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Five Things You Need to Know: An Inside Look at Our Asymmetric Recovery

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A ground level view from corporate executives suggests an economic recovery will take longer than we'd like.

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1. An Inside Look at Our Asymmetric Recovery

The overall economy is weak, housing remains a drag, unemployment high, consumer spending uneven, but some companies are reporting improved conditions. FedEx (FDX) executives during the company's fourth quarter earnings call this week maintained the company is seeing signs of an "improved economy" and "strong customer demand." Make no mistake, this wasn't a tentative, hopeful assertion of economic improvement. FedEx Chairman Federick Smith's comments were definitive and bold: "We believe that the near-term softness in the economy will be temporary," Smith said. "Going forward, we see stronger economic growth," he added. "We believe the industrial sector will lead growth in the United States and overseas in the next two years."

Fair enough. But rather than taking Smith's word at face value and leaving it at that, we decided to survey a handful of other companies that reporting during the week to see if they too are seeing the same industrial-led recovery as FedEx. Below are some comments pulled from those earnings calls.

As Smith noted, companies in the industrials sector are seeing improved economic performance. Here are a few comments:

Flow International
(FLOW) designs and manufactures ultrahigh-pressure waterjet cutting and cleansing systems, including robotics systems and food safety applications used in aerospace, automotive, food and paper industries:

President and CEO Charlie Brown: "[W]e feel that our spare parts business is a good indicator of industrial capacity utilization and overall economic activity. Often times even a leading indicator of sorts. Well, in Q4, this piece of our business set an all-time quarterly revenue record at $18.8 million, growing 8% sequentially and 17% year-over-year. Our previous record quarter was in Q2, but Q4 beat that record by over 4%."

Steelcase Inc. (SCS) designs and manufactures high performance work environments including office furniture, and office furniture systems.

President and CEO Jim Hackett: "[M]y biggest takeaway from [the NeoCon annual industry trade show in Chicago] was the upbeat mood of the customers, designers and dealers who came to visit. It wasn't just the quantity of visitors to the showroom which was very healthy, because the spaces seemed full throughout the show; it was the quality of those visitors. They're very serious about projects, serious about our topics more than just buying new furniture. We're seeing project business, as a result, come back to life in large companies."

Robbins & Myers (RBN) manufactures fluids management products and systems used by pharmaceuticals, the oil and gas production industry, wasterwater treatment and pulp and paper industries, among others:

CEO Peter Wallace: "Earlier this year we reported that our fiscal year started out strong and during the second quarter we continued to see strength and improving demand in many of our primary end markets. I am pleased to report that the momentum carried into the third quarter, with T-3 exceeding our preliminary expectations, and our other businesses also enjoying strong organic growth. With the orders coming in at a very healthy rate, we were able to see a nice ramp in our sales, and with the higher sales we were able to drop a respectable amount to the bottom line. Margins came in higher than our initial forecast, and cash flow from operations was extremely strong."

Not bad. But here's an interesting one:

Apogee Enterprises
(APOG) designs and develops glass products, services and systems, mostly architectural glass serving the commercial construction market, but with a smaller component of the business providing glass coatings for the electronics markets. The two-year product segmentation growth is -22.82% for architectural related products, as one would likely expect given the commercial construction industry, while optics-related growth is +2.8%.

CEO Russ Heffer: "Our businesses are beginning to see signs of improvement from the bottom of the commercial construction cycle. Among the first quarter signals pointing to architectural segment improvement were the sequential backlog growth as well as the revenue growth in our domestic architectural businesses.... I believe we are finally seeing the beginning of an upturn for our architectural segment, even though a stronger economy and more jobs are needed to bring ongoing steady growth to our commercial construction markets. For fiscal 2012, our outlook has improved slightly as we've become more confident that architectural glass price increases should flow as the year progresses and stronger volume is anticipated for our architectural glass and storefront businesses with both market improvement and share gain."

Of course, the main issue is that while things are improving on the industrial side, those economic improvements are not translating to Main Street. A survey of consumer-related businesses shows that the pass-through of costs to consumers for the narrow, yet important, area of the economy reflecting price inflation is continuing to have an impact not only on the availability of discretionary spending, but on consumer confidence as well. From some earlier conference calls this month:

Smithfield Foods
(SFD)
"No one wants to push through price increases because it hurts everyone's business, but it's the reality of life. If corn's going to be $6 and $7, we're going to have higher priced meat in the grocery store. That's the reality. And I've made the statement publicly if we could see corn come back and these ethanol subsidies reversed, I think you'd see the price of meat come back down. So it's a direct correlation here and I think retailers understand that and consumers are accepting it. I don't know that they're at all pleased but they're accepting it just like they're accepting $4 gasoline the second time around."

Lennar (LEN)
CEO Stuart Miller: "[S]tabilization and recovery will continue to be a slow and rocky process as traffic and desire have not yet translated into strong actual sales. These are, though, the first signs that repair of the market is upon us."

Kroger (KR)
"As you know, the weak economy continues to present significant challenges for most households. The promising signs of the improvement we saw earlier this year seems to have stagnated. Unemployment remains high in most of our markets. And food
stamp and other government program use continues at high levels."

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No positions in stocks mentioned.

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