Hurricanes don't derail performance
The pivotal point of the third quarter 2005 was the damage wrought by Gulf Coast hurricanes—Katrina, Rita, and Wilma—and the resilience of domestic consumer and manufacturing economies to absorb these shocks and keep moving forward. At last count, damages are forecast to exceed $150 billion, and between insurance recoveries and the federal government's initial pledge of $62 billion,...
The pivotal point of the third quarter 2005 was the damage wrought by Gulf Coast hurricanes—Katrina, Rita, and Wilma—and the resilience of domestic consumer and manufacturing economies to absorb these shocks and keep moving forward. At last count, damages are forecast to exceed $150 billion, and between insurance recoveries and the federal government's initial pledge of $62 billion, quite a bit of funding is being aimed at Gulf Coast reconstruction. There is a growing realization that the rebuilding efforts will create enough of a positive economic impact to more than offset the temporary loss of production capacity and economic activity in the affected regions. Further, this stimulus will unfold over the next 18-24 months, boosting the growth outlook for construction and industrial activity over this period.
The markets expressed this relief with a healthy rally, and the Control Engineering Index outperformed the market—up 7% during 3Q05, compared to a 3% gain for the broad S&P500 index. All but two controls stocks posted gains, and one of those (BMI) notched only a modest slip after a 56% increase last quarter.
Business fundamentals for the controls group also improved. Expected 2005 earnings for the group rose 1% on average, compared with a (1%) decline last quarter. The breadth of improvement was more pronounced as the earnings outlook improved at 9 of 12 companies, compared to 7 of 12 in the prior quarter.
Backlogs are looking better. A case in point is Honeywell—while 3Q revenue growth of the Process Control business (part of the Automation & Control Solutions segment) rose only 2% excluding acquisitions, bookings jumped 19%, following a 16% increase in 2Q. Another example is Rockwell Automation, where revenues rose 11% in the quarter but backlog at quarter-end was 30% ahead of year-ago levels. Several of Rockwell's larger dealers described September bookings and sales activity as some of the best in recent memory.
General economic activity has also improved during 3Q05, with GDP growth estimated at 3.8%, up from 3.3% in 2Q. We estimate that factory spending on machinery in 3Q rose at a 5% rate, compared to 6.5% growth in 2Q. Given the flattish pace of machinery spending in the final quarter of 2004, we suspect that reported machinery capital spending in the current quarter will show acceleration in equipment spending growth from the 3Q level.
Control Engineering Stock Index
Price ($) at close 6/30/05
($) at close 9/30/05
% chg. in 3Q05
Current EPS ($) outlook
EPS chg. from 6/30/05
EPS = earnings per share;
Mark Koznarek is an industry analyst and managing director with FTN Midwest Securities,