Amid industrial profits are reasons for caution

By Nick Zieminski and James B. Kelleher

NEW YORK/CHICAGO (BestGrowthStock) – U.S. industrial multinationals continued to post mostly higher-than-expected earnings, with many raising their forecasts, but their reports also left plenty of reasons for caution about the pace and breadth of a global economic recovery.

Although the results suggested the recovery was broadening out beyond early-cycle manufacturing markets to consumer segments like electronics and autos, several companies noted continued weakness in areas like aerospace and nonresidential construction, which typically move late in a cycle.

Hints of a consumer pickup came from diversified U.S. manufacturer 3M Co. (MMM.N: ), maker of Scotch tape and medical products, whose better-than-expected profit stemmed from demand from the consumer electronics industry.

“To see the growth across almost all the businesses, where before it was more patchy, speaks to the effectiveness of management’s restructuring,” said Morningstar analyst Adam Fleck.

Sales at 3M were also above Wall Street estimates, but its shares fell 7 percent after the company said recent acquisitions would dilute full-year profit more than expected.

3M’s results showed multiple reasons for caution, Nomura analyst Shannon O’Callaghan said in a research note, listing concerns about demand for video displays and the company’s disappointing healthcare margins. Nomura recommends investors reduce their 3M holdings.

Shares of Brunswick Corp (BC.N: ), whose products reflect discretionary spending, gained more than 2 percent after it reported stronger demand for its boat engines and its quarterly loss narrowed more than expected.

TRUCK, AUTO RECOVERY

While consumer spending has supported economic growth in China and other developing markets, concerns persist about shoppers in Western Europe and the United States.

Recovering truck and auto markets could temper those concerns. Bearings maker Timken Co’s (TKR.N: ) results were boosted by demand for its components used in heavy trucks and off-highway vehicles, as well as in cars.

Tyco Electronics Ltd (TEL.N: ), whose customers include automakers such as Ford (F.N: ), said the global economy was recovering and would continue to be led by emerging markets. Results from the world’s biggest maker of electronic connectors beat expectations, and its shares rose nearly 1 percent.

Specialty truck maker Oshkosh Corp (OSK.N: ) posted a 43 percent sales increase, but earnings were reduced by one-time charges.

Still, if demand does not broaden out beyond industrial markets and fast-growing places like China, the year-old recovery could have trouble gaining traction.

U.S. industrial companies are among the most geographically diverse of any U.S. stock sector, and the group was one of the few where earnings expectations rose coming into the reporting season. Like international peers, they also tended to report large profit increases, driven by sales to emerging markets.

3M cited such markets, especially China, as did industrial tool maker Kennametal Inc (KMT.N: ) and Timken, two multinationals that beat analyst forecasts and raised full-year estimates.

Kennametal also announced a stock buyback of up to 8 million shares, and the stock rose nearly 2 percent.

OBSTACLES TO GROWTH

Timken stock also rose nearly 2 percent, but the bearings company was among those expressing caution about certain markets. It said demand remained lower from commercial and general aviation customers and that it saw some weakness in the defense market.

Another note of caution came from Harsco (HSC.N: ). Its results beat estimates, and its stock rose, but the provider of construction equipment said conditions in its infrastructure business remain “very difficult.”

Indeed, fewer U.S. manufacturing executives are optimistic about the U.S. economy. A quarterly survey by the PricewaterhouseCoopers consultancy found 33 percent feel optimistic about the next 12 months, down 10 points from the previous study. The percentage who describe the economy as growing fell to 27 percent, from 31 percent.

“Manufacturers are approaching spending and overall business decisions in a cautious and conservative manner, certainly in the short-term,” said Barry Misthal, U.S. industrial manufacturing leader for PwC.

Corporate executives have said a lack of clarity on issues like taxes remains the key obstacle to stronger growth, even as they have largely stopped worrying about a renewed downturn.

“The good news is, we see no signs of any broad scale, broad-based double dip,” 3M CEO George Buckley said on the company’s conference call, but added that unemployment remains “the key to the puzzle particularly in the United States.”

Overall, industrials’ earnings results reflect a maturing economic recovery — the U.S. recession officially ended more than a year ago — so big profit gains are going to be harder to achieve when compared with last year’s numbers, said independent analyst Brian Langenberg of Langenberg & Co.

“They simply get less easy, and if anything, the cyclical recovery is being delayed by the political and economic uncertainty surrounding the U.S. election.”

U.S. President Barack Obama’s Democratic party is expected to lose seats in the U.S. House and Senate in midterm elections next Tuesday amid voter frustration with persistent high unemployment and widening deficits.

The U.S. jobless rate is expected to stay at 9.6 percent when the government reports October payroll data next week. (ECI/US: )

(Editing by Derek Caney and Lisa Von Ahn)

Amid industrial profits are reasons for caution