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Third Quarter Earnings Review Of An Industrious Sector

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By: Sam Quest
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The Industrials sector includes some of the largest companies in the US that manufacture construction machinery, capital goods and equipment for the aerospace and defense industries.
The sector is a bellwether for the US economy as well as the international economy. Industrials typically are the first to benefit from economic booms, as more investments are made in construction, machine manufacturing and other industrial activities. The flipside is that these companies are also the first to be affected by economic busts, as investments in the sector are the first to decline.
In the US, 65 out of 76 industrial companies have reported earnings for the third quarter (3Q) of 2013. Revenues for the entire group are up 1.8% year-over-year (YoY) and earnings increased 6.24%. 34 companies reported YoY growth in revenues while the remaining 31 were down. While the group missed revenue estimates by 0.63%, it surprised investors by when it beat earnings by 3%.  

Construction & Materials (C&M)

The segment missed sales estimates of $14.58 billion and actual sales were $14.14 billion, a negative surprise of 3%. It did, however, beat earnings by 3.6%. Vulcan Materials Company (VMC) was the top performer in the segment, with a 2.6% sales surprise and a 21.7% earnings surprise. The company reported $7.2 billion in 3Q sales, and reported an EPS of $0.32, higher than the estimate of $0.263.
Five companies in the C&M segment have so far announced third quarter earnings while Jacobs Engineering Group Inc. (JEC) is yet to report. Sales increased almost a tenth of a percent, whereas earnings grew by a more substantial 25.8%.
This segment is further divided into Building Materials & Fixtures, and Heavy Construction. Building Materials surprised on both sales and earnings by 2.4% and 4.9% respectively. Revenues increased 9.5% and earnings went up almost 39%. Heavy Construction reported $8.3 billion in revenues, missing estimates of $8.9 billion. Earnings for the Heavy Construction segment were up 10.2% YoY.

Industrial Goods

The Industrial Goods segment includes companies that are in the business of manufacturing various goods and providing services to a range of industries ranging from aerospace to waste disposal.

Aerospace & Defense

Defense and aerospace companies experienced combined YoY increase in sales of 2.1% and earnings increased 13.7%. Within the category, Aerospace segment revenues improved 7% and earnings rose by a considerable 19% YoY. Although sales in the Defense segment contracted 3.6% due to budget cuts, better margins resulted in a 6.5% rise in earnings. Out of all the companies in the Aerospace segment Precision Castparts Corp. (PCP) had the highest revenue growth of 22.4% YoY, and $2.4 billion in sales. The Boeing Company (BA) had the highest earnings jump of 33.3% YoY, from $1.35 to $1.80.

General Industrials

General Industrials comprises conglomerates such as 3M Company (MMM), Honeywell International Inc. (HON) and General Electric Company (GE), which produce a wide range of products. The Diversified Industrials segment was up 3.3% YoY on sales and almost 3% on earnings. Revenues, however, missed estimates of $64.1 billion by 0.8%.

Electronic & Electrical Equipment

The segment surprised investors by beating revenue estimates of $19 billion by 2% and earnings estimates of $1.84 billion by 4.6%. Revenues grew 4.7% YoY, and overall earnings in the sector were up 9.3%.

Industrial Engineering

The Industrial Engineering sector includes industrial machinery producers, and commercial truck and vehicle manufacturers. Companies such as Deere & Company (DE) and Caterpillar Inc. (CAT) fall in this sector. Most manufacturers have had a rough year and missed estimates. The sector missed revenue and earnings estimates by 3.36% and 2.77% respectively.

Industrial Transportation

Railroad companies such as Union Pacific Corporation (UNP), Norfolk Southern Corporation (NSC) and CSX Corporation (CSX) come under the Industrial Transportation sector. The sector also includes delivery couriers and transportation services.
The sector’s revenues were up 3.3% YoY, while earnings rose by a more noticeable 9.7%. The segment reported sales of $43 billion and earnings of $4.1 billion. Revenue growth for the Railroads segment was 4.4% YoY, the highest of any division in Industrial Transportation. Looking at the earnings growth metric, the Transportation Services segment improved the most, by 17.8%.

* The Trucking division is not included. Its inclusion was skewing data for Industrial Transportation since 3Q estimates are provided for Trucking but actual results have not been announced.

Support Services

Support Services include companies that provide various services like business support, disposal and financial services. The segment surprised on revenues by almost 0.5%, and 2.8% on earnings. Sales grew 4% YoY to $31.6 billion while earnings improved 11.2% to $3.1 billion, from $2.8 billion last year.

Conclusion

The outlook of the Industrials sector is uncertain, since the effect of budget cuts has not been quantified as yet. So far in the year, the sector’s performance has been alright, considering it narrowly missed revenue estimates but beat EPS estimates.

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