Illinois Tool Works Inc. and Parker Hannifin Corp., which will be releasing their quarterly results next month, are showing why the U.S. economy is maintaining a slow expansion.
Both could see their total revenue fall “slightly,” primarily because of “adverse currency translation” and also because of disappointing sales in Europe and Asia, according to Robert McCarthy, a senior analyst with Robert W. Baird & Co. in Chicago. While it’s “incrementally more difficult” to forecast order growth in North America, it probably didn’t contract for either company in the three months ending Sept. 30, as this business segment continues to expand, he said.
Data from these manufacturers are useful for investors such as Steven Roukis, managing director at Matrix Asset Advisors Inc. in New York. Illinois Tool Works’ North American industrial-packaging revenue and Parker Hannifin’s North American industrial orders are “early barometers” of production because both are exposed to a “broad swath” of customers, he said.
“To get a sense of the direction of the economy” in the first few weeks of the quarter starting Oct. 1, investors also should listen closely to company executives on the earnings conference calls, said Roukis, who helps oversee about $900 million in assets. These calls are “important for a qualitative read” on the state of their operating environments, he said.
Manufacturing in the New York region contracted more than forecast this month amid declining orders, as the Federal Reserve Bank of New York’s general economic index dropped to minus 10.41, the lowest since April 2009, from minus 5.85 in August, the bank said today. Readings less than zero signal contraction in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.
Industrial output for the U.S., excluding high-tech and vehicles, rose 2 percent to an index value of 95.3 in August from a year earlier, the slowest pace since March 2010, according to data from the Fed, which is scheduled to report September results Oct. 16.
Parker Hannifin, which manufactures motion-control products including pumps and valves, is slated to announce fiscal first-quarter earnings on Oct. 18, followed by Illinois Tool Works, maker of fasteners and components, on Oct. 25 with its third-quarter results. The companies declined to comment.
The industrial-packaging business of Glenview-based Illinois Tool Works is a “good gauge” of U.S. industrial production because its wrapping products are used “once goods roll off the conveyor belt” in a wide variety of end markets, said Jeff Windau, an analyst with Edward Jones & Co. in St. Louis. Meanwhile, Parker Hannifin is a proxy for capital-goods orders because the Cleveland-based company makes components for “big and heavy” items such as airplanes, tractors, machine tools and automobiles, McCarthy said.
While these segments at both manufacturers have grown, gains have slowed to mid-single digit rates, “representative of the sluggishness we’re seeing more broadly in the U.S.,” Windau said.
Employers added 96,000 workers to payrolls in August, missing the median forecast of economists surveyed by Bloomberg News, while the jobless rate has been stuck above 8 percent since February 2009. U.S. gross domestic product expanded at a 1.7 percent annual rate in the second quarter, up from an initial estimate of 1.5 percent, but less than the first quarter’s 2 percent, according to revised data from the Commerce Department.
Illinois Tool Works’ North American industrial-packaging revenue grew 4 percent in the second quarter compared with a year earlier, the slowest since 2009 when revenue was contracting, company data show. Similarly, Parker Hannifin’s North American industrial orders also marked the slowest gain since 2009, rising 4 percent in the three months ended June 30 from a year earlier, based on data from the manufacturer.
Even so, attractive valuations for Parker Hannifin and an “ongoing transformation process” under way at Illinois Tool Works make their stocks appealing to investors, McCarthy said, citing these as reasons for his “outperform” recommendations. In addition, these manufacturers “have solid, long-term track records of increasing dividends,” said Windau, who maintains “buy” recommendations on both.
Illinois Tool Works has risen almost 31 percent this year, while Parker Hannifin is up about 13 percent. That compares with an almost 17 percent rally for the Standard & Poor’s 500 Index.
If either company pre-announces negative quarterly results, this would send “an early cue” of weakness several weeks before government figures are released, Roukis said. He forecasts that Illinois Tool Works probably will fare better because of Parker Hannifin’s “almost pure industrial exposure.”
Orders for non-defense capital goods excluding aircraft and parts fell 6.2 percent in July from the year-ago period to almost $61.2 billion, the lowest since February 2011, according to the Census Bureau, which will release August figures on Sept. 27 and September data Oct. 25.
Still, North American orders at these companies haven’t fallen below zero, as they did during the 18-month recession that ended in June 2009. If they did, this could confirm the weakness seen in the Institute for Supply Management’s manufacturing index, which was below 50 -- a sign of contraction -- for a third consecutive month in August, the longest such stretch since 2009.
Through their quarterly results and conference calls, these companies provide the “forward outlook” that’s especially important to investors now, as the health of the economic expansion has come into doubt, Roukis said. They “are going to give you the flavor that’s not in the government data.”