PREVIEW-US producer earnings eyed for signs of stabilization

* US manufacturers report results over the next few weeks

* With most end markets still in a slump, expectations low

* More dividend cuts possible as companies hoard cash

* Investors looking for signs of a floor

* Will pricing - one of the sector's bright spots - hold?

By James B. Kelleher

CHICAGO, July 15 (Reuters) - It would be an understatement
to say investors are girding for bad news as publicly traded
U.S. manufacturers prepare to report their latest earnings.

"Horrible," "terrible" and "horrendous" are among the
adjectives tossed about by analysts to describe the past
quarter. Deutsche Bank analyst Nigel Coe has warned the quarter
is "likely to be the worst" of the downturn -- which is saying
something when you consider that some industrial bellwethers,
like Caterpillar Inc (CAT.N), were already calling this slump
the worst since the Great Depression.

Expectations are so low, in fact, that any pleasant
earnings surprises, or forecast increases, could trigger big
stock moves. But Ann Duignan, an analyst at J.P. Morgan, says
investors should not hold their breath.

"Company and industry data suggest Q2 was horrible," she
said. "We are not anticipating any large upside surprises."

DIVIDENDS, PRICING EYED

The bad news may extend beyond earnings. When truckmaker
Paccar Inc (PCAR.O) recently cut its regular dividend for the
first time in decades, it raised fears other manufacturers keen
to preserve cash might follow suit.

Andrew Obin at Merrill Lynch is keeping an especially close
eye on Caterpillar and Eaton Corp (ETN.N), which he says "stand
out as two other names at the risk of reducing their dividend
rate" in the second half.

Pricing, which has held up quite well despite the downturn,
will be under scrutiny.

"Too much capacity 'is already leading to incipient price
pressure," said Coe.

IS THIS THE TROUGH?

The most anyone is hoping for is that the quarter just
ended will mark the low point of the recession and that, with a
floor established, the next few quarters will see steady,
albeit slow, sales growth.

One or two analysts, like Coe, believe the worst is over.
"Stability is a very different proposition to recovery," Coe
said, "but there is no question that the free-fall ... has now
ended."

One reason for the optimism has been the U.S. dollar's
recent weakness, which has provided a cushion to fast-falling
sales by at least making U.S. manufacturers marginally more
competitive.

Another, ironically, has been a nascent pickup in North
American and European auto production -- potentially good news
for companies like ITW, Cummins Inc (CMI.N) and others.

But Wall Street seems less sure the sector has truly passed
the inflection point.

Most of the key end markets are still in deep recession.
These include residential and commercial construction, which
support building equipment makers like Caterpillar, Terex Corp
(TEX.N) and Deere & Co (DE.N), as well as the heating and
cooling products, controls and lighting fixtures made by
Ingersoll-Rand Plc (IR.N), Honeywell International Inc (HON.N)
and United Technologies Corp (UTX.N).

The truck and trailer markets -- important to Eaton,
Ingersoll Rand and others -- also continue to hurt as a result
of a drop in freight movement.

"Investors have begun to expect 'green shoots' before they
have sprouted," said analyst Henry Kirn at UBS.

WAITING FOR THE STIMULUS

Virtually every sector-wide indicator -- from employment to
output to utilization -- suggests U.S. producers are in the
midst of the worst cyclical downturn in at least a generation.

Company-specific data released ahead of the looming results
-- from companies with broad and diversified end markets like
Caterpillar, Kennametal Inc (KMT.N), Emerson, and Illinois Tool
Works Inc (ITW.N) -- suggests the downturn may, in fact, have
deepened in recent months rather than moderated.

Caterpillar's worldwide dealer sales, for instance, have
been decelerating steadily and were down 43 percent in May.

"The disappointing demand for Caterpillar's equipment is a
sign worldwide economies might be weaker and further from
recovery than investors had thought" said Alex Blanton, an
analyst at Ingalls & Snyder.

As they cast about for anything that might cheer them up,
investors will be especially alert to any signs that emergency
infrastructure spending, especially in China and the United
States, is producing traction for industrial sales.

Daniel Dowd, an analyst at Bernstein Research, said
anecdotal evidence from Caterpillar dealers "suggests that
those construction companies with exposure to paving and road
building are increasingly optimistic given the stimulus
package."

But with only a fraction of the tens of billions targeted
for infrastructure construction and repair in the United States
released so far, Dowd said it is likely those stimulus funds
will not show up in the current quarter's results.
(Reporting by James Kelleher, editing by Matthew Lewis)