Manufacturers bracing for a slower-growth 2012
(Reuters) - As they head into 2012, the world's top multinational manufacturers are trying to find a safe route through an economy that is known more for the promise of volatility than for the prospect of surefire growth.
Big manufacturers including Caterpillar Inc (CAT.N) and Boeing Co (BA.N) have notched profit growth that has generally beat Wall Street's expectations this year, helped by strong emerging market demand, a steadying U.S. economy and lower costs brought about by aggressive cuts implemented during the 2008-2009 downturn.
Their leaner operations may be set for a test, though, as Europe's sovereign debt crisis threatens to throw the continent into recession and concerns over a slowdown in emerging market growth persist, a shift that could leave big U.S. manufacturers far more dependent on the strength of their home market.
"The risk of disappointment coming out of Europe and emerging markets is higher than the disappointment coming out of the United States," said Keith Goddard, manager of the Capital Advisors Growth Fund. "My guess is by the summer of 2012 investors may be looking at their stock performance so far and saying, 'Wow, all my domestically exposed companies are doing better.'"
One piece of evidence that the U.S. economy may be pulling out of its long torpor can be found in recent employment reports. Recent government reports showed the unemployment rate fell to 8.6 percent in November, the lowest reading since March 2009. Stubbornly high unemployment has been the biggest stumbling block for the U.S. economy's recovery.
Top executives from big industrial companies also including United Parcel Service Inc (UPS.N) and Siemens AG (SIEGn.DE) will tackle their plans to navigate what promises to be a tricky year starting on Monday at the Reuters Global Manufacturing and Transportation Summit, in New York, Frankfurt and Singapore.
For a related suite of graphics, click: r.reuters.com/heb55s
INVESTORS CAREFUL, COMPANIES INVESTING
Wall Street has reason to be less confident in big manufacturers' growth prospects, based on the performance of the Standard & Poor's capital goods index .GSPIC, which has declined about 6 percent so far this year, while the broad S&P 500 index .SPX is flat and the blue-chip Dow Jones industrial average .DJI is up about 5 percent.
Still, investors continue to steadily pump cash into industrial-oriented mutual funds despite lower returns in hopes that companies making everything from military equipment to agricultural machinery will be the first in line to benefit from an economic uptick, according to data provided by Lipper, a Thomson Reuters unit that tracks mutual fund data.
But they may be waiting a while for a strong economic comeback, especially because Asian economies, where big manufacturers have found much of their revenue growth over the past few years, are showing signs of slowing as well.
"Asia is not immune to a slowdown," said Song Seng Wun, economist at CIMB Research based in Singapore. "Even in China, the anchor economy of Asia, we are already seeing there the pace of growth started to moderate. It is not tanking, we are not talking about the economy going into recession, but it is definitely slowing down from a very rapid pace."
Regardless of the near-term outlook, manufacturers including Caterpillar are continuing to add jobs in the United States, China and elsewhere.
"These are obviously long-run decisions," said Stu Levenick, group president at the world's largest maker of heavy equipment. Caterpillar last month said it plans to build a new excavator factory at a yet-to-be-determined North American location next year, which will employ about 1,000 people.
"We went to the board in August ... the same time U.S. debt got downgraded and the whole European thing started to unravel," Levenick said. "Because of the confidence we have in the business, we went ahead and approved all that."
Also next week a lineup of top manufacturers including General Electric Co (GE.N), United Technologies Corp (UTX.N), Danaher Corp (DHR.N) and Honeywell International Inc (HON.N) are set to lay out their 2012 financial forecasts to investors. Analysts are bracing for lower growth at all four companies.
The demand picture varies widely among the sectors in which the manufacturers compete. Analysts forecast strong demand next year for business jets, which have been weak sellers for the past few years, and for electric turbines, after years of low investment by power generation companies.
Orders for military vehicles and weapons, on the other hand, are expected to decline as governments in the United States and Europe look to cut back their spending. That could present an earnings headwind for summit guests Rockwell Collins Inc (COL.N) and Navistar International Corp (NAV.N).
"I'm worried about defense more than anything else," said Catherine Avery, president and CEO of CAIM LLC.
Avery, whose portfolio has a greater weighting of industrial names than the overall market, likes the sector for its dividend growth and strong cash flow. Her holdings include Emerson Electric Co (EMR.N) , Illinois Tool Works Inc (ITW.N) and United Tech.
She expects company chiefs to strike a similar tone as in the past two years: cautious optimism.
"They're very diversified in terms of end-markets, so that gives them the potential to grow. We just don't know where it's going to come from," Avery said. "There is an opportunity for these companies to surprise on the upside because they've kept pristine balance sheets and they're generating significant cash flow ... The biggest issue is the contagion (from Europe) to emerging markets."
(Reporting by Scott Malone in Boston and Nick Zieminski in New York, additional reporting by Harry Suhartono in Singapore, editing by Matthew Lewis)
- Special Report: Thailand secretly supplies Myanmar refugees to trafficking rings |
- UPDATE 2-China bars banks from bitcoin transactions
- The 10 Most Corrupt and Least Corrupt Countries in the World
- Obama says he's not allowed iPhone for 'security reasons'
- China central bank warns banks against use of bitcoin