With the third-quarter earnings season largely over, it's time to analyze which industrial stocks and sectors outperformed or disappointed. In doing so, let's take a look at the key trends and themes in the results of the major industrial companies. Will these investment themes continue to work in 2016?
A tough quarter
The following is a list of 10 heavyweight industrial stocks which compares their full-year 2015 guidance given in the previous quarter to the updated full-year guidance from the third quarter. Only General Electric Company and Danaher increased guidance -- albeit slightly -- while the rest either maintained or reduced guidance where applicable.
SOURCE: COMPANY PRESENTATIONS.*CATERPILLAR EPS FIGURES EXCLUDE RESTRUCTURING COSTS AND WERE MAINTAINED FROM A GUIDANCE REDUCTION IN SEPTEMBER.**GENERAL ELECTRIC FIGURES ARE FOR INDUSTRIAL OPERATING EPS ONLY.
Common themesAluminum producer Alcoa and General Electric reported early on and set the tone for the earnings season. Events turned out pretty much as both companies foretold. The four key themes were as follows:
- Europe was slightly better, and the U.S. held up well, but there was marked deterioration in certain emerging markets, particularly Brazil and China.
- Sector winners include aerospace, automotive, construction, food, gas turbines, medical technology, and consumer-facing segments in general.
- Sector losers include oil capital spending-related activity, particularly upstream oil, as well as electronics, heavy-duty trucks, heavy industry, cyclical industrial, and mining machinery.
- The China effect causes weakness in certain sectors, including automotive and construction.
The winnersNone of the three companies with heavy commercial aerospace exposure -- namely, Honeywell, United Technologies, and General Electric -- reduced full-year guidance. Moreover, the two that raised guidance -- General Electric and Danaher -- are both stocks with special-situations characteristics.
General Electric is refocusing on its industrial business, while investing heavily in new technologies and expanding its higher-margin services and industrial Internet offerings. Danaher is in the process of splitting into two companies, and its life science and diagnostics exposure makes it a relatively safe haven in the sector.
LosersCaterpillar, Emerson Electric, and Dover Corp. are all suffering from heavy exposure to commodity-based spending. Dover Corp. deserves a closer mention. Its energy segment was directly responsible for 35% of last year's earnings, but its fluids segment is also exposed to energy, and the company sounded a cautious note when discussing its exposure to China. Dover's deteriorating bookings suggest trouble ahead.
Special casesIllinois Tool Works and 3M Companystand out as relatively diversified companies that saw some mixed performance from their business segments. Illinois Tool Works outperformed in automotive, food, and construction but saw weak performance from cyclical areas such as welding, electronics, and polymers. Nevertheless, the stock is interesting because of its impressive margin expansion.
Similarly, 3M Company expanded margins in all five of its segments in 2015 and recorded local currency organic sales growth in four of them.3M's healthcare and consumer segments are doing well, but the electronics, energy, and industrial end markets have been weak in recent quarters -- a common refrain.
Three investment themes for 2016 Emerging-market spending has slowed, but so far, the weakness has been focused on commodities, construction, and industrial-facing industries, while healthcare has held up well. It's notable that consumer-facing industries, such as passenger cars and commercial aerospace, haven't seen a sharp slowdown as yet. However, it's hard to see this continuing as the industrial export sector is the key to a country like China's growth prospects.
All of which leaves three main themes. First, secular growth stories such as the industrial Internet with companies like Rockwell. Second,companies with significant "self-help" growth opportunities, Danaher and General Electric spring to mind.Third, stocks with heavy exposure to developed world spending in areas such as construction, aerospace, and automotive. All look likely winners in 2016.
The article Industrial Winners and Losers From the Third Quarter originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. The Motley Fool recommends Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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