Manufacturing Profits Suggest Stronger US Economy

Thursday, 27 Jan 2011 02:59 PM

 

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Slimmed-down work forces helped drive better-than-expected quarterly results from U.S. manufacturers, though some investors worried that persistently high unemployment threatens the recovery.

Companies including Caterpillar Inc., Tyco International Ltd. and Eaton Corp. posted strong sales and earnings, and investors were looking ahead to their full-year forecasts for signs that strong industrial demand would begin to affect the wider economy.

Most companies were expected to top Wall Street expectations coming into this earnings season, so beating by a few cents a share is not enough to excite investors, said Oliver Pursche, president of Gary Goldberg Financial Services.

"So far so good," Pursche said. "What we're hoping to hear is their outlook for the rest of the year, in particular whether they are looking at hiring.

"The more they talk about hiring, the more comfortable we're going to be with that company. If you're hiring people, your business is growing."

Intel and Caterpillar are among companies that have indicated encouraging plans to add workers, Pursche said.

Caterpillar, which slashed nearly 30,000 full-time and contract jobs worldwide during the recession, said it had rehired about 8,200 workers worldwide in 2010 — two-thirds of them outside the United States.

In addition, the company said it had hired another 11,000 temporary contract workers — about half of them in the United States. Caterpillar shares were up 1.5 percent at $97.20 on Thursday morning.

Caterpillar reported a stronger-than-expected quarterly profit, lifted by increased sales of its machines in Asia and Latin America and a sharp rebound in demand in North America, especially from mining customers. It reported a fourth-quarter net profit of $968 million, or $1.47 a share, beating estimates by 20 cents.

The company also forecast it would post a 2011 profit "near $6.00 per share," above the market consensus of $5.86.

Tyco's quarterly earnings more than doubled, beating Wall Street expectations amid sharply higher profits at the conglomerate's security business, which includes the former ADT Worldwide service. Earnings from continuing operations before special items were 75 cents per share, 7 cents ahead of analysts' average estimate, according to Thomson Reuters I/B/E/S.

Tyco, which said it was close to finalizing deals worth around $500 million, also raised its full-year forecast. Its shares were up 0.4 percent at $44.81 on Thursday morning.

Industrial stocks rose 24 percent last year, lagging only the consumer discretionary sector, according to Standard & Poor's, which recommends investors stay "overweight" in industrials amid expectations of continued global expansion.

The sector has outrun the broader stock market in 2011, and a correction could be imminent, S&P said.

Companies keyed to industrial demand continued a trend of beating Wall Street forecasts, but investors took profits in some stocks, like Kennametal Inc. and Eaton Corp., after big gains in recent weeks.

Tool maker Kennametal, considered a pure play on industrial production, raised its full-year forecast above Street estimates amid strong demand from industrial and transportation markets. Profit at Timken, maker of bearings and specialty steel, was helped by auto and truck production and an ability to push through higher prices.

Eaton's quarterly profit beat expectations on a strong truck market and higher demand for its electrical systems. The maker of hydraulics, truck transmissions and other industrial products forecast record 2011 earnings, set a stock split and announced a 17 percent dividend increase.

Electrical and electronics products maker Hubbell Inc also beat, as did Harsco, which provides products to metals producers.

Conglomerate Danaher Corp. showed sharply higher profits in its industrial components and test-and-measurement segments. It affirmed 2011 earnings targets.

"We expect the global economy to continue to improve in 2011, lead by the emerging markets," Danaher CEO Larry Culp said on the company's conference call.

Optimism among manufacturing executives is widespread. Sixty-three percent are upbeat about U.S. economic prospects over the next 12 months, according to a quarterly survey by PricewaterhouseCoopers. That marked a 28-point increase over the prior quarter.

Still, fewer than half — 48 percent — plan to add employees over the next year, PwC found, partly reflecting concerns about taxes, regulation and soft demand.

Worries about corporate taxes, especially, may keep U.S. companies from significantly boosting capacity until the second half of 2011, said analyst Brian Langenberg of Langenberg & Co. U.S. consumers remain constrained by an uncertain housing market.

A reminder that not all is well on the housing front came from the No. 1 homebuilder, DR Horton Inc, which posted a wider-than-expected loss.

"Industrial production is increasing on a global basis," Langenberg said. "(Manufacturers) need to increase capital spending.

"When do they have to boost capacity? Now. Where? Not necessarily in the U.S."

© 2014 Thomson/Reuters. All rights reserved.

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