Automation, control heat up

A collection of indicators used to judge the health of the automation and control marketplace provided a decidedly warm glow this winter. Consider capital spending activity—the most important driver for overall automation and control investment. With equipment investment up 15% in 4Q and 14% for all of 2004, the U.

By Mark Koznarek March 1, 2005

A collection of indicators used to judge the health of the automation and control marketplace provided a decidedly warm glow this winter.

Consider capital spending activity—the most important driver for overall automation and control investment. With equipment investment up 15% in 4Q and 14% for all of 2004, the U.S. economy has just completed its best year for equipment capital spending since 1994.

FTN Midwest Securities recently completed its annual survey of domestic industrial companies’ capital spending plans; 161 public companies in 25 separate industries were polled, representing $2.7 trillion of estimated 2004 revenues and $128 billion in capital expenditures. The survey conclusions imply that the surge in 2004 spending was no fluke, and 2005 looks even better. 50% of survey respondents plan increased capital expenditures in 2005, with the average planned increase at 10%—a marked improvement from 2004, when this same group grew capital spending only 2%.

The stocks that comprise the Control Engineering Stock Index together posted a 15% gain in fourth-quarter 2004, handily outpacing the S&P 500 and the Dow Jones indexes, and matching the resurgent Nasdaq index. The breadth was surprisingly strong, with only two companies within the index posting modest declines.

The market is also expecting a robust 2005 for these stocks. Forecasts for 2005 earnings have been boosted 19% for 2005, up from the 15% growth expected after the third quarter.

A final observation is the narrow breadth of improved earnings expectations—only two companies, Rockwell Automation and Badger Meter, did the heavy lifting. It isn’t a coincidence that these two also saw the best share price performance—stock prices follow earnings. We think that the share price increases across the rest of the group says that the consensus earnings estimates for many of the other CE Index stocks are still too low—and the capital spending trends (see chart) are certainly pointing in that same direction.

Capital Spending Survey

2000 2001 2002 2003 2004 2005 (est)
Higher 79 71 56 78 92 102
Flat 6 13 10 23 22 37
Lower 76 77 95 60 47 22
Total 161 161 161 161 161 161
% up 49% 44% 35% 48% 57% 63%
% flat 4% 8% 6% 14% 14% 23%
% down 47% 48% 59% 37% 29% 14%
Net 2% -4% -24% 11% 28% 50%
% Change 2% 0% -7% -3% 2% 10%
Note: Flat calculated within 62% of 0%
Source: FTN Midwest Research and Control Engineering

Control Engineering Stock Index

Price ($) at close 9/30/04($) at close 12/31/04% chg. in 4Q0452-wk high2004 EPS($)2005 P/E
EPS = earnings per share;
P/E = price/earnings ratio
Source: FTN Midwest Research and Control Engineering
Ametek
30.32 35.67 18% 40.10 1.63 19.8x
Badger Meter
22.83 29.96 31% 32.25 1.42 16.0x
Danaher Corp.
51.28 57.41 12% 58.90 2.30 20.3x
Eaton Corp.
63.41 72.36 14% 72.69 4.22 13.2x
Emerson Electric
61.89 70.10 13% 70.88 3.06 19.6x
Flowserve
24.18 27.54 14% 28.18 1.20 19.4x
Honeywell
35.86 35.41 -1% 38.52 1.72 19.2x
National Instruments
30.27 27.25 -10% 35.15 0.62 32.8x
Rockwell Automation
38.70 49.55 28% 61.46 2.10 22.5x
Siemens
73.70 84.67 15% 87.50 4.56 15.3x
Thermo Electron
27.02 30.19 12% 31.40 1.25 19.0x
Tyco International Ltd.
30.66 35.74 17% 36.58 1.78 17.0x
S&P 500
1,115 1,212 9% 1,218 64.11 18.0x
Nasdaq
1,897 2,175 15% 2,192 68.80 27.3x
Dow Jones
10,080 10,783 7% 10,868 592.05 20.2x
Author Information
Mark Koznarek is an industry analyst and managing director with FTN Midwest Securities,