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The Late Cycle Indicators of Industrials

From: James Cramer
Sent: Friday, April 20, 2012 6:42 PM
To: Nicole Urken
Subject: Next week

I want to do a couple of different things next week. First, we always say that you shouldn’t pull the trigger during earnings season. It’s too wild. But how about a look back at everyone who reported last week. We call it, Upon Further Review, and we pick the best qs…

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Sunday, April 22, 2012 11:45 AM
To: James Cramer
Subject: Next week

Attached is the list. We talked about specialty (DD/PPG) vs non-proprietary (FCX) and standouts like Ebay (EBAY) along with closer look at the rails (UNP/CSX) hit on coal concerns. Will go through.

What a week of earnings this week handed to us — upside blowouts, including Apple, Amazon, Citrix , Expedia and Regeneron. Debacles at Deckers, Big Lots and Netflix . As always, digesting this data (vs. trading on it) is the most important aspect of earnings. This week on "Mad Money," we highlighted a couple of the stand-out quarters from last week to highlight the winners, including Coca-Cola (See the Coke segment here) and Ebay (Watch the Ebay segment here).

One question that remains in many investors’ minds as many earnings have come in better than expected is the macro, particularly with emerging market slowdown, worries of a U.S. fiscal cliff, and European worries continuing to abound (once again highlighted by the Spain downgrade and unemployment number this morning). Ultimately, when looking under the hood at company earnings, the industrials space is the sector that can give us the strongest reflection of trends, as any shifts will be seen here first.

Case-in-point: Eaton. The company’s span of early cycle (like auto), mid-cycle (like truck) and late cycle (like aerospace and non-residential construction) businesses globally gives us an important read on pockets of strength and weakness. And the messaging from CEO Sandy Cutler (including during his interview on "Mad Money") has been reiterated by peers: Strength in later cycle North American businesses with a bit of lumpiness in early/mid-cycle industries and a pullback internationally.

Eaton’s stand-out performance in Electrical Americas, where the company raised its growth guidance to 6 percent from 5 percent, reflects underlying strength in non-residential construction. To play non-residential later cycle plays, Illinois Tool Works remains well positioned. On the conference call, the company said that data from commercial “have finally begun to show some improvement in numbers.” United Rentals also mentioned that spending on nonresidential construction appears to be growing year-over-year. Importantly, the Architectural Billing Index, a leading indicator looking out almost a year remained above 50 (the growth threshold) in March for the fifth month in a row. While a dominant name in the heating, ventilation and air conditioning (HVAC) space — Ingersoll Rand — remains in show-me mode due to a history of inconsistency, other HVAC plays like Lennox, and Watsco should benefit.

Additionally, Eaton called out aerospace, which grew 11 percent. The roar of aerospace has been reiterated by peers. Look no further than Boeing, which beat estimates and raised guidance. From the likes of Boeing, BE Aerospace — echoing comments from Honeywell last week (see the "Mad Money" interview here).

Areas to stay away from right now? Eaton pointed to lower truck end-market growth along with auto (both pointing to some international slowdowns) which reflects a bit of stalling in these cyclical recovery markets that are earlier cycle than aerospace and non-residential construction. Look no further than data points from Paccar and Navistar in trucks and some lumpiness from auto parts names like Borg Warner with OEM name Ford pointing to some international weakness.

The bottom line: The industrials names hint that we are moving into later stages of the cyclical recovery in the U.S. but with strength continuing with some weakness in emerging markets and continued European overhang. We will keep a look out for more indicators as earnings continue to come through.

When this story was published, Cramer's charitable trust owned Apple and Boeing.

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