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Although there is mounting evidence of a weakening U.S. economy, we see significant pockets of strength in select industrial markets. Specifically, we expect substantial demand -- in 2008 and beyond -- for industrial controls in the process-management and factory-automation markets.
We think the suppliers of these products, including ABB Ltd. (ABB, news, msgs), Emerson Electric (EMR, news, msgs), Honeywell International (HON, news, msgs), Rockwell Automation (ROK, news, msgs) and Siemens (SMAWF, news, msgs), will buck the trend of slowing sales growth among industrial companies and generate robust sales and earnings growth in 2008.
What is the industrial-controls market?
We estimate industrial controls make up a $200 billion-a-year global market that can be divided into two parts: process management and factory automation.Process-management controls are designed for applications in continuous-flow processing, catering to markets including oil and gas, petrochemicals, beverages, dairy, metals, minerals and water.
Factory-automation products are designed for applications in discrete (individually manufactured) goods, such as those in the automotive, telecom and semiconductor sectors.
We see robust growth for industrial controls coming from two primary sources:
- The demand for natural-resource-processing capacity for oil, gas and base metals.
- The industrial expansion in emerging markets.
How the companies performed
We estimate the five largest global industrial-controls producers generated 11% organic growth, on average, in 2007. Despite signs of a weakening U.S. economy, it appears that organic sales growth actually ticked up to an average of 12% during the year's fourth quarter.ABB and Siemens, the two largest suppliers of industrial controls, generated the most sales growth in their respective businesses in the fourth quarter. We estimate ABB's automation-products and process-automation divisions generated 15% organic sales growth (20% including the effects of foreign currency).
Demand in Europe for automation products drove results in the automation-products division, while demand for metals and mining solutions drove the company's process-automation division. Similarly, Siemens also delivered impressive sales growth, reporting organic sales growth of 14% in the fourth quarter (17% including the effects of foreign currency).
| Annual sales | 4th-qtr. '07 organic growth | 4th-qtr. '07 book order growth | |
|---|---|---|---|
$14.9 billion | 15% | 10% | |
$8.6 billion | 9% | 15% | |
$12.5 billion | 7% | 30% | |
$5.0 billion | 9% | 9% | |
$29.9 billion | 14% | 12% |
Why the companies stand to outperform
Though a consumer-driven dip in the U.S. economy may be unavoidable, we see no signs of abatement in the global demand for natural-resource-related process equipment or systems, or in emerging markets' demand for industrial infrastructure.Generally, company order books are the best predictor of future sales. The largest producers of industrial controls reported growth in their order books ranging from 9% to 30% in the fourth quarter of 2007, indicating solid support for future sales.
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Honeywell, the biggest U.S.-based supplier of industrial controls, saw the largest order growth: 30% over the prior-year period. Honeywell's orders were driven by robust global demand from process industries, particularly in emerging markets.
Emerson, another formidable supplier of industrial controls for process management, is enjoying solid order growth as well. Based on Emerson's business disclosures, we estimate its process-management orders increased 15% to 20% in the fourth quarter. We believe demand from oil- and gas-processing markets is driving the increased orders at Emerson.
Our favorite stocks in this market
ABB, Siemens and Emerson have all achieved five-star ratings under the Morningstar valuation methodology, and we expect them to generate significant earnings growth in 2008.We think Siemens stands to grow earnings by at least 20% this year, driven by increased sales of industrial controls as well as improved operating margins accomplished through restructuring.
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ABB should deliver earnings growth of about 19% in 2008, driven by increased sales of industrial controls as well as power products and systems.
Finally, we're pegging Emerson's growth for the year at 14%, as its process-management, industrial-automation and network-power divisions are all poised to deliver double-digit sales growth and improved operating margins.
This article was reported and written by Tom D'Amore for Morningstar.
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