Economy and Banking & Finance and Transportation, Distribution & Logistics

BEHIND THE NEWS: Hoosier stocks take flight, propelled by higher profits

May 14, 2007

Many Hoosier stocks are on a tear, posting year-to-date gains rivaling the numbers we saw in the frothy late 1990s, before the Internet bubble burst.

But market analysts say the comparison stops there. The companies posting gains are old-line manufacturers like Cummins Inc., not dot-com startups built on hype. And the appreciation is built upon a solid foundation-rapid increases in profit.

Indeed, New York-based Citigroup noted that corporate profits are up 115 percent since the last recession ended in the fourth quarter of 2001, while the S&P 500 over that span rose only 35 percent.

"Our expectation is, there is more to come," said Mark Foster, chief investment officer of Kirr Marbach & Co., a money manager in Columbus, Ind.

Market watchers say a stew of factors is stoking the market. For one, the economy is growing at a respectable rate-not so fast that the Federal Reserve would likely intervene by raising interest rates but not so slowly that a recession is within reach.

Further, the Fed has been boosting the money supply, increasing the availability of credit through the banking system, a move that often drives up stock prices.

Then there's takeover mania. Private equity buyers are scarfing up companies at big premiums to where they'd been trading. And even companies on the sidelines are seeing their shares rise on speculation they'll be next.

Which brings us back to diesel-engine maker Cummins-whose shares are up nearly 50 percent this year, primarily on the strength of robust profit.

The stock shot up on April 27 when the company reported a 6-percent increase in first-quarter earnings and boosted its forecast for the full year.

Analysts beforehand had more modest expectations because of new U.S. emission standards, which hurt North American truck sales. But Cummins was able to offset that weakness by boosting by 26 percent sales of commercial generators, alternators and other power products.

Investors also have Italy-based Fiat to thank for contributing to the recent runup. On April 23, CEO Sergio Marchionne said his company is considering entering the United States with its truck-making unit "especially in terms of acquisitions."

Cummins is far from alone in enjoying heady times. The S&P 500 is up 6.4 percent for the year, while certain industry sectors have done far better. The Dow Jones transportation average is up 13.3 percent, and the Dow Jones utility average has risen 16 percent. Ten of the 76 Hoosier companies tracked by IBJ are up more than 25 percent.

Even so, more Indiana stocks are down than up, largely because many of the issues are small banks-a sector that's been pummeled this year. (See story, page 19.) Financial institutions are being squeezed by the narrow spread between what they pay for money and what they can charge borrowers. Fort Wayne's Tower Financial, for instance, is off 16 percent.

But banks are an aberration. Analysts say the ingredients are in place for many stocks to fare well the rest of the year. They say stock prices haven't gotten ahead of themselves yet. While the price-to-earnings ratio for the S&P 500 has climbed this year, it remains within historical norms.

And even some of the negatives that have economists fretting could turn into positives for the market. The weakness in the housing market and the spike in gas prices, for instance, may quash any inclination by the Fed to ratchet up rates.

"A moderation of economic growth is exactly what we want at this point," Foster said.

Simon's new strategy

Hear what's coming to Castleton Square Mall? It's about as far from a trendy new retailer as you can get.

Mall owner Simon Property Group Inc. says in a regulatory filing that it will be 50-percent owner of a self-storage facility that's expected to open on the mall's grounds by the end of this year.

The project appears to be the first local example of Simon's push into "asset intensification," a recent initiative focused on finding new ways to wring profit from underused portions of its retail properties.

The regulatory filing says Simon plans four asset intensification projects this year-two self-storage facilities and two residential projects. None of the others is local.
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