Fair value = 4.50
Manufacturers Dubious About Boom;
Officials Don't See a Profit Rebound
By DARREN MCDERMOTT
Staff Reporter of THE WALL STREET JOURNAL
TUCSON, Ariz. -- Manufacturing executives don't seem nearly as confident in prospects for a coming boom as the investors who've been bidding up the prices of their stocks.
Last week, prices of "cyclical" stocks such as Minnesota Mining & Manufacturing Co., Caterpillar Inc., Boeing Co. and International Paper Co. -- companies whose fortunes rise and fall with the economy -- rose sharply on expectations that global economic growth will boost profits for these old-line manufacturers.
March Manufacturing Output Was Flat as Factories Used 79.3% of Capacity
But many manufacturing executives, gathered here over the weekend for a board meeting of the National Association of Manufacturers, said that while the worst of the global economic crisis that pummeled many companies appears to be behind them, profits might actually weaken in the months ahead before making a rebound. Some pointed to nascent signs of life in their orders from battered Asia. But few suggested that international demand for their goods would be springing back with much gusto anytime soon.
During one conference event on Friday, executives assembled at a remote desert facility run by Caterpillar for a display of its latest earth-moving equipment. The executives ooh-ed and ahh-ed over the payloads and horsepower of the giant yellow machines. The real heavy lifting, however, was taking place on Wall Street, where Caterpillar's stock jumped $2 to $63.8125. But just hours later, Caterpillar's group president, Richard L. Thompson, was sounding more cautious than robust; "fragile" was the word he chose to summarize the company's markets.
NAM President Jerry J. Jasinowski delivered the most restrained prognosis. While pointing to a "rich diversity" within manufacturing that has some companies growing at record rates while others suffer with little end in sight, Mr. Jasinowski said he saw "no reason" to think that gap would narrow this year.
Call for Tax Cut
Of course, Mr. Jasinowski has a reason to be restrained in his assessment of manufacturing: he's leading a lobbying charge for a 10% tax cut for businesses -- an argument that wouldn't be helped by an assertion that manufacturers are booming.
Mr. Jasinowski notes that manufacturing output expanded by an average 3.8% from 1991 through 1998. But just as investors are starting to take notice, he is warning that the sector is headed for a slowdown. Manufacturing output could slow to 3% or less this year, he says. "Anyone who writes a story that manufacturing is heading for a boom is going very far out on a limb," he said.
Not that all manufacturers are suffering. Companies that make consumer products have performed far better than producers of goods that are sold to other companies.
Indeed, Whirlpool Corp. Executive Vice President Michael D. Thienemen could hardly stop from smiling about his company's strong earnings, reported Thursday. And Maytag Corp. Chairman and Chief Executive Leonard A. Hadley said that after the appliance industry's 9% growth last year -- coming atop record years in 1997 and 1996 -- a flat year would have been all right. Instead, the company told analysts late last month that first-quarter sales growth likely would be between 5% and 7%. Maytag, which sells home appliances such as ovens, washing machines and Hoover-brand vacuum cleaners, has the added advantage, for now at least, of deriving 90% of its sales from the U.S.
For many other manufacturers, however, August 1997 was the start of a very painful period of collapsing overseas demand exacerbated by the effects of a suddenly much-stronger dollar.
Now, with Asian economies no longer in free-fall and disaster apparently averted in Latin America, some economists have cautiously suggested that things should be getting better for manufacturing.
Rosanne Cahn, an economist at Credit Suisse First Boston, puts great stock in a gauge of manufacturing compiled by the National Association of Purchasing Managers, which has shown better levels of both output and exports for three months running. Wesley Basel, an economist at Regional Financial Associates, offers two more indicators showing a hint of recovery: less price deflation in goods sold to producers since December and more exports of information-technology goods to Asia.
'At Odds With Signals'
But investors have charged ahead of the pack in the past two weeks. Even Morgan Stanley chief economist Stephen Roach, an early champion of the global economic recovery, noted in a commentary to clients Friday that the stock market's bet on such companies is "at odds with signals" in nearly every other financial market: commodities, bonds, currencies -- even the current guidance of the Federal Reserve that it isn't now poised to raise short-term interest rates.
But perhaps most of all, the stock market is ahead of the thinking of many executives in the companies whose stocks are soaring. Case Corp., Caterpillar and other heavy manufacturers say that, around the world, the worst appears to be behind them but things are only marginally better.
Instead, it is the U.S. market that is surging beyond expectations. Demand for construction equipment in the U.S. is nearly insatiable due to the surging housing market and highway-construction programs. Caterpillar's Mr. Thompson was late to meet a reporter Friday afternoon, he said, because he was on the phone approving emergency capital expenditures to increase capacity for making the engines Caterpillar sells to truck makers -- and that after having raised such capacity twice already this year.
Europe, meanwhile, has been sluggish. Latin America, which just two months ago appeared on the verge of a major meltdown, seems to have pulled back from the abyss. But sales there continue to slump. Asia is another case where just a bit of good news can send signals about recovery that promise more than can be delivered.
Many executives at the Tucson gathering said that their Asian customers, after more than a year of complete inactivity, appear to have run down their inventory such that they are starting to make a few fresh orders. But it is still far from clear that a couple of months of orders, coming from the need to replenish inventories that haven't been restocked in many months, points to a significant change.
Most uncertain of all is the outlook for agricultural equipment, still a key contributor to sales for the likes of Case and Caterpillar, as well as for a host of smaller manufacturing companies such at Timken Co. of Canton, Ohio. Economic stability in Asia, a key market for the grains grown in the U.S., Europe and elsewhere, is the first step on the road to recovery for agriculture. But some executives fear that it could take a long time for Asian economic growth -- still more an expectation than reality at this point-to work its way back the demand chain to their order books.
Robert J. Ratliff, executive chairman of Agco Corp., another farm-equipment maker that has benefited from the new Wall Street mentality, says he doesn't expect much improvement in Agco's markets this year. The crisis is "much deeper than people realize."
|
