Jefferies & Co.
WITH YEAR-END RESULT REPORTS now behind us, we have a clearer view on [industrials] company expectations for demand, earnings, capital spending and costs in 2010. We have examined the data on an aggregate basis to get a snapshot of expectations for 2010 in the context of the broader economic environment.
Earnings estimates for 2010 are forecast to be up 35% year-over-year for the 50 select industrial companies that we examined. Of these, only 19% of 2010 earnings are expected to come in first quarter with 25% in second quarter, 27% in third quarter and 29% in fourth quarter.
While there are company-specific factors that may support back-half weighted results for some, as a generalization, manufacturing companies typically experience fourth-quarter seasonal weakness due to a lower number of shipping days. However this does not appear to be factored into 2010 expectations given the heavy fourth-quarter weighting of results.
We believe that the sequential-earnings increases being factored in assume a stronger rebound in economic activity that may even suggest later-cycle end markets such as aerospace & defense and oil & gas improving as the year progresses. However, should this scenario not occur to the degree that is currently anticipated, we believe that there is likely risk to full-year earnings estimates.
Those names in our coverage for which we believe estimates could be at risk include: Dynamic Materials /zigman2/quotes/202925937/composite BOOM +0.77% (Ticker: BOOM), FreightCar America /zigman2/quotes/205839777/composite RAIL -5.12% (RAIL), and Northwest Pipe /zigman2/quotes/200402928/composite NWPX -0.39% (NWPX).
Capital spending among the selected industrial companies dropped by 32% in 2009 as companies focused on conserving cash. Many provided a rosier outlook for capital-spending plans in 2010 as compared to 2009. While budgets are expanding as compared to the prior year by about 12%, spending remains cautious. Capacity-utilization rates likely need to be closer to 80% from the current low 70's before seeing more of just a creep up in capital spending.
Companies have indicated some selective hiring domestically related mostly to sales expansion and research and development initiatives. In some industries capacity coming back on line has led to moderate increases in headcount as well. A few firms in the group looked at are hiring abroad in developing regions on the back of expansion initiatives.
Our top mid-cap picks remain Barnes Group /zigman2/quotes/210293936/composite B -2.39% (B), Harsco /zigman2/quotes/208039417/composite HSC -2.20% (HSC) and MSC Industrial Direc /zigman2/quotes/201529229/composite MSM -2.82% t (MSM) with Altra Holdings /zigman2/quotes/200868519/composite AIMC -7.15% (AIMC), Globe Specialty Metals /zigman2/quotes/208451301/composite GSM -5.74% (GSM) and Fushi Copperweld (FSIN) our small-cap recommendations.
-- Yvonne M. Varano <BREAK /> -- Jeffrey W. Flynn <BREAK /> -- Chirag Patel
To be considered for the Soapbox feature, please submit an original article of less than 1,000 words to email@example.com with "Soapbox Submission" in the headline. Please include your daytime telephone number and credentials.
The opinions contained in Investors' Soapbox in no way represent those of Barrons.com or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).
Comments? E-mail us at firstname.lastname@example.org