This is a stunning turnaround in the index, which in December of 2008 stood at 32.5, its lowest level since March of 1975. The index is set up so that any reading above 50.0 indicates that the manufacturing side of the economy is expanding, and any level below that indicated contraction. It is composed of ten sub-indexes, nine of which rose in January and eight of which are now above the magic 50 mark. The overall index has now been above the 50 mark for six straight months.

Production Levels, New Orders Key

The most important of the sub-indexes for judging the current state of the economy is the one for production — it soared 6.5 points to 66.2, up from an already strong 59.7 in December. This is the highest reading on the production index since April 2004, and dramatically higher than the low for this cycle set back in December 2008 at 25.5.

The rise this month was driven both by a big increase in the number of respondents who said production was up (38% vs. 26%) and by a decline in the number who said things were getting worse (11% vs. 16%). The only industry that was weaker was furniture manufacturing, while 15 industries reported higher production.

If the production index is the most important in telling us about the present, the most important sub-index in telling us about the future in the New Orders index. It rose by 1.1 points to 65.9 from 64.8 in December. Its December 2008 low was 22.9, and this is also the highest reading since April 2004. It was also driven by good news on both sides, an increase in the number of respondents saying things were getting better (41% vs. 35%) and a decline in those saying things were getting worse (16% vs. 19%). Four industries reported lower new orders, while 14 reported increases.

Employment Index Up, As Well

The top focus on most people’s minds right now, though, is jobs. Here, too, the news was good with the employment index rising 3.1 points to 53.3 from 50.2 in December. In February, it had hit an all-time record low of 25.9. The January reading is the highest since April of 2006. In December, the index was just barely positive at 50.2, yet the economy lost 27,000 manufacturing jobs in the month.

We will see on Friday if the stronger ISM employment report actually translates into new manufacturing jobs according to the Bureau of Labor Statistics (BLS). It would be very good news if it does.

The graph below shows the history of the overall PMI and these three key sub-indexes. Unfortunately, the St. Louis Federal Reserve site has not yet updated the numbers for January (this will probably happen later this afternoon or tomorrow) so the data in the graph is only through December, but it does give some context to put the current readings in.

Note that the employment index (blue line) usually stays well below the other lines, especially coming out of recessions. Then again, the economy has been steadily losing manufacturing jobs through both good and bad times for the last 30 years or so.

The improvement in the employment index came mostly from a decline in respondents who said they were cutting jobs (12% vs. 18%); the number of respondents who said that they were increasing jobs actually fell, to 15% from 17%. There was a big increase then in the number of respondents who said they are standing pat on the jobs front.

The employment numbers that will come out on Friday measure the net between jobs lost and jobs created. For some time now it has been apparent that the jobs lost situation is coming under control; however, there is a huge problem with very few jobs being created. Seven industries reported increases in jobs, while six reported declines.

The only two sub-indexes that are below the 50 level are the two which deal with inventories. Much has been made about how the fourth quarter GDP growth was all an inventory bounce.

Well, yes and no on that. Yes, inventory liquidation in the fourth quarter was much less than it was in the third quarter (or the second or the first for that matter). However, in the fourth quarter, inventories were still being liquidated at a $40 billion annual rate. The decline in the rate of inventory liquidation did provide a huge boost to GDP growth, and accounted for 3.39 points of the 5.70 total growth or almost 60% of the total growth.

However, it does not mean that goods are piling up on store shelves. If they were, then the boost from inventories would have been fleeting. We still have destocking going on, and the restocking process has lots of room to run, which means that inventories could be a positive contributor to GDP growth again in the first quarter and even into the second and third quarters of this year.

Inventories In-Depth

The respondents’ assessment of their own inventories supports this, with the inventory index rising to 46.5 from 43.0, an increase of 3.5 points — but note that it is still well below 50. In other words, their inventories are still contracting, but just doing so at a slower rate. While inventory contraction puts a drag on the current economy, it sets it up for future growth as those inventories are replenished.

Their assessment of their customers’ inventory situation was bad on both fronts, at least from the point of view of current growth. Only 4% of the purchasing managers surveyed thought that their customers inventories were too high in January, down from 7% in December. As for inventories being too low, that shot up to 40% from 37% in December.

The overall customers inventories sub-index fell to 32.0 from 35.0% and remains the weakest of the sub-indexes by a very large margin. If I had to chose one of the sub-indexes to be on the low side, this would be the one (or perhaps the other inventory number). No industries reported that their customers had higher inventories, while 13 of the 18 industries tracked reported lower customer inventories.

The increase in the production index did not cut into the backlog of orders that manufacturers have. The backlog sub-index rose 6.0 points to 56.0 from 50.0 in December. This is a very positive sign for the next few months.

Looking Ahead: Service Index

Overall this was a very positive report. However, it only deals with the Manufacturing side of the economy. On Wednesday, the ISM non-manufacturing or Service index is due out. It does not have the long and venerable history that the Manufacturers’ index has, but it covers a much larger part of the economy. In recent months it has been running significantly below that of the manufacturing index.

Still, this is a very strong report showing that manufacturing has lots of momentum so far in 2010. It is also a stunning turnaround from where we stood just a little over a year ago. While we have a long way to go, this report indicates we are clearly headed in the right direction.

In terms of the industries, the furniture industry was consistently noted as being on the weak side of things, which is not a good omen for the likes of La-Z-Boy (LZB) or Ethan Allen (ETH). On the other hand, primary metals and Transportation equipment were consistently mentioned among the industries showing strength. That probably bodes well for firms like Freeport McMoRan (FCX) and Nucor (NUE) as well as firms like Ford (F).

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

Zacks Investment Research

(LZB) Institute for Supply Management Manufacturing Index Soars

However, the company offered a conservative outlook for 2010 and said that it expects EPS of $2.30 to $2.80 per share, which is below the Zacks Consensus Estimate of $2.89 per share derived from 12 covering analysts. Fortune Brands also stated that earnings for the first quarter of 2010 is expected to be lower compared to the year-ago period due to higher brand investment in the Spirits business and incremental costs associated with restructuring efforts.

The Zacks Consensus Estimate on the company’s earnings for the first quarter is currently pegged at 46 cents per share, which reduced by 7 cents over the past month as 1 of 6 covering analysts lowered expectations.

Meanwhile, net sales for the fourth quarter of 2009 grew slightly to $1.80 billion from $1.79 billion in the year-ago quarter, primarily due to growth in Spirits and Golf businesses. However, the top-line increase was partially offset by revenues declines in Fortune Brands’ Home Products business.

Home Products declined 3.3% to $823.8 million as Fortune Brands continued to face the adverse impact of conservative spending by consumers on big-ticket discretionary items. However, the company witnessed improved results in Moen and Simonton brands, which helped moderate the sales decline in this segment.

Fortune Brands’ Spirits division recorded a growth of 3.5% year-over-year to $746.4 million, mainly driven by improved performance by Jim Beam and Maker’s Mark brands in the U.S, which more than offset sluggishness in certain international markets. Moreover, the segment’s sales also benefitted from favorable foreign currency translations.

The Golf segment rose by 6.9% to $226.9 million as Fortune Brands outperformed the industry with double-digit sales increases for Titleist golf balls and FootJoy shoes coupled with solid performance in Asian markets.

At the end of the quarter, Fortune Brands had cash and cash equivalents of $417.2 million and long-term debt of $4.4 billion, compared to $163.3 million of cash and $4.7 billion of long-term debt in the year-ago period. During 2009, the company generated free cash flow of $724.7 million, compared to $691.5 million in the year-ago period. For 2010, Fortune Brands expects free cash flow to range between $375 million and $475 million.

Zacks Investment Research

(FO) Fortune Brands Beats the Street – Guidance Falls

Company Description

La-Z-Boy Inc. designs, manufactures and sells a wide range of furniture products in the United States and Canada. The company was founded in 1927 and has a market cap of $549 million.

Third-Quarter Results

Although sales were down a bit from last year on the weak consumer environment, earnings came in strong at 12 cents, 2 cents ahead of the Zacks Consensus Estimate. La-Z-Boy has been beating big in the last three quarters, with an average earnings surprise of 177%.

The company noted that its results were helped by ongoing cost saving initiatives, adding that it had almost completed the transition of moving its domestic cutting and sewing operations to a new facility in Mexico, where over 840 people will be employed. The move is expected to save La-Z-Boy $20 million a year.

La-Z-Boy’s balance sheet also looks strong, with its debt to capitalization level dropped to 13% from 23% last year.

Estimates

Estimates have moved higher since word of the good quarter hit the Street, with the current year adding 5 cents to 43 cents. The next-year estimate is up 6 cents in the same time to 83 cents, a bullish 91% growth projection.

Valuation

After the recent string of gains, this stock is a bit pricey, trading with a forward P/E of 25X, a premium to the overall market.

The Chart

Shares of LZB recently rebounded from a key trend line that has been supporting prices since June, placing shares back within reach of the 52-week high. If shares are rejected from the high look for more support at the trend line. Take a look below.

Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader.

Zacks Investment Research

(LZB) La-Z-Boy Incorporated – Earnings Forecasts Move Higher

During the quarter, total U.S. net sales increased 6.1% year-over-year to $233.0 million, while wholesale domestic net sales (which exclude third-party sales from Sealy’s component plants) increased 7.3% to $227.7 million. New product introductions such as the Stearns & Foster line helped Sealy to offset a weak retail environment and drive profitable market share gains. However, international net sales decreased 6.6% to $99.1 million during the quarter due to relatively weak sales in Canada. Net sales for full fiscal year 2009 decreased 13.9% to $1.3 billion from $1.5 billion in fiscal 2008.

Sealy reported a gross profit of $131.1 million during the quarter compared to $117.9 million in the year-ago quarter. Gross profit margin during the quarter increased 331 basis points to 39.5% compared to the prior year fourth quarter, primarily due to lower material costs in the U.S. For full fiscal year 2009, gross profit was $516.8 million (40.1% of net sales) versus $582.0 million (38.9% of net sales) for fiscal 2008.

Selling, general, and administrative expenses reduced $3.1 million year-over-year to $113.9 million during the quarter due to stringent cost-control measures. Fixed operating costs (excluding compensation expense) of Sealy decreased $10.5 million due to reduction in discretionary and severance related costs. Income from operations for the fourth quarter increased to 5.9% of net sales from a loss in the prior year period. Total adjusted EBITDA (earnings before interest, tax, depreciation and amortization) for the quarter increased 465 basis points on a year-over-year basis to $37.0 million.

For full fiscal 2009, income from operations was $111.1 million (8.6% of net sales) compared to $82.5 million (5.5% of net sales) for fiscal 2008. Total adjusted EBITDA for fiscal 2009 was $167.7 million (13.0% of net sales) compared to $166.9 million (11.1% of net sales) for fiscal 2008.

During fiscal 2009, Sealy reduced its year-over-year net debt by $40.8 million to $716.0 million. Total cash and equivalents at quarter end was $131.4 million compared to $26.6 million in the year-ago period. Amid positive signs of recovery in the macro-economic environment and retail industry conditions, the strong quarterly results of the company indicate stabilization in demand and profitability. In addition, product innovation and operational improvements of Sealy have strengthened its position in the market and will help drive profitable market share gains in the future.

Zacks Investment Research

(ZZ) Sealy Corporation Reports Quarterly Profit

Company Description

Select Comfort Corp develops, manufactures and sells adjustable foam beds and other sleep related accessories in the United States and Canada. As of January 2009, the company operates 471 retail stores with an additional 800 ‘partner’ doors. Select Comfort was founded in 1987 and has a market cap of $$304 million.

Shares of SCSS posted a huge rally in the second half of 2009 as the company continued to execute its strategy to increase operational efficiencies and close less competitive stores. The effort showed up in the company’s better than expected Q3 results from late October.

Third-Quarter Results

Total sales were down 6% from last year on an absolute basis, but when factoring the company closing 14 stores during the quarter, sales were actually up 9%. Select Comfort closed a total of 71 stores during 2009. Earnings came in strong at 20 cents per share, 13 cents ahead of the Zacks Consensus Estimate.

Margin Expansion and Operational Efficiencies

Gross margin was up 120 basis point from last year and 180 basis points from just last quarter to 63.4%. Sales and marketing costs dropped 20% to $66 million. Operating cash flow came in at $53 million, helped by tax credits from previous year losses, a big improvement from $12.2 million in the first nine months of 2008. Cash and cash equivalents are up to $4.8 million.

Estimates Jump

The strategic initiatives have pushed estimates higher, with the current year climbing from a loss of 7 cents 90 days ago to 18 cents. The next-year estimate has more than doubled, climbing to 34 cents, a bullish 85% growth projection.

Valuation

In light of recent gains, this stock doesn’t come cheap, trading with a forward P/E multiple of 36X, a sharp premium to the overall market.

The Chart

Shares of SCSS caught fire in the 2nd half of 2009, bottoming out in late July at $1 before hitting a new multi-year high above $6. Take a look at the big jump below.

Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Surprise Trader Service.

Zacks Investment Research

(SCSS) Select Comfort Corporation – Margin Expansion and Operational Efficiencies

Leggett reported total sales of $810 million from continuing operations compared to $1.13 billion in the year-ago period – a decrease of 28%, due to the continued sluggish market demand and steel-related price deflation. Cash flow from operations was $142 million during the quarter and $430 million year-to-date. Leggett anticipates cash flow for full year 2009 to exceed $500 million, primarily due to optimization of working capital.

Gross margin was 23.1% during the quarter, while EBIT margin was 11.7%. Leggett anticipates an EBIT margin (excluding the net LIFO benefit) of 8.5% to 9% for full year 2009 on annualized sales of $3 billion, which represents a 200 bps year-over-year improvement in margins despite a 25% decline in overall sales. The company realized net LIFO benefit of $11 million during the quarter.

Leggett repurchased 4.4 million of common stock during the quarter at $18.40 each. Consequently, shares outstanding decreased to 152.3 million. Leggett has an authorization to repurchase 10 million shares every year under its share repurchase program, and currently 4.1 million shares remain available for repurchase in the remainder of 2009. At quarter end, the company had cash and cash equivalents of $221.5 million with no significant long-term debt maturing before 2013. Leggett’s net debt decreased to 23.7% of net capital during the quarter with virtually no short-term debt.

With increased margin expectations and continued cost-cutting measures, Leggett has now revised its earnings guidance for 2009. The company now expects its earnings to vary within 65 cents to 75 cents per share compared to the prior guidance of 55 cents to 70 cents. However, Leggett has kept unchanged its full year 2009 sales guidance at approximately $3 billion. The company has marginally increased its quarterly dividend by 1 cent to 26 cents per share.

Zacks Investment Research
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(LEG) Leggett & Platt Incorporated Earnings Up on Cost Cutting

Net sales for the quarter declined 10.6% year-over-year to $1.72 billion, primarily due to flat sales for the company’s spirits business and comparatively moderate revenue declines in the golf and home products brands.

The Spirits segment revenues were flat during the quarter, as higher sales of Jim Beam bourbon and Canadian Club whisky, the Cruzan acquisition and strong growth in emerging markets was almost fully offset by soft results in other international markets. In addition, a benefit from the company’s route-to-market initiatives was largely offset by unfavorable foreign exchange.

There are signs that the U.S. housing downturn is decelerating, which coupled with the company’s share-gain initiatives across all product categories helped moderate the sales decline in the home products business compared to the prior two quarters.

In the golf segment, the company outperformed the industry with successful new products and double-digit constant-currency sales gains in Europe and Korea which were partially offset by a double-digit decrease in the U.S.

Cash flow from operations at the end of the quarter was $382.3 million and the company had a debt-to-capitalization ratio of 47%.

Based on the results year-to-date, management raised the low end of the earnings target. The company now expects annual earnings in the range of $2.10 to $2.30 compared to the previous target of $2.00-2.30. Although, the moderate declines in the home and golf product categories are encouraging, management expects consumers to remain cautious in the months ahead.

Also, the overall home products market — particularly big-ticket remodeling purchases — are expected to be challenging in 2010. The company reaffirmed its free cash flow guidance of $400 million.

Zacks Investment Research
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(FO) Tough Third Quarter for Fortune Brands

• Acuity Brands Inc (AYI)
• Anthracite Capital Inc (AHR)
• Build-A-Bear Workshop Inc (BBW)
• C&D Technologies Inc (CHD)
• Cavco Industries Inc (CVCO)
• China Precision Steel Inc (CPSL)
• CNOOC Ltd (CEO)
• CoBiz Financial Inc (COBZ)
• Corn Products International Inc (CPO)
• Cumulus Media Inc (CMLS)
• Cybex International Inc (CYBI)
• Discover Financial Services (DFS)
• Eastman Kodak Co (EK)
• Electronics For Imaging Inc (EFII)
• Entertainment Properties Trust (EPR)
• Erie Indemnity Co (ERIE)
• Fastenal Co (FAST)
• First Advantage Corp (FADV)
• First M & F Corp (FMFC)
• FirstService Corp (FSRV)
• Gray Television Inc (GTN)
• Kaman Corp (KAMN)
• KVH Industries Inc (KVHI)
• Legacy Bancorp Inc (LEGC)
• Mercantile Bank Corp (MBWM)
• Meridian Bioscience Inc (VIVO)
• MetroCorp Bancshares Inc (MCBI)
• Monsanto Co (MON)
• Nara Bancorp Inc (NARA)
• NOVA Chemicals Corp (NCX)
• Orion Energy Systems Inc (OESX)
• Pacific Ethanol Inc (PEIX)
• Pacific Capital Bancorp (PCBC)
• Physicians Formula Holdings Inc (FACE)
• Sociedad Quimica y Minera (SQM)
• The St. Joe Co (JOE)
• Tennessee Commerce Bancorp Inc (TNCC)
• THQ Inc (THQI)
• Trico Marine Services Inc (TRMA)
• UTi Worldwide Inc (UTIW)
• Wendy’s Arby’s Group Inc (WEN)

Zacks Investment Research
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(AYI) Zacks #5 Rank Additions for Monday – Zacks Tale of the Tape