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WRAPUP 2-Firm dollar, weak Europe crimp U.S. industrials' sales
October 19, 2012 / 4:30 PM / 5 years ago

WRAPUP 2-Firm dollar, weak Europe crimp U.S. industrials' sales

* GE, Honeywell, Ingersoll, Parker miss sales forecasts

* Limits seen to propping up profit through cost cuts

* Honeywell expects higher 2013 margins

* Honeywell, Ingersoll gain; others lower

By Nick Zieminski

NEW YORK, Oct 19 (Reuters) - Four top U.S. manufacturers, including General Electric Co and Honeywell International Corp, reported weaker-than-expected sales on Friday, in a fresh warning to investors that demand around the world remains sluggish.

The ream of recent results sets the stage for an even heavier week of earnings reports next week, including those of global heavyweights such as Caterpillar Inc, Dupont Co , 3M Co, Boeing Inc, Eli Lilly & Co , and Procter & Gamble.

On Friday, four leading manufacturers - General Electric Co , Ingersoll Rand, Parker Hannifin Corp and Honeywell International Corp - with a combined $52 billion of quarterly sales, earned less revenue than Wall Street analysts had expected.

“Revenues keep missing,” said Ken Polcari, Managing Director of ICAP Equities in New York. “That is the story that we are hearing across the line.”

Going forward, however, the outlook is mixed.

Ingersoll and Parker Hannifin gave forecasts that disappointed investors. GE and Honeywell missed analysts’ sales estimates, but kept their forecasts for the rest of the year. All but Parker reported higher profits in the quarter.

GE, the largest U.S. conglomerate, said Friday sales at its aviation and healthcare arms dipped 1 percent in the quarter, though analysts noted overall revenue was hurt by a firmer dollar, which diminished the value of its foreign sales. GE shares fell 2.8 percent in noon trading.

Diversified U.S. manufacturer Honeywell International Inc rose 2.1 percent after it reported a 10 percent rise in quarterly earnings as falling natural gas prices buoyed profit at its UOP chemical arm and offset weakness in Europe.

The industrials sector is one of five market segments where earnings have been better than expected so far this quarter, even as revenue has fallen short.

Some of Friday’s results suggested multinationals could be reaching the limit of their ability to boost profit through efforts such as cost cutting, said Keith Goddard, CEO of Capital Advisors.

“We’re at the upper boundary of where profit margins can go. They’re not going to expand further,” Goddard said, adding that margins are not likely to collapse, barring another recession.

Honeywell, traditionally an aggressive cost cutter, offered a guarded 2013 forecast that calls for sales growth from existing businesses in the low single digits. But margins should grow, Chief Financial Officer Dave Anderson told investors.

“We expect to grow earnings at a multiple of sales in what will likely be a slow-growth environment,” Anderson said.


International industrial markets hurt profit at Parker Hannifin, which said the economic picture remained murky and that it was focused on controlling costs. The maker of motion control and hydraulic systems slashed its forecast for the fiscal year that extends to June 2013.

Parker’s international industrial segment showed a third consecutive year-over-year sales decline, which was “largely as a result of recessionary conditions in Europe and moderating growth in Asia,” CEO Don Washkewicz said.

Parker shares dropped 8 percent.

Heating and cooling systems maker Ingersoll Rand also cited weak demand and growth in Europe for revenue that fell short of estimates. However, it beat profit expectations as it realized some of the benefits of years of restructuring. Ingersoll shares added 2 percent.

Some of the strongest results were among companies that will soon lose their independence.

U.S. engineering company Shaw Group Inc, which agreed in July to a $3 billion takeover by Chicago Bridge & Iron Co, beat estimates, helped by higher sales in its power business.

Cooper Industries Plc, the electrical products maker that agreed to a takeover by Eaton Corp, reported higher-than-expected profit and sales amid lighting demand in North America and growth in international energy projects.

Cooper’s sales in China jumped more than 20 percent in the quarter, raising hopes that the giant Asian economy, a key market for U.S. industrials, may be reviving from a slowdown that has rattled the nerves of investors in economically-sensitive stocks.

“I don’t think it’s smart to bet against (China),” Honeywell CEO Dave Cote said.

Cote said the U.S. and world economies could recover more strongly if governments take concrete steps to resolve debt issues in major nations.

Industrial companies deserve higher valuations, Capital Advisors’ Goddard said, noting it’s unusual for a growth stock fund to own names like GE, Eaton, GM, FedEx and Swiss-based ABB.

“Coming out of the great recession, industrial companies rationalized their cost bases more deeply than has ever occurred in the post-World War II era,” he said. “You can make a case the intrinsic value is higher than it used to be (and that) the price-earnings ratio deserves to be higher than it used to be.”

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