Is the recovery real? Check the revenue.
As analysts and investors brace for earnings reports from more than a dozen major U.S. manufacturers over the next two weeks, they will eye revenue growth as one of the surest signs of health for the industrial sector over the next year.
Sales growth will be critical to profits this year, since major companies including General Electric Co
Cost management will matter if the sector is to continue its strong run on Wall Street. Standard & Poor's industrials group <.GSPI> rose about 20 percent over the past year, the second-biggest gain in the broad S&P 500 index <.SPX> after the S&P consumer discretionary group <.GSPD>, which rose almost 26 percent.
From a top-line, revenue side, we're going to see some modest expansion there, said Peter Klein, senior portfolio manager at Fifth Third Asset Management, in Cleveland, Ohio. This is what I'm sort of tuning my ear to hear. And if we don't hear it, then maybe some of this ebullience that we've seen in the industrials since this summer will flatten out.
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FOREIGN DEMAND CRITICAL
Demand outside the United States will be critical to that momentum. More manufacturing executives expect their shipments outside the United States to rise in the coming months, while demand at home eases, according to a Manufacturers Alliance/MAPI survey released last week.
The group's overall composite index of manufacturing activity slipped to 75 from 77, but remained well above the 50 market that separates growth from contraction.
It suggests maybe a slightly slowing rate of recovery, but still continued expansion, said Donald Norman, an economist with the Arlington, Virginia-based group.
China, a major area of focus for big industrial operations including Caterpillar Inc
Higher raw material prices, particularly for copper, will be a major drag on profit growth this year, and leave executives looking for ways to raise their selling prices on heavy equipment.
The bigger challenge this year is to stem the margin impact of commodity inflation and seeing what they are able to pass through on pricing, while at the same time leveraging the top-line growth they're starting to show, said Steven Winoker, an analyst at Bernstein Research in New York.
We're getting back into a more positive cycle and they're starting to spend again, he added.
Makers of machinery used in heavy construction and other so-called early cycle equipment have already felt the benefit of a recovering global economy.
But producers of goods that are ordered later in a recovery, such as equipment used to produce and distribute power, may start to feel more of a rebound in demand this year, analysts at Credit Suisse said.
That could boost results at companies including SPX Corp
Another question in investors' minds is when companies will begin hiring again. Unemployment has remained stubbornly high in the United States even as economies abroad have recovered from the recession.
We believe that we will hear more and more talk about expansion plans and re-hiring plans, said Oliver Pursche, president at Gary Goldberg & Company, a Suffern, New York-based money manager. The latter will ultimately be the key to a stronger economic recovery.
(Reporting by Scott Malone, additional reporting by James B. Kelleher in Detroit; Editing by Derek Caney)