Venture Corp’s attractive dividends cover flat earnings

What’s New
The US economy has been in a slump for the whole of the first six months of this year. As a result, Venture is feeling the effects of the cautious business sentiment. While we had previously modelled a gradual QoQ earnings improvement, 2Q11 earnings could just be flat YoY. We have cut our FY11 forecast by 10% to reflect this.

However, there was a glimmer of recovery last month as manufacturing data showed a pick‐up. Further, dividend yield is expected to be secure and attractive at 6.3%. Maintain BUY but with the target price lowered from $11.60 to $10.40 (15x earnings).

Our View
America’s persistent economic weakness may have led to weaker‐than‐expected earnings for Venture in 1H2011. With growth coming mainly from the Test & Measurement and Retail Store Solutions segments, whose key customers are American (ie, Agilent and IBM), Venture will depend on the US market for much of this year’s momentum. We had previously modelled a gradual QoQ earnings improvement but 2Q11 earnings could just be flat YoY.

Despite an encouraging jump in 4Q10, consumer spending did not pick up in 1H11 due to rising inflation and lower household wealth. Businesses have responded negatively to this weakness, as suggested by the poor outcome of the Institute for Supply Management (ISM) manufacturing index from February to May 2011. However, this is not just a US phenomenon. Globally, the picture is the same as shown by the JPMorgan Global ex‐Japan manufacturing output index.

However, there was a glimmer of recovery last month as the ISM manufacturing index picked up slightly. The effects of Japan’s earthquake and tsunami on global supply chains appear to be easing as Japanese companies have brought production back on line, while the moderating costs of oil and other raw materials are brightening prospects for a second‐half recovery.