Manufacturers' view rosier as demand returns
By Scott Malone and Nick Zieminski
BOSTON/NEW YORK (Reuters) - Three major manufacturers raised their profit targets for the rest of the year on Wednesday, saying they were confident a rebound in demand for industrial goods would hold.
The shares of United Technologies Corp (NYSE:UTX - News), Textron Inc (NYSE:TXT - News) and Eaton Corp (NYSE:ETN - News) rose after they posted second-quarter results that topped Wall Street's expectations, easing concerns the economy might be sliding back into recession.
All three companies also posted better-than-expected revenue, meaning they had more than cost-cutting to thank for their growth. In addition, United Tech noted that orders, an indicator of future sales, were up across its business units, something Chief Financial Officer Greg Hayes called "a sign that the worst is behind us."
The revenue beats stood in contrast to recent reports from largest U.S. conglomerate General Electric Co (NYSE:GE - News), as well as banks, including Bank of America Corp (NYSE:BAC - News) and Citigroup Inc (NYSE:C - News), which topped Wall Street's profit expectations, but missed the mark on revenue and saw their shares slide.
"As you look at the order rates, it suggests pretty good global growth," said analyst Jeff Hammond of KeyBanc Capital Markets. "As I talk to my companies, they feel better about the demand cycle than the investment community and the macro data points do."
For a graphic on manufacturing earnings, click on link.reuters.com
United Tech, the world's biggest maker of elevators and air conditioners, posted better-than-expected quarterly profit and revenue and it raised its 2010 profit target for the second time this year. It expects full-year profit of $4.60 to $4.70 per share, representing growth of 12 percent to 14 percent.
The Hartford, Connecticut-based company, which also makes Pratt & Whitney jet engines and Sikorsky helicopters, for the first time since 2008 reported quarterly organic revenue growth, a measure that factors out the effect of currency fluctuations and acquisitions.
Providence, Rhode Island-based Textron, the world's biggest maker of corporate jets, also posted results that beat Wall Street's forecasts.
Textron, which also makes Bell helicopters and EZ-Go golf carts, looks for full-year profit of 55 cents to 65 cents per share. At the high end, that range represents growth from last year, suggesting the company could return to profit growth sooner than new CEO Scott Donnelly's target of 2011.
UNCERTAINTY REMAINS
Donnelly, a former GE official who became Textron's CEO in December, acknowledged demand for big-ticket items, including Cessna jets, wavered late in the quarter in the wake of Greece's sovereign debt crisis.
"The pace of the recovery remains uncertain with the European sovereign debt concerns, which have negatively impacted business and consumer confidence," Donnelly said on a conference call with analysts.
Profit growth at Textron's helicopter, military and industrial units offset a slide at Cessna.
Growth outside the United States has been a key boost for major manufacturers this year and the greatest risk many face is the possibility of slowing demand in Asia, which has been robust.
Eaton CEO Alexander Cutler cited that concern, although he expressed confidence the Cleveland-based maker of hydraulic and electrical systems would manage its way through it.
Eaton raised its profit forecast sharply, looking for earnings of $4.90 to $5.10 per share, above its earlier forecast of $4.30 to $4.60 per share. It also said it would raise its quarterly dividend.
"While the debt problems in Europe are likely to slow the rate of growth in some European markets, and the rate of economic growth in China has moderated slightly, we anticipate solid global growth continuing during the second half of the year," Cutler said.
Still, the fact that these companies grew profits at a better-than-expected pace -- and expect to continue to do so -- suggests the risks are manageable for businesses that have just survived the worst downturn in the world economy since the Great Depression of the 1930s, investors said.
"You have a mind-set and sentiment that is very negative, so the negative sentiment is telling you that things are bad because you see them with your eyes and yet the companies are telling you that they're not horrible," said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which holds United Tech shares. "Eventually, sentiment is going to have to take that into account and have a little hope."
The top executive of U.S. staffing company Manpower Inc (NYSE:MAN - News), which generates the bulk of its profits in Europe, said he believed investors exaggerated the risks the Greek debt crisis posed to the rest of the world.
"The notion of the euro blowing up? No, the stuff isn't happening," Manpower CEO Jeff Joerres said in an interview. "Is (growth) going to be robust? Not necessarily, but Armageddon is not on the horizon here.
Investors will get a further look at where the manufacturing sector is heading later this week, when companies including Caterpillar Inc (NYSE:CAT - News) and 3M Co (NYSE:MMM - News) report quarterly results.
Textron shares rose 8 percent to $19.48 and Eaton rose 6 percent to $73.08, while United Tech shares were up less than 1 percent at $67.86 on the New York Stock Exchange.
The industrial sector has moderately outperformed the broader market this year, with the Standard & Poor's capital goods industry group (^GSPIC - News) notching a rise of 0.75 percent at a time the broad S&P 500 (^SPX - News) is down 3.9 percent.
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