Strong spring '06

Mark Koznarek -- Control Engineering, 7/1/2006

Through spring things were looking decidedly green for automation and control companies. In 1Q06, the Control Engineering share price index gained 18%, very healthy performance compared to the 4% gain for the S&P 500 and the Dow Jones Industrial averages. This strength continued into April and May, with the index advancing another 5% on positive economic and corporate earnings news.

Strong share price performance of the Control Engineering index is due to stronger than expected earnings growth in 1Q, and high expectations for the remainder of the year. Of the 12 companies in the Control Engineering stock index, 11 beat Wall Street analysts' earnings forecasts for 1Q06, with the average extra performance an astonishing 9%. Earnings growth is expected to remain strong for the remainder of the year, with 19% average growth forecast for 2006 on 10% revenue growth.

The healthy stock performance is underpinned by a recovery in economic growth following the aftermath of last year's hurricanes. Gross domestic product rose at a 4.8% rate in 1Q, a sharp recovery from the 1.7% growth reported in 4Q, due to a rebound in business spending. Industrial production also remains supportive of factory investment, with 1Q growth coming in at a respectable 4.5%. Institute of Supply Management's Purchasing Managers Index (ISM) suggests this strong economic environment continued into 2Q; the April reading accelerated to an index level of 57.3%, well above the 50% level that indicates manufacturing growth.

Industrial capital spending is the key driver to the outlook for automation and control sector, and our research indicates we are still in the early innings of recovery. On average, the past three cyclical recoveries in capital spending have lasted about seven years from trough to peak levels, and the current recovery is only about three years underway. Manufacturing capacity utilization is now running above 80%, the level where companies have historically begun to let loose the purse strings for capacity expansion.

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