Manufacturers beat Wall Street's profit view

BOSTON (Reuters) - Brushing aside surging energy and metals costs and a slowing economy, several top manufacturers reported better-than-expected profit on Thursday, in some cases raising their full-year targets, helped by solid demand outside the United States.

The Standard & Poor's capital-goods industry index .GSPIC rose as much as 2 percent after United Technologies Corp (UTX.N), Danaher Corp (DHR.N) and Illinois Tool Works Inc (ITW.N) reported second-quarter profits that topped Wall Street's expectations and raised their outlooks for the year.

Investors even bid up shares of motorcycle maker Harley-Davidson Inc (HOG.N), which reported a profit drop that was less severe than expected, as international sales offset softening U.S. demand in the face of a credit crunch and surging gasoline prices.

United Tech raised the top end of its 2008 profit forecast by 10 cents to $4.95 per share, which would represent 16 percent growth over last year.

"While the challenges in the world's economies we saw at the outset of the year are materializing, especially with higher oil prices impacting the airlines and the U.S. economy generally, we remain confident in our ability to deliver on this increased guidance," said Louis Chenevert, chief executive of Hartford, Connecticut-based United Tech.

The world's largest maker of elevators and air conditioners said the increase reflected strong growth at its Otis elevator and fire and security businesses, which have been helped by strong non-residential construction activity outside the United States.

United Tech said its commodity costs had risen faster than expected, but it had been able to pass on much of the increases to customers.

The raft of results showed that demand outside the United States is holding up for diversified industrials. That provided a double lift, offsetting weak demand at home, and further boosting profit when foreign earnings were converted back into weak dollars. United Tech said 4 cents per share of its earnings growth were related to currency fluctuations.

"They still believe in the emerging markets and the foreign markets as a place to sell. That's a positive," said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, which oversees about $20 billion in funds and holds United Tech shares.

HOG MILD

Harley-Davidson, hit by a credit crunch and housing slump that have left U.S. consumers less able to buy its high-end motorcycles, known as "hogs," and surging gasoline prices that have made recreational vehicles less appealing, posted a 23 percent profit drop that was not as bad as investors feared.

The Milwaukee-based company in April warned Wall Street it was slashing production and laying off hundreds of workers to deal with the downturn.

"The actions we took to reduce shipments to our U.S. dealers and our related work force reduction position us appropriately for the current economic environment," said Jim Ziemer, the company's chief executive.

But Textron Inc (TXT.N), the world's largest maker of corporate jets, spooked investors with a third-quarter profit forecast that was well below Wall Street's expectations.

The Providence, Rhode Island-based company said it expected to report third-quarter earnings of 80 cents to 90 cents a share -- perhaps lower than last year's comparable 85 cents per share. Analysts had expected 99 cents.

"Since we first discussed our outlook, oil has been up well over $50 per barrel and other commodities are up significantly as well," CEO Lewis Campbell said on a call with investors. "This is having a direct impact on us."

Textron was not alone in having a conservative view on the rest of the year. A Manufacturers Alliance/MAPI business outlook survey released on Thursday showed U.S. manufacturers expecting flat business activity for the next three months. The survey had been in positive territory since December 2001, in the wake of the September 11 attacks.

The survey showed manufacturers expected orders to be flat this year and that inventories were rising. However, it also showed executives expected shipments outside the United States to rise.

SHARES BOUNCE

Despite Thursday's gains, the shares of manufacturers that beat Wall Street forecasts remained firmly in negative territory for the year. The bounce reflects the fact that -- spooked by turmoil in the financial and consumer sectors -- some on Wall Street had taken an excessively negative view on manufacturers, some investors said.

"It's not like these stocks are going to rocket, but we're seeing some good data points here," said Brian Langenberg, principal at Langenberg & Co in New York. "If you're leveraged to global infrastructure, you're going to be fine. If you're leveraged to defense spending, that is not going down."

All five reporting companies' shares trade at a premium to the Dow Jones industrial average's .DJI forward price-to- earnings ratio of 9.9.

Danaher is the richest, valued at 17.5 times forecast 2008 earnings. ITW carries a forward P/E of 12.8, United Tech is at 12.5, Harley is at 11.8 and Textron is at 11.5.

United Tech shares rose 5.2 percent to $64.29, while Danaher was up 6.9 percent at $81.50, Harley rose 8.3 percent to $39.18 and Illinois Tool was up 1.3 percent at $47.15.

Textron shares fell 6.3 percent to $43.08. Earlier, they had been as low as $40.58, their lowest since September 2006.

All trade on the New York Stock Exchange.

(Additional reporting by Nick Zieminski in New York and James B. Kelleher in Chicago; Editing by Andre Grenon and Braden Reddall)