Barclays declares ‘industrial recession,’ warns forecasts too upbeat

An employee helps install a traction motor onto the truck of a General Electric Evolution Series Tier 4 diesel locomotive at the GE Manufacturing Solutions facility in Fort Worth, Texas.
Luke Sharrett | Bloomberg | Getty Images

Barclays declared on Thursday that “we are in an industrial recession” with nearly one-third of the building, energy and manufacturing companies it monitors reporting sales declines in the second fiscal quarter.
But perhaps more alarming, wrote industrials analyst Julian Mitchell, is that the trend doesn’t appear likely to slow down anytime soon.
In the fourth quarter of 2018, 100% of the industrial companies Barclays covers posted organic sales growth, the analyst noted. But by the second quarter of 2019, nearly 33% of those companies had reversed course with sales declines.
“What is concerning is that when we look at our forecasts (which have typically been lower than the street ⁄ Co guidance for organic sales, since our initiation), they embed only 8 companies having organic declines in the 2H19,” Mitchell wrote. “This looks too optimistic now, given the recent trade news, and some of the corporate commentary in recent days regarding how the demand slowdown is spreading beyond auto and electronics.”
Mitchell highlighted companies like Caterpillar, Samsung and Honeywell as just a few of the several companies that reported sales deceleration in key business segments, representing potential forewarning for those thinking of buying “on the dip.”
Investors and economists have point to the fierce U.S.-China trade dispute among other headwinds to help explain why industrials companies are seeing a decline in revenues.
The slump in business spending appeared in the most recent GDP print, which showed a deceleration in research and development and building and transportation equipment. Orders of industrial and transportation equipment have fallen as trade flows have slowed, impacting companies throughout global supply chains.
Of the S&P 500 industrial companies that have already reported second-quarter financial results, more than 70% have topped analyst expectations on earnings per share. However, only 42% of those companies have beat on the top line, with reported growth coming in at -0.12% thus far into the earnings season, according to FactSet data.
We’re skeptical “of industrial management teams’ claims that their businesses were ‘less cyclical’ now, and that severity of Q2 decremental margins in most cases have been eye-watering,” Mitchell added.
“Amidst fairly robust consumer spending in the U.S., it has been interesting to see a 2nd consecutive [quarter] of very underwhelming organic growth (0-1%) for Short Cycle consumer businesses within our coverage,” he wrote.

Source link

Category: