2008.

Chart of Communications Equipment - New Orders and Shipments
What pops out is the fact that New Orders look to have way more variability than the Shipments numbers. I have in the past assumed that New Orders would make a good predictor of future Shipments. It sure doesn't look like it.

How the numbers are generated --

At this point, I'd like to digress a bit and point out some facts on how the Durable Goods report numbers are generated:

1. The figures published are calculated by applying monthly ratios of change from the Census Bureau's reporting panel (which accounts for about 60% of the U.S total value of shipments) to the Universe levels estimated by the Annual Survey of Manufactures. This is clear as mud but serves to inform the reader that the government is applying some kind adjustment to numbers obtained by surveying a subset of manufacturers and then extrapolates the results to create the report.

2. New Orders (NO) are derived based on the value of current shipments (VS) plus current unfilled orders (UO) minus prior month unfilled orders. The formula for calculating new orders is:

NO's (current) = VS's (current) + UO's (current) - UO's (prior)

Note that for some companies that ship within the same month that orders are received, new orders are equal to shipments. In addition, there are numerous companies that are able to report unfilled orders, but are not able to report new orders.

According to this equation, it appears that the volatility in New Orders that we see on the chart is actually the result of volatility in Unfilled Orders. Unfilled orders will turn into shipments only as long as they are not canceled. New Orders may be filled out of inventory so they may not contribute to future demand; hence, Unfilled Orders are used as the better indicator.

What do the numbers tell us?

What is disconcerting is the fact that the general trend for both New Orders and Shipments seems to be slightly but clearly downward.

In looking at the values of New Orders, there has been a very visible slowdown starting in August of last year. Shipments began to decline one month later.

To deal with the volatility, I thought it might be useful to try some moving averages. Taking 6-month moving averages of New Orders and Shipments since January of 2006, it appears that New Orders are almost always higher than Shipments; however, when the New Orders moving average begins to turn down growth in Shipments becomes essentially flat or negative for one or more quarters. You can see this in the chart below.

Chart of Communications Equipment - New Orders and Shipments with Moving Averages
Given that Shipments translate directly into revenues, it certainly looks like we are in for flat performance at best over the next quarter or two. Goldman seems to have made the correct call.

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any