For the first half of 2012, most large industrial companies repeated a similar refrain - first half results were weak due to problems in Europe and China, but the second half would be better. If recent comments from Siemens' (NYSE:SI) CFO are broadly applicable, though, that rebound may not materialize as hoped.
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Siemens Finding Its Targets Harder to Hit
Siemens has been one of the more relatively conservative industrial conglomerates for a little while now, as CFO Joe Kaeser started the year off by telling the Wall Street Journal that full-year guidance was going to be "ambitious." Mr. Kaeser recently updated these views, suggesting that the company's financial targets for the second half were getting even harder to reach.
According to Siemens, there has been "significant deterioration" in both Europe and China, with conditions getting notably worse in the past two months. With Europe representing 15-40% of many large industrial companies' revenue base and China representing a major growth market, this is a serious development - not only for Siemens, but also for a range of companies from ABB (NYSE:ABB) to General Electric (NYSE:GE) to Emerson (NYSE:EMR), just to name a few.
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Weaker Data As Well
It's not just data from Siemens that should lead investors to give some pause to the health of the global economy. Industrial suppliers Grainger (NYSE:GWW) and Fastenal (Nasdaq:FAST) have both recently reported slowing growth (though still relatively strong by the standards of a full-cycle average), and Emerson reported soft order growth in its fiscal fourth quarter. Elsewhere, companies like Caterpillar (NYSE:CAT), Joy Global (NYSE:JOY) and Eaton (NYSE:ETN) have reported slowing growth, particularly in key emerging markets like China and Brazil.
How Long Can the Strong Horses Keep Pulling?
There have certainly been pockets of strength and weakness across the global economy for a while now. While construction activity has been weak in Western Europe and North America for some time now, it had until recently been red-hot in many emerging markets. Likewise, while the entire renewable energy market has been in the dumps (bad news for Siemens, General Electric and ABB), companies with good exposure to the conventional energy, petroleum and chemical sectors have seen robust demand.
The question is how much longer this can all go on like this. At some point, chemical and oil companies will have the infrastructure they need (or at least in the order books). With demand in factory automation slowing, will markets like commercial aerospace pick up the slack?
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Be Picky, Be Patient
With the way the global economy is heading, the second half of this year looks to be pretty "interesting." Companies like ABB and Siemens could be significantly vulnerable to a one-two punch of weakening automation markets and worsening conditions in power generation and transmission. At the same time, companies like United Technologies (NYSE:UTX) and General Electric could hold up better as markets like commercial aerospace and energy services stay strong.
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This means that investors have to be both selective and patient. Companies like ABB and Siemens still look like good long-term holdings, and even while Siemens' CFO was talking down expectations for this year, he reiterated the strong long-term potential for businesses like automation. Likewise companies like Caterpillar and Cummins (NYSE:CMI) are still quality industrial names with solid long-term prospects, but the near-term could be dicey.
The Bottom Line
Investors who can live with the risk of taking a 20-30% paper loss in the short run may be willing to buy these stocks today on the long-term potential alone. For others, though, the smarter move may be to keep an eye on names like Lincoln Electric (Nasdaq:LECO) and just wait in the hopes of picking them up at more compelling prices should the market get even more nervous about the health of the global economy.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.