U.S. industrials stare at profit squeeze from excess inventory, weak demand

U.S. manufacturers are likely to see a hit to their quarterly profit in the second half of the year as higher prices for everything from light bulbs to air conditioners take a toll on consumer spending.

Wall Street analysts fear the second quarter would be the last three months of a good spell that began during the pandemic as consumers used stimulus checks to buy products of 3M Co (MMM.N), Emerson Electric Co (EMR.N), Eaton Corporation Plc (ETN.N) and Johnson Controls (JCI.N).

High inventory levels combined with sluggish order growth are likely to hurt manufacturers’ revenue as analysts foresee a further slowdown in demand.

“Electrical orders momentum is likely to slow sharply, which is a risk that is under-appreciated by investors,” brokerage firm Barclays said.

THE CONTEXT
The U.S. manufacturing and trade inventories rose 17.7% year-over-year to $2.38 billion in May, the U.S. Census Bureau data showed, while the manufacturing activity slowed more than expected in June.

In its latest quarterly report, industrial products maker Dover Corp (DOV.N) said bookings dropped 33% for its unit that serves commercial refrigeration, heating and cooling markets from a year earlier.

“We’ve been guiding for a year now that this can’t go on forever and orders are going to come down,” its Chief Executive Richard Tobin told analysts.

Dover’s peer 3M, which generates 17% of its revenue from the consumer segment, is set to report its results tomorrow.

FUNDAMENTALS

  • Analysts estimate 3M’s Q2 revenue to fall 4.2% to $8.57 billion when it reports results on July 26
  • Earnings per share is estimated at $2.22
  • The stock has lost about 27.4% of its value this year
  • For Emerson, analysts estimate Q3 revenue to grow 8.8% to $5.11 billion
  • Earnings per share is estimated at $1.06
  • The stock has lost about 14.6% of its value this year +
  • Eaton’s Q2 revenue is expected to fall 0.19% to $5.21 billion
  • Earnings per share is estimated at $1.61
  • The stock has lost about 26.6% of its value this year

WALL STREET SENTIMENT

For MMM, 1 out of 23 analysts rate the stock “buy”, while 15 have a “hold” rating and 7 rate the stock “sell” or lower. The median price target is $144.

For EMR, 16 out of 27 analysts rate the stock “buy” or higher, while 11 have a “hold” rating. The median price target is $97.

For ETN,

17 out of 26 analysts rate the stock “buy” or higher, while 8 have a “hold” rating and one “sell” rating. The median price target is $154.

For JCI, 18 out of 24 analysts rate the stock “buy” or higher, while 6 have a “hold” rating. The median price target is $62.