From Fitch this morning:
Fitch Ratings-New York-24 October 2013: The latest round of earnings from U.S.industrial companies, including Caterpillar Inc. (CAT) and Honeywell International Inc. reflects a slow growth global environment, according to Fitch Ratings. Overall slow growth mirrors mixed conditions in end markets for U.S. industrials while higher interest rates are could limit demand in some financing-dependent sectors.
Challenges facing the U.S. industrial sector and others include ongoing concerns with Eurozone economies and low consumer demand in China and other emerging markets. Meanwhile, uncertainty surrounding U.S. monetary policy remains a focus as the climate in Washington is divisive.
Fitch thinks a weak recovery in the Eurozone will follow as gains in competitiveness and rebalancing bear fruit, fiscal consolidation eases, and financing conditions normalize. We believe economic rebalancing in China and tighter global monetary conditions have exacerbated domestic structural vulnerabilities and difficult policy trade-offs. Fitch now expects growth in China to slow to 7.0% in 2014 (from our 7.5% estimate previously), from 7.5% in 2013.
We expect global economic growth to increase in 2H13 and 2014-2015. GDP in major advanced economies will expand by 0.9% in 2013, 1.8% in 2014, and 2.1% in 2015. Nevertheless, we have revised downward our forecast for world GDP growth to 2.3% in 2013 (from 2.4% in the June Global Economic Outlook), 2.9% in 2014 (from 3.1%) and 3.2% in 2015 (unchanged), partly reflecting a softer than expected tone in U.S. data but also reduced forecasts for many emerging market countries – underscoring their growing weight in the global economy.
CAT reported poor third quarter earnings as well as a cut in its 2013 profit forecast. The company expects that 2014 could be a better year for global economic growth, but stated that significant risks and uncertainties could alter that forecast. CAT also thinks that China’s transition to a more consumer-led economy could affect global growth.
In its Wednesday conference call, CAT said that sales and revenue expectations are lower across most of the company as mining remains difficult to forecast.
The company said it is still not receiving nearly as many mining orders as expected. Despite higher mine production around the world, new orders for mining equipment remain low.The global metals and mining sector has entered a period of retrenchment as deteriorating fundamentals and overexpansion have led to weak shareholder returns, a string of multibillion dollar write-downs, management changes, and a renewed focus on living within cash flow means. The metals and mining complex has been hit by significant price weakness, driven by a slowdown in emerging market demand (in particular, China’s projected growth), improved supply and weakness in developed market demand.
Honeywell also lowered its full-year sales forecast while its CEO said the company is planning for a continued slow-growth macro environment. The company is undertaking additional restructuring to support margins, and conditions in some end-markets are positive, such as commercial aerospace and certain of its UOP unit’s petrochemical markets.
Given this environment, most Fitch rating outlooks in the U.S. industrial space remain stable, although negative outlooks outnumber positive outlooks. Fitch’s industrial ratings are stressed to withstand another recession.
Negative revisions in revenue forecasts reflect our broader view that U.S.corporates will find it difficult to expand margins significantly in coming quarters. As we noted in the Oct. 16 Fitch Fundamentals Index report, EBITDA forecasts remain broadly constrained by limited top-line growth potential, scaled-back capex and diminishing expense reduction opportunities.
