January 20, 2009 / 4:46 PM / 9 years ago

Industrial-sector investors braced for brutal news

BOSTON (Reuters) - Now investors will see how bad the bleeding is.

With so many of the world’s economies in recession and a crisis in the finance industry, diversified U.S. manufacturers are expected to report their worst quarter in years.

Wall Street is bracing for big profit drops from blue-chip General Electric Co (GE.N), 3M Co (MMM.N) and Caterpillar Inc (CAT.N) over the next week, with few bright spots expected among the more than a dozen industrials reporting results.

Given the brutal environment, investors say they want to hear what new steps companies are taking to weather what many fear will be a prolonged slump.

“I’m looking for realistic assessments, looking for realistic approaches to the problem,” said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which owns GE shares. “Especially with GE, maybe focusing on what’s realistic here. They’re been telling folks ‘We want our triple-A and we want our dividend,’ and quite frankly, I don’t know if that’s realistic.”

Standard & Poor’s last month lowered its credit outlook on the U.S. conglomerate to “negative,” meaning that it faced a 1-in-3 chance of losing its “AAA” rating over the next two years. GE executives have repeatedly said they are committed to keeping that top-shelf rating and paying the $1.24-per-share annual dividend; but several analysts have said the company may have to choose one or the other this year.

“They could say we’re interested and we’d love to have it, but we’re going to protect our business,” Sorrentino said.

The world’s biggest maker of jet engines and electric turbines is expected to report a 25 percent drop in per-share earnings, factoring out $1.4 billion in expected restructuring charges, according to Reuters Estimates.

GE shares have been battered over the past year, falling 59.6 percent to lows not seen in over a decade. That is a steeper slide than the 44.4 percent decline of the Standard & Poor’s capital-goods industry index .GSPIC.

SHARP DETERIORATION

Wall Street is braced for hefty profit drops across the industrial sector, with Caterpillar expected to report a 12.7 percent fall in per-share earnings, 3M seen down 21.8 percent and Textron Inc (TXT.N) — which is facing deteriorating demand for corporate jets and pulling back from its finance operations — forecast down 55.9 percent, according to Reuters Estimates.

Analysts also look for profit declines at Harley-Davidson Inc (HOG.N), Eaton Corp (ETN.N), Illinois Tool Works Inc (ITW.N), Paccar Inc (PCAR.O) and Timken Co (TKR.N). Truck maker Oshkosh Corp (OSK.N) is expected to report a loss.

Only two big industrials are expected to say profits rose in the quarter, with United Technologies Corp (UTX.N) forecast up 9.8 percent and Honeywell International Inc (HON.N) seen up 6.6 percent. That may be the peak, as Wall Street expects profits at those two companies to decline throughout 2009.

Deutsche Bank analyst Nigel Coe forecast that the manufacturing sector would report core revenue declines of about 2 to 3 percent. Falling revenue, coupled with restructuring charges as companies look to cut costs, will erode margins and could prompt Wall Street analysts to cut their already-cautious earnings forecasts for 2009.

“The key theme is one of sharp deterioration,” Coe wrote in a note to clients. “It is clear that this is going to be the toughest quarter in quite some time.”

The only potential good news the sector faces is incoming U.S. President Barack Obama’s plan to stimulate the economy through spending on infrastructure. Obama is due to be sworn in as the 44th U.S. president at noon EST (1700 GMT).

But the plan will take time to play out, said Sterne Agee analyst Nicholas Heymann.

“While initial expectations for significant benefit to accrue from the Obama stimulus plan appear likely to have been overestimated for most infrastructure suppliers in 2009, the prognosis for significant benefit beginning in 2010 and beyond appears more realistic,” Heymann wrote in a note to clients.

Reporting by Scott Malone; editing by Patrick Fitzgibbons and Gerald E. McCormick

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