Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18
Big Cap US Stocks Fundamentals - 13th Apr 18
Jaguar Land Rover Cuts 1000 Jobs on Diesel Sales Slump, Long-term Discovery Sport Review - 13th Apr 18
Stock Market SPX May Tangle with the 50-day MA - 13th Apr 18
Longtanding Chinese War: Intrigue & Betrayal - 13th Apr 18
How I Own My Gold - 13th Apr 18
ISupply Energy Consumer Warning - Never Put Your Account Into Credit! - 13th Apr 18
SPX Resistance May Prompt A Massive Short Squeeze - 12th Apr 18
Stock Market High Volatility is Not Consistently Bearish for Stocks - 12th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

U.S. Manufacturing Outlook 2011 Slow, but Steady Growth Could Win Profits for Investors

Companies / Investing 2011 Jan 12, 2011 - 05:49 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleLarry D. Spears writes: It's often said that a little bit goes a long way, and that will certainly be the case for U.S. manufacturing growth in 2011. Although most projections still call for slower improvement in the sector than in 2010, the estimates have been characterized as "less bad" than originally expected -and that could translate into increased profit prospects for investors.


The market gave evidence of that just last Tuesday (Jan. 4) when the major indexes shrugged off other concerns and moved nicely higher in response to a larger-than-expected 0.7% rise in November factory orders, which had been forecast to fall by 0.1% according to a Thomson-Reuters survey of economists. Orders excluding the volatile transportation sector also posted their biggest gain in eight months.

Analysts characterized the numbers as "pointing to underlying strength in manufacturing." That bodes well for the greater economy, since U.S. manufacturers employ nearly 12 million people, or 9% of America's work force, and add $1.6 trillion annually to the U.S. economy, roughly 11% of gross domestic product (GDP).

The improved factory-orders numbers confirmed a cautiously optimistic business outlook evident in the most recent Industry Week/National Association of Manufacturers (NAM) Manufacturing Index. The Index indicated that 75% of respondents surveyed were positive about business prospects -the highest level of confidence since the second quarter of 2007 and nearly triple the 28% reading the index registered at its most recent bottom in the first quarter of 2009.

Other recent industry group surveys have had similar findings. The Manufacturers Alliance (MAPI) found improvement in third-quarter readings for all four of the major predictive indexes it maintains:

•The U.S. Investment Index, which measures domestic spending expectations among manufacturing executives, found 80% expecting more capital investment by their companies in 2011 than in 2010. That was up from the most recent cyclical low of 47% in the September 2009 survey.
•The Non-U.S. Investment Index, which tracks sentiment regarding overseas capital expenditures by U.S. manufacturers in 2011, climbed to 73%, up from 52% of respondents who had a positive outlook for 2010 in the year-ago survey.
•The Research and Development (R&D) Index rose to 70% in the most recent survey, well above the 49% of executives anticipating increased R&D in September 2009. (According to NAM, manufacturing companies are responsible for 50% of U.S. research and development spending each year.)
•The Annual Orders Index showed 86% of managers expect a rise in manufacturing orders in 2011 over 2010, compared to just 66% who had a positive outlook for orders in 2009.
A lot of the positive sentiment was based on improvement in MAPI's Capacity Utilization Index, which measures current activity at U.S. manufacturing plants. Its latest reading showed 28.1% of U.S. factories operating above 85% of capacity, up from 20% in June. Although that reading remains below the long-term average of 32%, it continues an upward trend for the index stretching back to a record low of just 7% in December 2009.

The MAPI sentiments for 2011 were largely supported by the latest manufacturing-related economic indicators tracked by the U.S. Census Bureau. While all of the numbers weren't favorable, most did reflect a continuation of positive trends carrying back to late 2009:

•As noted above, November factory orders rose 0.7% compared to a decline of 0.7% in October.
•New orders for manufactured durable goods in November fell by $2.6 billion, or 1.3%, to $193.7 billion. That followed a 3.1% decline in October and was the third drop in four months. However, without the volatile transportation sector, new orders actually rose by 2.4%, supported by strong orders in the defense sector. Orders for transportation equipment fell by 11.9%, largely due to weakness in the market for civilian aircraft and parts, with transportation inventories rising by 1.3%.
•Inventories of manufactured durable goods rose 0.6% in November, identical to October's increase and the 11th consecutive monthly rise.
•New orders for capital goods, excluding defense items, decreased 6.8% to $66.1 billion, with shipments falling to $64.8 billion. Unfilled orders rose by 0.3% and inventories climbed by 0.5%. Orders for defense-related capital goods climbed 16.3% to $8.8 billion.
Despite the weak spots in those numbers, they were good enough to prompt MAPI to predict continuation of a "moderate manufacturing recovery," with production increasing by 4% in 2011 and 5% in 2012. A stronger outlook was seen in high-tech industrial production, with MAPI forecasting 12% growth in 2011 and a 15% jump in 2012.

The improving trends also triggered positive predictions from the Institute for Supply Management (ISM), a major industrial trade group:

•Manufacturing revenue is expected to increase by 5.6% in 2011, compared to 7.9% in 2010. (Revenue in the services sector is expected to increase by 3.4%, based on ISM's Non-Manufacturing Index [NMI], which hit a multi-year high in December.)
•Manufacturing capital investments should jump by 14.5%, up from a 5.9% increase in 2010.
•Manufacturing sales should rise by 5.6% in 2011, with sales growth in the services sector hitting 3.4% compared to just 0.2% in 2010. On the negative side, ISM's survey director, Norbert Ore, warned that a large portion of the growth in sales revenue would likely be the result of price increases, not gains in volume.
The ISM also urges caution in evaluating sales numbers because margins may not track higher to the same degree because of higher costs for materials. ISM predicts higher material costs of 4% for all of 2011, with 2.7% of the increase coming in the next four months. A weaker dollar, which would help U.S. manufacturers by making their products cheaper overseas, could offset that to some degree.

Another weak spot in the 2011 forecast is employment. Manufacturing jobs increased by 7.1% in 2010, but the ISM sees growth of just 1.8% this year. Add that to very weak hiring expectations among non-manufacturing firms -an increase of just 0.3% -and the ISM says the United States could face a year of "flat employment conditions."

Those fears were supported somewhat by last Friday's (Jan. 7) December employment report, which showed a smaller-than-expected increase of 103,000 in non-farm payrolls, even though the overall jobless rate fell to 9.4%.

The broad manufacturing industry is generally considered to have 18 individual sectors, ranging from big-factory corporations involved in defense, aerospace, automotive and industrial operations to smaller businesses such as bakeries, candy stores and custom tailors, which sell directly to consumers from the locations where the products are made.

Despite those market variations, however, ISM predicts broad-based improvement in manufacturing sales, with revenue expected to increase in 16 of the 18 manufacturing sectors. Companies in the primary metals, fabricated metals and petroleum-product sectors are currently forecast to lead the manufacturing industry in sales growth, though the ISM cautions that all three are highly sensitive to price changes in the supply chain. Mining is expected to top the non-manufacturing sector.

Investors looking to capitalize on manufacturing's leadership in a continuing economic recovery face two primary challenges -identifying good opportunities amid the huge number of choices, and recognizing companies that may already be fully valued (or even overvalued) as a result of 2010's strong second-half market.

An example of a company in the second category might be engine-maker Cummins Inc. (NYSE: CMI), recent price $109.78. Cummins was the poster child for this fall's surge in manufacturing stocks, rising from below $70 in July to an early year high of $113 a share -a 61.4% gain. As a result, the company has caught the eye of many analysts and market pundits. But strong revenue, which median projections now indicate may climb by just 7.5% in the coming year, already has been factored into the stock price.

 

A stronger choice among the major manufacturers might be 3M Co. (NYSE: MMM), recent price $86.23. 3M Co. is a conglomerate operating in six primary business sectors: Industrial and transportation, healthcare, consumer goods and office supplies, security and protection services, graphics services, and electronics and communications.

3M products are sold worldwide and it posted revenue of $23.1 billion over the past year, with earnings climbing 22.3%. Earnings growth is projected to continue at an annual rate of 10%-plus over the next five years, with analysts predicting a median price target of $100.50, or 16.5%, over the coming 12 months. Trailing 12-month earnings were $5.67 per share, with $1.27 expected for the fourth quarter, results for which are due out Jan. 25. The company pays a healthy dividend yield of 2.44%.

Some other manufacturing plays include:

•EnPro Industries Inc. (NYSE: NPO), recent price $42.04 -EnPro manufactures industrial machinery and also engages in the design, development and marketing of engineered industrial products. It makes sealing products for a variety of industrial engines, hydraulic systems and compressors, as well as rubber, synthetics materials and bearings for use in heavy-duty wheels -all of which should see increased demand as growth accelerates in other industries.

The stock has been in a strong upward trend, gaining 53.9% since hitting a late August low of $27.31. Earnings growth rose 75.81% last year and is projected to continue at an average of 16% a year over the next five years. The median price target over the next year is $47.50, or 12.9%, but some analysts really like this stock, projecting a 12-month advance of 52.2% to $64 a share.

•Armstrong World Industries Inc. (NYSE: AWI), recent price $39.89 -The housing market must come back eventually, which will be good for building supplier Armstrong. But, even if housing doesn't rebound any time soon, the remodeling trend will strengthen and AWI will benefit.

The company is a major global producer of flooring products and ceiling systems for use in the construction and renovation of residential, commercial and institutional buildings. AWI also designs, manufactures and sells kitchen and bathroom cabinets in the United States. Earnings rose 25.52% over last year, with the company netting $77.3 million in profit on $2.8 billion in revenue. Earnings are due out Feb. 28, with 18 cents per share expected. Annual earnings growth of 15.5% is forecast over the next five years.

The stock bottomed below $30 a share in early July, then rallied to $54.58 before taking a big hit in early December. It's now steadied and just above year-ago levels, with median projections calling for a 12-month rebound to $53.50, or a gain of 34.1%.

•Amerigon Inc. (Nasdaq: ARGN), recent price $10.96 -There are lots of plays in the "original equipment" sector of the auto parts industry, but ARGN could be a big beneficiary if an improving economy brings buyers back to the high-end markets. The company's primary product, based on its proprietary thermoelectric-device (TED) technologies, is a Climate Control Seat (CCS) for cars and light trucks.

Quarterly earnings are expected to come in at 11 cents a share when they're reported Feb. 9, adding to trailing 12-month totals of 36 cents. Growth of 25% per year is predicted over next five years. Median target price over the next 12 months is $14 a share, or a 27.7% gain.

•China XC Plastics Co Ltd. (Nasdaq: CXDC), recent price $5.70 -A good choice for those who like to spread their bets, CXDC makes custom plastic parts and provides after-market service for Chinese auto manufacturers, as well as such international brands as Audi, Volkswagen AG (PINK: VLKAY) and Mazda Motor Corp. (NYSE ADR: MZDAY). Earnings of 23 cents a share are projected for 2010 (report due March 2), followed by annual growth of 19.8% over the next five years. Median target price over the next 12 months is $8.50, which would equate to a 49.1% gain.
For those who prefer playing the sector through funds rather than individual stocks, several exchange-traded funds (ETFs) with an emphasis on manufacturing are also available, including:

•SPDR Dow Jones Industrial Average (NYSE: DIA), recent price $116.57 -This fund tracks the Dow Jones Industrial Average. However, in spite of the name, only about a third of the companies in the modern Dow are true manufacturing plays, so this ETF may provide less sector exposure than you really want.
•ProShares Ultra Industrials (NYSE: UXI), recent price $47.25 -This fund compounds the impact of strong potential growth among the manufacturing members of the Dow Industrial index because the managers use leverage designed to produce price moves double that of the DJIA itself -which is a good thing in an up market.
•PowerShares DB Base Metals ETF (NYSE: DBB), recent price $24.13 -Since most heavy manufacturers use metals of some sort in their products, this is a good front-end choice for playing the sector -especially since most analysts expect commodities to outperform stocks in 2011, with industrial metals leading the sector. Rather than buying actual metals or mining stocks, DBB trades futures contracts on such widely used metals as aluminum, zinc and copper, which should give it strong profits on any significant upmove in 2011.

Source : http://moneymorning.com/2011/01/12/2011...

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules