Tags: big | manufacturers | European | sting

Big Manufacturers Feel European Sting

By    |   Thursday, 29 March 2012 09:17 AM

The European debt crisis may not yet be damaging the U.S. economy, but makers of big machines and large capital goods such as General Electric (GE), Tyco International (TYC) and Honeywell (HON) certainly feel the sting it inflicts on business units there.

Fortunately, big makers of capital goods are diversified in reach and product that diversity will cushion themselves from external blows.  Nevertheless, Europe bears watching, as do cooling economies in once red-hot emerging markets.

Take iconic GE. The company reported fourth quarter 2011 net income of $3.7 billion, down 18 percent from the fourth quarter of 2010. Revenues hit $38 billion for the quarter, down 8 percent on year, with a weaker European economy and unfavorable exchange rates to blame, as well as discontinued operations.

The news wasn't all bad. Record infrastructure orders of $28.6 billion in the fourth quarter enabled GE to end the year with a backlog of $200 billion, the largest in its history.

Tyco International, meanwhile, reported first quarter revenue of $4.2 billion, down 4 percent on year.

Net income fell 49 percent to $334 million, mainly due to costs associated with separating the company into three different units, one for security, one for fire prevention and the other for flow control.

Like GE, there was an upside as demand picked up.

"We delivered a strong quarter operationally with continued organic revenue growth supported by improving order activity," says Tyco Chairman and Chief Executive Officer Ed Breen.

Honeywell's fourth quarter sales were up 8 percent at $9.5 billion versus $8.7 billion in the fourth quarter a year earlier.

The company reported a net loss of $310 million in the fourth quarter compared with a $369 million profit a year earlier, mainly due to pension-related costs.

Honeywell had a particularly good 2011 as a whole, with sales hitting $36.5 billion, up 13 percent over 2010.

"While we expect a more challenging macro environment ahead in 2012, primarily driven by softness in Europe impacting the short-cycle businesses, we're confident that Honeywell is well positioned to continue to outperform," Honeywell Chairman and CEO Dave Cote says in an earnings statement.

Cloudy Europe

Ratings agencies agree that clouds could build for company units in Europe in 2012.

"Persistent risks include a European recession, sovereign crisis, decelerating emerging market growth, and slow economic recovery in the U.S.," Standard & Poor's credit analyst Dan Picciotto says in a report on big manufacturers.

"Nonetheless, the major capital goods issuers have been resilient thus far."

Expect positive growth in 2012, but Europe will dampen earnings, he adds. "We expect average organic growth for these bellwethers to be positive in 2012 although growth could decelerate further as economic recovery remains slow," Picciotto adds.

Alongside a European recession, slowing growth in China will mute earnings, but the sector should weather the uncertainty fairly well, he writes.

Honeywell is currying particular favor among Wall Street banks. In March, RBC Capital Markets reiterated an outperform rating on the stock while Oppenheimer did as well in January.

Also in January, UBS reiterated a neutral recommendation while Barclays Capital reiterated an overweight rating. Honeywell develops many products and solutions for the aerospace and defense industries.

While cuts to defense spending may hurt smaller firms, big outfits like Honeywell should keep business ties with governments healthy.

"Although lower defense spending will likely reduce revenues and earnings for most contractors, we do not expect to take any rating actions on large contractors based solely on this news," Standard & Poor's credit analyst Christopher DeNicolo says in a report on the sector.

All three companies next report in the second third week of April.

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Thursday, 29 March 2012 09:17 AM
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