The Economic Calendar shows three potentially important news releases this week:

• Monday’s retail sales report (Consensus 0.6%, 0.9% less autos)
• CPI on Tuesday (Consensus 0.2% core, 0.6% headline)
• Housing Starts on Tuesday (Consensus 1.49 million, SA)

Earnings season is quite active this week as well.

Tuesday

• IBM (IBM - Annual Report) - Consensus expects $1.21 on $21.86 billion in revenue and next-quarter guidance of $1.46 on $23.04 billion. Given that these numbers represent sales growth of 5.8% and 5.2%, respectively, it would be a near-disaster if they miss.
• Intel (INTC - Annual Report) - Consensus wants $0.22 on $9 billion this quarter and $0.22 on $8.9 billion next. We think that next quarter sales figure, which represents 10.8% year/year growth, is too optimistic.
• Linear Technology (LLTC) - Consensus wants $0.32 on $254 million this quarter and $0.34 on $263 million next.
• Yahoo! (YHOO) - Consensus expects $0.11 on $1.21 billion this quarter and $0.13 on 1.28 billion next.

Wednesday

• Motorola (MOT - Annual Report) - Consensus expects $0.02 on $9.3 billion this quarter and $0.08 on $10 billion next. They already preannounced, so the guidance is the important bit. Numbers have come down dramatically but may have further yet to go.

Thursday

• Armor Holdings (AH) - Consensus wants $1.11 on $841 million this quarter and $0.92 on $775 next. There may well be a guidance beat since the numbers expect a significant growth slowdown year/year.
• Advanced Micro Devices (AMD - Annual Report) - Expected to lose $0.46 on $1.34 billion in sales this quarter and $0.36 on $1.35 billion next. Given how disastrous the current outlook is, we may be getting near the bottom for estimates. Valuation, however, remains questionable. We hate negative P/E multiples.
• Google (GOOG - Annual Report) - Consensus expects $3.30 on $2.5 billion in revenue this quarter and $3.41 on $2.63 billion next. The Double-click acquisition may help next quarter. Without it, the estimates seem more realistic (less room for upside surprise) than they have been recently.
• Landstar (LSTR - Annual Report) - Consensus expects $0.40 on $590 million this quarter and $0.54 on $656 million next. We think they will beat.
• Nokia (NOK) - Consensus expects $0.32 on $13.1 billion this quarter, $0.34 on $13.9 billion next. We take the under.

Friday

• SAP (SAP - Annual Report) - Consensus expects $0.36 on $2.93 billion this quarter and $0.44 on $3.17 billion next. Both seem on the high side.
• Xerox (XRX)  - Consensus expects $0.20 on $3.82 billion this quarter and $0.27 on $4.09 next. The estimates have come down but are at the high end of revised guidance.

The headline for the durable goods report was not very bright this morning - Durable goods orders slid 8.3 percent in Oct - Yahoo! News

New orders for U.S.-made durable goods tumbled much more than anticipated in October on a big drop in civilian aircraft but were also down unexpectedly when transportation was stripped from the total, a government report suggesting economic weakness showed on Tuesday.
Durables goods — big-ticket items expected to last three years or longer — fell 8.3 percent, the biggest drop since July 2000. The decline was propelled by a 21.7 percent fall in transportation orders, the
Commerce Department said.

But even excluding transportation orders, durables declined 1.7 percent as manufacturing, fabricated metal, and computers and electronics orders all slid.

As is our custom, however, we like to dig a little deeper into the data to determine whether there are any bright spots. Instead, what we saw for the most part was rising inventories and falling orders and shipments. All charts below are based on information provided by the U.S. Census Department and collected by Stock Market Beat.

Although last month we said it looked like it was time to play defense, even that sector is giving back much of its strength.

Also consider computers and related products. Both shipments adn orders are falling through the floor. The potential bullish case is that customers are holding off on equipment upgrades in anticipation of Microsoft (MSFT) Windows Vista. However, given the strong recent performance at Dell and Hewlett Packard (HPQ - Annual Report) this bullish case may be priced in already. That could leave investors holding a heavy bag if the Vista orders don’t come in as expected.

Communications equipment, which had formerly been bucking the trend in technology, has also seen a sharp reduction in order growth.

Semiconductors may be the bright spot, but at this point it seems too early to tell given that the one strong data point is balancing several weak ones. At the least, the strength could support the argument that slowing computer sales and orders are Vista related, and that the semiconductors will be needed to build computers in a few months.

Electrical equipment and appliances also look strong, which is probably due at least in part to strong holiday sales of flat-panel televisions.

There seem to be few places to hide.

Investors in vehicle armor provider Armor Holdings (AH) doubtless remember the 10% dive the company’s shares took a couple of weeks ago when the company pre-announced that the current quarter’s earnings would be below expectations. At the time, we said:

The fact that Armor is down more than 10% on an apparently minor and supposedly temporary reduction to guidance is due largely to the fact that the “timing of revenue” argument appears suspect. If it were really just a timing issue, wouldn’t it be made up in the fourth quarter (thus rendering the full-year guidance reduction unnecessary?)

Until that gets ironed out, possibly on the earnings conference call, investors are likely to shy away from Armor Holdings.

We were wrong (to some extent.) Investors didn’t shy away from Armor Holdings, as the stock regained nearly half of the preannouncement-related losses. Of course, those investors were also burned when the shares fell right back to the bottom upon release of the actual report. From MarketWatch:

Armor Holdings, which makes armor for U.S. troops and vehicles, late Thursday posted a decline in third-quarter profit as the company absorbed its acquisition of military-truck manufacturer Stewart & Stevenson.

Armor Holdings shares closed ahead of the report with a 4-cent gain at $55.64 before falling to $54.38 in after-hours trading.

The company reiterated its earlier full-year earnings forecast of $3.55 to $3.65 a share.

So, two weeks later and the news still means the stock is worth $54 in the market’s eyes. So was there  anything noteworthy in that conference call? Yes and no. Here management describes what went wrong:

First, we experienced delays in the third quarter shipments of both supplemental armor for the M1114 Up-
Armored HMMWV program as well certain soldier equipment programs. We now expect these deliverables to ship in the fourth quarter and in fiscal ’07. The schedule change was primarily the result of revived design specification as well delays in the receipt of component parts from suppliers.

Hmm… so how come the fourth quarter guidance is unchanged?

Second, armored military vehicle spare parts volumes were lower than originally expected. Order volume from the army was lower and volumes were also negatively impacted by increasing competition in particular for transparent armor or ballistic glass.

Thirdly, the third quarter in a row, commercial armored vehicle production volumes continued to be weaker than expected, driven by the ongoing base chassis availability issue as well as weaker than expected demand out of the Middle East. Because of these particular issues, we have lowered our expectations for both spare parts volumes and for commercial armored vehicle production in the fourth quarter.

Oh, we see. Management then goes over a littany of other mishaps, all of which sounded to us like the typical setbacks any business is likely to face in any given quarter. In our opinion they should have had no impact on guidance. Management concludes:

In spite of the challenges I have just described we have not changed our outlook, our outlook for earnings in the fourth quarter and now expect earnings per diluted share of $3.55 to $3.65 for this fiscal year. As for fiscal 2007, we have provided back in June of $4.80 to $5.20 per share and we do not intend to reiterate or update this guidance early next year. We are currently in the midst of our 2007 budgeting cycle which is scheduled to complete in early to mid January. We believe there maybe considerable opportunity for us in the 2007 federal budget distribution. However, this was substantially anticipated in our 2007 guidance provided in June.

So long story short, the setbacks were not temporary timing issues, at least on a net basis. This is okay because as we noted two weeks ago, the street didn’t believe they were temporary anyway. Which is why they are now right back where they were then.

Ceradyne (CRDN) is not falling alongside its fellow armor manufacturer Armor Holdings (AH) as the factors leading to Armor’s reduction in earnings guidance appear to be company-specific.

Armor, which makes body armor and combat vehicles, now expects earnings of between 55 cents and 65 cents per share, down sharply from its previous forecast of 75 cents to 80 cents per share.

“The revised outlook primarily reflects the timing of revenue associated with ground vehicle supplemental armor programs for the M1114 Up-Armored HMMWV,” as well as other soldier equipment programs, the company said in a statement. Armor Holdings now expects to ship the products in the fourth quarter and next year.

The contractor also cut its full-year forecast to a range of $3.55 to $3.65 per share from previous guidance of $3.75 to $3.85 per share to reflect the lower third-quarter outlook.

The fact that Armor is down more than 10% on an apparently minor and supposedly temporary reduction to guidance is due largely to the fact that the “timing of revenue” argument appears suspect. If it were really just a timing issue, wouldn’t it be made up in the fourth quarter (thus rendering the full-year guidance reduction unnecessary?)

Until that gets ironed out, possibly on the earnings conference call, investors are likely to shy away from Armor Holdings. Since Ceradyne makes body armor rather than vehicle armor it is not falling in sympathy.

Photo: Armored Horse in the Great Hall at Warwick Castle, originally uploaded by mharrsch
Disclosure: The author owns shares of Ceradyne and is short an equal number of Ceradyne call options (net position neutral)

The market being in a celebratory mood, little attention is being paid to such gloomy news as the durable goods report, which Briefing.com describes in rather bleak terms:

August durable goods new orders dropped a disappointing 0.5%.  There was nothing in the breakdown of the data to provide contrary cheer. Every key category was soft.

So, in an attempt to find the silver lining and push the market over the critical hump so we can enjoy the champagne we have had on ice since January, 2000, here are the durable goods categories that showed better growth in both shipments and new orders in August (all data sourced from US Department of Commerce, on a non-seasonally adjusted year/year basis.)

The clear winner in today’s report was Defense Capital Goods, which saw nearly a 70% rise in new orders and a 10% rise in shipments. And while the trend does nothing to help our general sense of well-being, with inventory and backlog flat and a customer with good credit quality the defense sector appears to be a good play in this environment.

The runner-up for our affections is Communications Equipment, not traditionally a defensive play but perhaps so today due to how low the sector sunk and the high credit quality of its remaining customers. Those who deride Verizon’s capital spending may not appreciate that the company is one of the last threads on which the economy hangs. At any rate, their spending appears to be lending a helping hand to the environment for comm equipment manufacturers.

In the “ehh, I guess we’ll take it” department is Transportation Equipment. New orders improved and turned positive, while shipments did just a bit better. Still, the inventory growth suggests that the industry is making too much stuff and will have to cut prices, production or both in the near future.

Finally, last but (unfortunately) not least comes Motor Vehicles and Parts.  Orders and shipments for beleaguered Detroit were both down year/year. However, they were down less than they were in July. With inventory building up further the industry may still be going to hell in a handbasket, but it will take longer to get there. That’s positive, isn’t it?

We now return to our previously scheduled celebration.

In a modest negative for Watch List member Ceradyne (CRDN), Armor Holdings (AH) has announced an acquisition that it expects will have a “material financial impact” on its vehicle armor business.  Although Ceradyne is currently focused on body armor rather than vehicle armor, the latter category was a potential area for it to generate growth, since its body armor business appears to be peaking. Armor Holdings is the leader in vehicle armor, and this acquisition suggests it intends to maintain that position.
Armor Buys Integrated Textile: Financial News - Yahoo! Finance

Armor Holdings Inc., which makes security products and vehicle armor systems, said Monday it bought Integrated Textile Systems Inc. for an undisclosed sum.

Monroe, N.C.-based Integrated Textile makes Tensylon, a high-strength yarn used to manufacture lightweight vehicle armor. Armor said it plans to make investments of more than $12 million over the next two years to increase its Tensylon capacity.

While Armor does not expect the acquisition to have an immediate impact on its 2006 financial outlook, the company does expect Tensylon to have a “meaningful financial impact” on its financial results over the next five years.