This market indicator – Order Backlogs -- is definitely sending out strong signals to buy….. and the market is certainly following this theme!
October 28th, 2011
As I mentioned in an earlier article, “Earnings Continue Positive Trend,” there is certainly plenty of bullish sentiment abounding, and from the indicator, “order backlogs”, this is quite evident, which presents a continuous opportunity to buy and profit!
The three major indexes have surged quite positively, and with the “order backlogs” indicator presenting a favorable stance, there will be further forward momentum.
Definition of Order Backlogs
Order backlogs refer to orders for goods or services that have not yet been fulfilled. The term "backlog" has a number of uses in finance. It may refer to a company's sales orders waiting to be filled or a stack of financial paperwork that needs to be processed, such as loan applications. The level of backlogs is an important indicator of whether an economy is growing or not. When a public company has a backlog there can be implications for shareholders, because the backlog may have an impact on the company's future earnings, as the company is unable to meet demand.
Falling backlogs may be a sign that new orders are dropping and the old ones are being fulfilled, and that producers are less willing to hold large stocks or inventories. A backlog is generally something that companies want to avoid.
Due greatly to the convergence of several cycles (including the powerful presidential cycle), the next six to eight months are going to be strong. And now, thanks to a single item in General Electric's (NYSE: GE) report last Friday, it may be even better than first assumed.
With $191 billion worth of orders waiting to be finished, General Electric has never had this many jobs waiting to be fulfilled, and is setting a new record for the company!
The order backlogs are definitely one of the most important indicators to judge a company’s health for a simple reason -- unlike just about everything else in a quarterly report, it can't be manipulated.
Backlogs can't be backed out as a "one-time" cost. They can't be a random glitch because of an "accounting effect" such as used by Verizon last week. It is very black and white – the company has the contract or they don’t.
For investors, this is certainly a decision-making reason to trade – if a company is quite stagnant in their order backlogs – in other words not “logged-up” – compared to a company with a year's worth of work in signed purchase orders – the investment becomes an easy decide!
As we move further into the reporting season we are finding an unlimited number of companies which fits the positive order backlogs indicator – GE, as mentioned earlier, is certainly one of them.
Despite the economic malaise, companies have found plenty of business -- but, too afraid to hire or dump their cash into a new factory, they're saving it for later. It's the kind of potential energy that, once realized, sends stocks (and economies) soaring.
Similar Themes Relating to the Order Backlogs Indicator
Reading through the earnings reports of the past week or so you can see a surge in order backlogs as a common denominator.
• Beazer Homes (NYSE: BZH) says it has a backlog of home sales 90% higher than a year ago.
• Boeing (NYSE: BA) has so many planes on backorder, its customers are jumping in line at Airbus.
• Thanks to strong government sales, FLIR System's (NASDAQ: FLIR) order book surged over the past three months. It now has $400 million worth of projects in queue.
• After announcing its fifth-straight quarter of double-digit year-over-year revenue growth, the boss at Air Products and Chemicals (NYSE: APD) had good news about what's ahead for his firm.
"While the near-term economic outlook is for continued slow growth and is clouded by global economic and policy uncertainties," said CEO John McGlade, "we are well positioned with a large backlog of projects backed by signed customer contracts."
A More In-depth Look at WAB and the Effect of Order Backlogs
Wabtec Westinghouse Air Brake Technologies Corp (NYSE: WAB) announced its quarterly results on Tuesday. The last time it reported -- on July 26 -- it revealed a record-breaking quarter, with a best-ever $1.51 billion backlog.
The company reported $0.96 earnings per share for the quarter, beating the Thomson Reuters consensus estimate of $0.88 by $0.08. The company’s quarterly revenue was up 32.8% on a year-over-year basis.
WAB has a 52 week low of $45.01 and a 52 week high of $72.43. The stock’s 50-day moving average is $57.26 and its 200-day moving average is $62.55. The company has a market cap of $3.263 billion and a price-to-earnings ratio of 22.24.
After the earnings report, WAB tried to break out. The strong uptick is obvious. Shares of Westinghouse Air Brake Technologies Corp (WAB) traded up 5.85% during mid-day trading on Tuesday, hitting $67.62. However, the beast of an over-correlated market brought shares down with the rest.
Wall Street was too wrapped up with Europe to reward the company for its obvious excellent report!
However, as indicated in the chart above, this changed dramatically on Thursday. A good earnings report coupled with a market itching to end the year on a high note sent shares higher. With a beta of 1.45, the stock was able to break the chains that shackled it to the overall market.
Potential upside of 15.9% exists for Wabtec, based on a current level of $68.95 and analysts' average consensus price target of $77.80. The stock should find initial support at its 200-day moving average (MA) of $61.00 and further support at its 50-day MA of $57.14.
A Thought for A Future Investment Strategy
The idea that order backlogs are growing and, in many cases, reaching record levels, provides us with an opportunity to take advantage of an untapped value that would otherwise remain hidden.
Although Europe remains a day-to-day threat, the market is finally waking up to the idea that there is room to grow. We are not at the stages of the 2007’s stock market standards, but there is definitely plenty of improvement being observed in today’s market.
”Success is simple. Do what's right, the right way, at the right time.”