Industrial-equipment producers indicate an upward trend.
By Jason Tuma
Recent news on where the U.S. economy is headed can be very confusing. Housing sales are down, and the jobs outlook remains bleak; but a closely watched index from the Institute for Supply Management has been positive for 15 months, indicating an upswing in orders and production. Additionally, recent earnings reports have been largely positive, and companies have more cash in the bank than they’ve had in years.
While predictions about U.S. economic growth and performance for 2011 vary, North American manufacturers that make smart choices about deploying their assets and managing their finances could see substantial improvement in orders. Here’s why.
One of the most prophetic indicators of which way the economy is headed is the health of manufacturers in the industrial-equipment sector. This is true for several reasons:
- Supply chains in this sector are both lengthy and diverse. Lots of different companies, in lots of different industries, in lots of different places, are producing raw materials, extruded and molded parts, electronics, user interfaces, and other components that comprise finished industrial machinery. When one of these companies is doing well, it’s a sign that their suppliers and customers are, too.
- Industrial equipment tends to be very costly. Buyers plan purchases far in advance and plot them according to budget cycles. An upswing in orders in industrial equipment says that buyers are confident enough in their markets to reinvest in their most-expensive hard assets.
- The industrial-equipment sector is less affected by changing consumer taste than other sectors. For example, car buyers might be buying fewer cars (and car companies producing fewer cars), but cars are still selling, and cars can’t be made without machinery. Similarly, consumers who are still stinging from the Great Recession might not have regained their taste for luxury goods, but they still need to buy groceries, clothing, appliances, and other manufactured goods. All of these are made with industrial equipment.
- Industrial-equipment producers in North America are some of the leanest companies in the world. They have learned to respond to fierce competition with hypervigilant cost-control: lowering inventories, using strategic sourcing, removing non-value-add activity, etc. This means that when they do hire back workers and restart their plants — as they are doing — it is in response to genuine demand — that is, actual orders from customers. This is a truer indicator of economic activity than industries that are more forecast-based, such as retail sales and construction.
The most recent earnings reports from three Northeastern Ohio manufacturers in the industrial-equipment sector reveal a positive trend. Parker Hannifin, Timken Co., and Lincoln Electric are all in growth mode.
Cleveland-based Parker Hannifin, a highly diversified global producer, reported an increase in revenue of 27 percent in its most-recent quarter compared with the same period last year. In North America exclusively, revenue improved by 32 percent. The company’s profit margin more than tripled, from 2.2 percent in the same quarter last year to 8 percent this year. And in a final sign of positive expectations, Parker Hannifin is expanding its capabilities through acquisition. It recently announced the purchase of Micro Thermo Technologies of Quebec, Canada, from Carrier Corp.
The Timken Co. increased sales by 37 percent in its most-recently reported quarter compared with the same quarter last year; and the company is investing in its steel-producing capabilities in its hometown of Canton.
“Our company has rebounded extremely well from the challenges experienced during the most recent recession,” said James W. Griffith, president and CEO. “We are leveraging increased customer demand and growth in attractive markets.”
Global arc-welding equipment producer Lincoln Electric reported an increase in revenues of 24.8 percent compared with the same quarter in 2009. Profit more than doubled in the same period, from $15.1 million to $32.5 million.
CEO John M. Stropki cited investment in new product development and production facilities for the company’s ability to take advantage of an improving market.
“Our second quarter results were excellent and demonstrated a steady and significant improvement in operating results,” Stropki said. “While demand levels have significantly improved in most markets and geographic regions on a year-to-year basis, volume trends are stabilizing. Although recent economic forecasts are more guarded, we remain cautiously optimistic…”
