Manufacturers Could Face Slower 2011 Growth

Thursday, 02 Dec 2010 02:49 PM

 

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After racking up strong earnings growth in 2010, major U.S. manufacturers are expect to set the stage for a slower-paced 2011 when they meet with analysts and investors to lay out their expectations for the coming year.

Heavyweight industrials including General Electric Co., United Technologies Corp., 3M Co., Honeywell International Inc., Illinois Tool Works and Danaher Corp. are all set to provide 2011 forecasts in the coming weeks.

Profit margins across the sector swelled this year as companies that cut costs to the bone during the brutal recession experienced a rebound in sales that helped the Standard & Poor's capital goods industry index to rise about 14 percent, more than twice the gains of the broader U.S. stock market.

Heading into the meetings, analysts expect 2011 profits to rise next year, but at a slower pace than in 2010.

"The comparisons are going to be getting a lot tougher going forward," said Perry Adams, a senior portfolio manager at Huntington Private Financial Group in Traverse City, Michigan, who holds GE shares.

"Margins were expanding at a significant pace over the course of the last year, just given the productivity gains that these companies have had," Adams said. "One of the concerns now is: Can we continue the pace of revenue growth we've had? There's been a lot of uncertainty of late."

Some investors see declining margins as inevitable, as companies will need to add staff after cutting their operations to the bone during the recession.

"They're going to have to start hiring people, so their personnel costs will start going up," said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which holds shares of companies including GE, 3M and United Tech in its funds.

"We'll probably see accelerating sales ... but a lot of these stocks already have that figured into their pricing," Adams said.

Honeywell, for instance, is up about 27 percent so far this year, while Rockwell Automation Inc. — which has already provided an initial forecast for its 2011 fiscal year — has risen more than 40 percent.

RECOVERY HOPES

While margins may decline in 2011, investors are becoming more confident that the economic recovery is firming up. Data released Wednesday showed U.S. manufacturing activity rose for the 16th straight month in November, and Chinese and Indian reports also showed their factories were humming.

That bodes well for the sector, though improving global demand could also start to push up the prices of key raw materials, such as copper and steel. Prices of copper in particular — used in wiring of all kinds — have been rising, with futures hitting a three-week high in London Thursday.

Takeover talk could also be a major theme of the coming briefings. Big manufacturers including GE and Caterpillar Inc have made major acquisitions in the past few months, and with demand in the United States growing weakly, investors expect more companies to look at takeovers as a growth vehicle.

Officials at United Tech, which owns Pratt & Whitney, will also have something to crow about. European planemaker Airbus EADS this week said it will use Pratt's forthcoming geared turbofan engine, which the company has been working on for about two decades, on its next-generation A320 aircraft.

That was the first win for the geared turbofan on a jet from one of the two major aircraft makers.

Investors in GE will also be listening for further action on the dividend. The largest U.S. conglomerate in July raised its quarterly payout by 2 cents to 12 cents a share. Historically it has reviewed its dividend in December and aimed to pay out 40 to 45 percent of profit to shareholders through the dividend.

"They could go incrementally higher as a show of confidence," Barclays Capital analyst Robert Cornell wrote in a note to clients.

© 2014 Thomson/Reuters. All rights reserved.

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