Consumer markets hurt some industrial earnings
U.S. industrial companies sounded warning alarms about U.S. consumer spending on Tuesday, citing high unemployment, a depressed housing market and the risk of a U.S. debt default.
Makers of products ranging from television components and restaurant equipment to roofing materials and air conditioners warned of weak consumer markets in the second half of the year. Investors dumped shares of industrials whose earnings disappointed, and even those of companies that met profit expectations, like 3M Co (MMM-N).
3M reported strong demand for industrial products, but sharply lower sales in its display and graphics division.
If U.S. and global economies slow down, cyclical manufacturers may be one of the first sectors where a slowdown will be visible. Near-term profit expectations may come down, said Edward Jones analyst Jeff Windau.
"Even with some warning signs and potential economic slowing, we still have high expectations," Windau said. "You see some signs of weakness. The consumer is the most obvious."
3M said Japan's March earthquake had reduced sales and profit margins in its display and graphics division, which makes specialty films for computers and televisions. Lower consumer spending was also a factor.
"The LCD TV business is ... going through one of those down cycles that reflect inventory corrections and, ultimately, a less robust consumer end market," 3M Chief Executive Officer George Buckley told analysts.
Expectations were fairly high for 3M, said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland. The company met estimates because of a weaker dollar and a boost from acquisitions.
"Display and graphics was the weak spot, and that's a consumer item," Klein said. "That just speaks to the pullback by consumers. It's not unexpected, but it's a concern."
Illinois Tool Works Inc. (ITW-N) missed Wall Street estimates and said it expected moderating demand in the second half of the year.
"Clearly, housing has not bounced back as expected," said BB&T Capital Markets analyst Holden Lewis, who said ITW is more reliant on consumer markets than many of its peers. "The broad economy is not as strong as the industrial economy. ITW's weak performance reflects that composition."
Emerging markets will continue to drive demand for products needed to build infrastructure, he said, although overall growth rates are moderating as the global economy moves past the initial recovery phase.
A few other manufacturers missed forecasts Tuesday.
Truck maker Paccar (PCAR-Q) lowered its forecast of 2011 industry-wide tractor-trailer demand in North America.
Carlisle Cos Inc.'s (CSL-N) profit suffered from high raw material costs.
Earnings at Lennox International (LII-N), which makes furnaces and air conditioners, missed by a wide margin.
A bright spot in U.S. industrial earnings was Cummins Inc. (CMI-N), which credited strong international markets for its profit growth. The diesel engine maker said truck, mining and energy markets remained strong and raised its forecast.
A wider index of U.S. capital goods companies was down 2 percent. The sour mood affected even companies whose earnings came in ahead of expectations, like Pentair (PNR-N), a maker of filtration and electrical systems whose third-quarter profit outlook disappointed.
Warning signs were not limited to industrial names.
On Monday, Texas Instruments (TI-N) gave a lukewarm outlook, suggesting back-to-school sales of computers and other electronics would be weaker than normal.
ARM Holdings also sounded a note of caution about electronic goods sales for Christmas, overshadowing a better-than-expected second quarter.
And Ford Motor (F-N) trimmed its forecast for industry auto sales in North America even as its profit topped expectations on strong pricing.
Shares of United Parcel Service (UPS-N) were down after a modest earnings beat. The world's largest package delivery company, whose iconic brown trucks carry some 6 percent of the U.S. economy, said it was cautious about its upcoming peak shipping season.
"We have to get unemployment rates down in this country to get consumer confidence up," CEO Scott Davis said.
Steel and aluminum companies have reported stronger demand from some industrial sectors, but said profits were still constrained by weakness in residential and nonresidential construction in Europe and North America.
AK Steel Holding Corp. (AKS-N) forecast a sharp fall in third-quarter operating earnings. U.S. Steel, the biggest U.S. steelmaker, also expects a lower third-quarter profit.