23 July 2001
Sales and Stocks
Ross rethinks his previous opinion on motion control stock market indicators.
In my last column, I wrote, "One of the indications of how well motion control is doing is the price of the motion control companies' stocks." I'd rather have said, "Stock prices are an indication of what investors think of motion control companies."
Sales growth, however, is an integral component of a company's performance. Personally, I've always been more concerned with sales than with stock price in improving a company's overall well-being. If you can sell more of your product, both your profits and the value of your stock will improve.
I wanted to see whether it's true that sales are a good indicator of company stock price. However, whenever I investigate anything, I find something different from what I expected.
So I looked into the sales performance of the leading public companies that manufacture motion control products, expecting to see a close correlation between the growth of their sales and the price of their stocks.
I was wrong! That is, wrong about the positive correlation. I was right about finding something I didn't expect.
As the table shows, Newport, with a fantastic 86% sales improvement (No. 1 on the list), had the second-worst stock performancedown 55%. Analog Devices' sales grew from $1.9 billion to $2.9 billion, up 53%, and its stock lost 48% of its value. All four of the top companies in sales growth were near the bottom in stock performance. Their sales growth ranged from 37% to 86%, while their stock price growth ranged from -40% to -55%.
You might think, after glancing at the figures, that the better the sales performance, the worse the stock price. (This is like an all-star baseball team in which the members hit fewer home runs than an average player does.) But in fact, the four with the most negative sales growth averaged about a 15% stock decline. That's a positive correlation.
I calculated the correlation coefficient among the 29 companies' sales rank with their stock performance. It came out growth at -0.04. This shows that there was almost no relationship between sales and stock. What correlation did exist was slightly negative.
The best stock performer was Moog, which is almost all motion control. Its stock price improved 63% on moderate sales growth. Magnetek, Penn Engineering, and DanaherNos. 2, 3, and 4 in stock growthhave substantial motion control operations. Danaher has been acquiring important motion control leaders to become a powerhouse. Its stock price increased 26%.
Should we feel good about these figures?
I think we should. Although few of these companies derive most of their income from motion control, their other activities tend to be subject to the same economic forces that affect their motion control operations. So far, things look good. Stocks declined about 7%, but sales grew about 8%. (Sales figures were based on the latest quarterly numbers released by the companies, including the first quarter of calendar year 2001.) Sales growth is in line with industry performance in recent years. There's no sign of recession.
If Vesuvius should really blow, all bets are off. But so far, so good. MC
Figures and Graphics
Edward A. Ross is president of Ross Associates in Needham, Mass., and author of The Ross Guide to the Motion Control Industry. Contact Ed at (781) 449-5123; fax: (781) 449-2942.