The Over the Hill Gang- Part 2

More companies that benefit from using older equipment

Earlier this month, we analyzed companies in the Building Products industry that were using equipment significantly older than their peers. In that report, we discussed how delaying capital spending projects can temporarily boost earnings by reducing depreciation expenses. The report also outlined the mechanics of the accounting involved and provided guidance on evaluating a company’s PP&E (property, plant, and equipment) base. Readers can access the discussion here, as it is available in front of the paywall for free subscribers to access.

Today, we shift our focus to three companies in the Electrical Equipment industry whose earnings appear to have benefited from artificially low depreciation expenses. These companies may face an earnings headwind as they rebuild their infrastructure. While we are not forecasting a dramatic collapse for these firms, our estimates suggest the financial benefits derived from using fully depreciated equipment range from approximately 4% of total EPS to the low teens. Investors should be aware of this dynamic and consider it when forming expectations.

Earnings season is already underway, with 10-K and 10-Q filings soon to follow. Readers can expect an increase in the number of Red Flag Notes, as our analysis of these filings is sure to uncover additional insights.

Now, let’s get behind the numbers…

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