Conglomerates ready for slowdown? Wall St wonders

BOSTON (Reuters) - Investors will be watching next week's 2008 outlook briefings from four U.S. industrial heavyweights for any signs of order cancellations, capital spending cuts and cost slashing as they face an economic slowdown at home.

Investors and analysts who follow General Electric Co (GE.N), United Technologies Corp (UTX.N), 3M Co (MMM.N) and Honeywell International Inc (HON.N) said they expected the slowing U.S. economy to take a toll on revenue growth.

With a combined market capitalization of more than $500 billion, the size and variety of their operations make these blue-chip companies U.S. economic bellwethers. Their words will help shape investor opinion as to whether the United States faces a serious risk of recession.

"It's the source rather than the magnitude of improvement for '08 that's really likely to become the most critical evaluated factor," said Nicholas Heymann, director of global industrial infrastructure at Sterne, Agee & Leach Inc in New York.

"If it's margin expansion and acquisition benefits, or share repurchase, those are probably going to be viewed more favorably than if you're over-reliant on perhaps rosy macroeconomic projections or foreign exchange continuing to work the right way," Heymann said.

In the United States, manufacturers are facing economic headwinds that include the slumping U.S. housing market, a credit crunch and high energy and commodity costs.

The White House last month trimmed its 2008 forecast for growth in gross domestic product to 2.7 percent from 3.1 percent.

Executives see a slowdown coming. Less than half -- 44 percent -- of chief financial officers at 600 U.S. manufacturers expect the U.S. economy to grow next year, according to a Bank of America survey released on Thursday, down from 55 percent in last year's study.

HAWK'S EYE ON COST

Given a slowing economy, investors want reassurance that companies have a firm hand on costs.

"My biggest concern is, are they matching pricing with input costs?" said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati.

Sorrentino, who helps manage $6.5 billion in assets that include shares of GE, United Technologies and Honeywell, said he was also looking at backlog levels.

"Are orders being canceled?" he said. "Do we see over-ordering? Just to make sure that order books are in fact intact and legitimate."

One key sign of discipline would be their capital expenditure plans, he said.

"Is anyone talking about big capex plans? Is anyone talking about ramping up capacity?" Sorrentino said. "That's the kind of thing that worries me."

Right now, investors do expect these manufacturers to continue to post solid profit growth.

Analysts, on average, expect GE to report 2008 earnings of $2.49 per share, according to Reuters Estimates, which would be up 13 percent from the $2.20 forecast for 2007.

Wall Street's 2008 outlook for United Technologies is $4.85 per share, up 14 percent. Analysts expect 16 percent growth at Honeywell to $3.67 per share, and 9 percent at 3M to $5.42.

EYEING INTERNATIONAL MOMENTUM

The conglomerates owe their growth trajectories to markets outside the United States, particularly rapidly developing China and India, as well as the oil-rich Middle East.

In part because of their international strength, all four companies trade at a premium to the Dow Jones industrial average .DJI, of which they are components.

Honeywell and United Technologies trade at about at 18.4 times forecast 2007 earnings, while the forward price-to-earnings ratio for 3M is 17.1 and for GE, 16.9. The multiple for the Dow as a whole is 15.8.

Investors will be looking for reassurance that strong growth outside the United States will continue for the conglomerates, even if the dollar bottoms out in its recent slide.

This year, international results have benefited from translation into the weak U.S. currency.

"People are going to wonder if the international scene is slowing down," said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which oversees about $20 billion in assets and invests in all four companies.

"That's going to be a big, big issue for these folks," he said, "to sort of bolster up confidence that the international scene is hanging in there and humming along."

(Editing by Brian Moss)