Published October 19, 2012
NEW YORK – 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 .
GE, Honeywell, Ingersoll Rand Plc and Parker Hannifin Corp all took in less revenue than 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 profit in the quarter.
GE, the largest U.S. conglomerate, said 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 were down 2.8 percent at $22.17 on Friday afternoon.
Shares of diversified U.S. manufacturer Honeywell were up 2 percent at $62.67 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.
Recent 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.
Industrial companies cut costs so deeply during the most recent recession, they now deserve higher valuations, Capital Advisors' Goddard said, noting it is unusual for a growth stock fund to own names like GE, Eaton Corp , General Motors Co , FedEx Corp and Swiss-based conglomerate ABB Ltd , a GE peer.
MUCH STRONGER DOLLAR
Top GE and Honeywell executives said the third quarter may represent the greatest hit their results take from exchange-rate fluctuations, since the comparison was against a third quarter of 2011 when the dollar was falling after a standoff in Washington over whether to allow a U.S. debt default.
GE Chief Financial Officer Keith Sherin noted that the dollar was up about 14 percent from a year ago.
"Even if the dollar stays where it is for the fourth quarter, that'll be less of a drag," Sherin said. "It'll be a little stronger, but it won't be as much as the third-quarter impact. But who knows where it's going to go?"
Honeywell expects the strengthening of the dollar to reduce operating income by $100 million in 2012, but does not expect those pressures to recur next year, said Chief Financial Officer Dave Anderson.
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 stronger margins.
"We expect to grow earnings at a multiple of sales in what will likely be a slow-growth environment," Anderson said.
PARKER MISSES, COOPER BEATS
Struggling 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 through 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 on a conference call. Parker shares were down 6.8 percent at $79.28 on Friday afternoon.
Heating and cooling systems maker Ingersoll also cited weakness 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. Its shares were up 2.3 percent at $46.69.
Some of the strongest results were from companies that will soon be swallowed up by larger rivals.
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, 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 massive 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.
(Additional reporting by Scott Malone in Boston and Ernest Scheyder in New York; editing by Bernadette Baum and Matthew Lewis)