US Industrial Companies Finding Growth
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been a good quarterly earnings season for US industrial companies. Companies such as Boeing and Caterpillar raised their outlook for 2012 while others like General Electric and DuPont comfortably beat Wall Street expectations.
However, some analysts say they see storm clouds looming on the horizon for these companies as a global slowdown takes hold, particularly in China. There is some data which supports this thesis. US business investment shrank at an annual 2.1 percent rate in the first quarter of 2012. Contrast that to a robust 5.4 percent growth rate in the fourth quarter of 2011. Durable goods orders in March also fell by 4.2 percent, the steepest drop in three years.
But what about the elephant in the room, China? No doubt its economy is slowing to a certain degree, but US manufacturers say that China is not the only place they do business overseas
Take Caterpillar (NYSE: CAT), for instance, which in the past has touted its rapidly growing Chinese business to investors. Caterpillar has 16 manufacturing facilities in China with 9 more under construction. But, while growing rapidly, China accounts for just 10 percent of the company's Asia-Pacific sales and just 3 percent of its global revenues. So a slowdown there will hurt but will not be devastating to Caterpillar's fortunes, especially since sales in the US have exceeded company expectations.
Caterpillar like other US manufacturers have counted on Asia in the past several years for the growth component to their business. But it looks like it will have to be a different story this year. Companies may have to rely on other emerging markets and renewed growth in the United States for any growth in their business. Eaton, for example, raised its growth expectation for US sales from 6 percent to 9 percent.
But what is really interesting is how well business in the other emerging markets besides China is doing for US industrial firms. Chemicals giant DuPont (NYSE: DD), in its most recent earnings statement said that revenues in Asia (thanks largely to China) fell by 2 percent while other areas in the emerging world showed strength. DuPont said sales climbed by 23 percent in Latin America and by 30 percent in the Middle East.
A similar tune was sung by United Technologies (NYSE: UTX). It stated that orders in the first quarter from China fell by 15 percent, led by a drop in orders for its Otis elevator division. But orders climbed by about 20 percent in the other BRIC countries – Brazil, India and Russia. Its chief financial officer, Greg Hayes, said “The problem in emerging markets for us is really isolated to China.”
And let's not forget about that bellwether of US industrial firms, General Electric (NYSE: GE). It tells a fairly similar tale, but with a bonus of persistently strong sales growth in China. For GE, Chinese sales growth in the first quarter of 2012 came in at an impressive 18 percent. But China was outperformed by its emerging market peers. Sales for General Electric in Latin America were up 35 percent and sales in Russia nearly doubled!
Bottom line for investors in industrial stocks? Don't panic about the slowdown which is occurring right now in China. It will likely not last long and the Chinese economy will still be growing at a mid single-digit percent rate. In the meantime, the rest of the emerging world has not disappeared. That will offer US industrial companies lots of opportunities for growth.
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