Manufacturing Slowdown: Here Are The Stocks That Might be In Trouble

Manufacturing Slowdown: Here Are The Stocks That Might be In Trouble

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Big manufacturers have so far topped analyst expectations for the third quarter but it hasn't calmed the industry's concern over 2012 earnings. With heavy reliance on overseas orders and expectations of depressed building activity, the industry is expecting a tougher year and is actively preparing for the worst.

The European sovereign debt crisis, although slightly subdued, still risks shaking the world’s financial system. Investor fears have sent manufacturing companies, as measured by the S&P Capital Goods index, down about 8% this year compared to the full S&P 500 index, which is down 2.6%.

On fears that economic hardships for cautious consumers translate to weak demand in 2012, manufacturing companies have been quick to make cost cutting a priority. Restructuring spending has increased while job cutting is on the rise.

Reasons for decreased demand range from budget issues in developed and developing nations to more specific variables like lower military spending and rising costs of materials.

"Another reason for caution came from a widely-tracked annual forecast of U.S. construction activity, a key market for makers of machinery, electrical systems and heating and cooling technology. New U.S. construction starts are forecast to rise only slightly in 2012, to $412 billion from 2011's $410 billion, according to McGraw-Hill Construction," reports CNBC.

With manufacturers turning cautious on the 2012 outlook, machinery companies are expected to take a hit (since they provide many of the inputs that go into the manufacturing process).

With that in mind, we ran a screen on machinery stocks that have seen their inventories pile up during the current quarter. This may mean one of two things:

1. These companies expect increased demand for their products (this seems to be contradicted by the manufacturing outlook)
2. These companies are struggling to sell their products (not an ideal scenario, no matter what the 2012 outlook)

Do you think these companies are in trouble? Use this list as a starting point for your own analysis.

 

1. Flowserve Corp. (FLS, Earnings, Analysts, Financials): Develops, manufactures, and sells precision engineered flow control equipment. Revenue grew by 17.13% during the most recent quarter ($1,125.75M vs. $961.1M y/y). Inventory grew by 36.66% during the same time period ($1,090.58M vs. $798.03M y/y). Inventory, as a percentage of current assets, increased from 34.79% to 42.11% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

2. IDEX Corporation (IEX, Earnings, Analysts, Financials): Engages in the manufacture and sale of an array of pumps, flow meters, other fluidics systems and components, and engineered products worldwide. Revenue grew by 19.88% during the most recent quarter ($453.8M vs. $378.53M y/y). Inventory grew by 66.0% during the same time period ($282.38M vs. $170.11M y/y). Inventory, as a percentage of current assets, increased from 29.46% to 34.69% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

3. Actuant Corporation (ATU, Earnings, Analysts, Financials): Actuant Corp. manufactures and markets industrial products and systems worldwide. Revenue grew by 29.99% during the most recent quarter ($403.44M vs. $310.36M y/y). Inventory grew by 52.75% during the same time period ($223.24M vs. $146.15M y/y). Inventory, as a percentage of current assets, increased from 31.76% to 40.85% during the most recent quarter (comparing 3 months ending 2011-08-31 to 3 months ending 2010-08-31).

 

4. Aixtron SE (AIXG, Earnings, Analysts, Financials): Engages in developing, producing, and installing deposition equipment for the semiconductor and compound-semiconductor industry. Revenue grew by -8.45% during the most recent quarter ($175.62M vs. $191.84M y/y). Inventory grew by 42.24% during the same time period ($186.35M vs. $131.01M y/y). Inventory, as a percentage of current assets, increased from 21.52% to 28.3% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

5. Gorman-Rupp Co. (GRC, Earnings, Analysts, Financials): Designs, manufactures, and sells pumps and related fluid control products worldwide. Revenue grew by 27.33% during the most recent quarter ($92.16M vs. $72.38M y/y). Inventory grew by 72.29% during the same time period ($64.97M vs. $37.71M y/y). Inventory, as a percentage of current assets, increased from 28.94% to 41.08% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

6. Encore Wire Corp. (WIRE, Earnings, Analysts, Financials): Encore Wire Corporation manufactures and sells copper electrical building wires and cables primarily in the United States. Revenue grew by 31.08% during the most recent quarter ($309.47M vs. $236.09M y/y). Inventory grew by 37.93% during the same time period ($55.16M vs. $39.99M y/y). Inventory, as a percentage of current assets, increased from 12.69% to 15.45% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

7. Kadant Inc. (KAI, Earnings, Analysts, Financials): Develops, manufactures, and markets equipment and products for the papermaking and paper recycling industries. Revenue grew by 19.27% during the most recent quarter ($82.46M vs. $69.14M y/y). Inventory grew by 49.02% during the same time period ($60.95M vs. $40.9M y/y). Inventory, as a percentage of current assets, increased from 29.36% to 34.6% during the most recent quarter (comparing 3 months ending 2011-07-02 to 3 months ending 2010-07-03).

 

8. Met-Pro Corp. (MPR, Earnings, Analysts, Financials): Met-Pro Corporation manufactures and sells product recovery and pollution control equipment for purification of air and liquids, fluid handling equipment for corrosive, abrasive and high temperature liquids, and filtration and purification products in the United States and internationally. Revenue grew by 7.7% during the most recent quarter ($23.09M vs. $21.44M y/y). Inventory grew by 13.96% during the same time period ($16.98M vs. $14.9M y/y). Inventory, as a percentage of current assets, increased from 22.86% to 25.79% during the most recent quarter (comparing 3 months ending 2011-07-31 to 3 months ending 2010-07-31).

 

9. Tecumseh Products Company (TECUA, Earnings, Analysts, Financials): Tecumseh Products Company manufactures and sells hermetically sealed compressors. Revenue grew by -0.2% during the most recent quarter ($248.8M vs. $249.3M y/y). Inventory grew by 23.23% during the same time period ($160.2M vs. $130M y/y). Inventory, as a percentage of current assets, increased from 28.74% to 36.02% during the most recent quarter (comparing 3 months ending 2011-06-30 to 3 months ending 2010-06-30).

 

 

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. https://www.kapitall.com/framework/#?tool=Accounting data from Google Finance.)

 

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