Our outlook for industrials stocks

Industrial activity remains slow and steady, giving companies a chance to navigate the environment.

Daniel Holland 3 October, 2013 | 6:00PM

U.S. macro data is sending mixed signals as sentiment indicators remain high, but production and orders remain moderate. Companies have adjusted to the current growth environment and have largely delivered healthy profitability.
Housing demand in the U.S. is above pre-recession levels, but rising interest rates (increasing the financed cost of homes) and labour shortages have held near-term production below the market's and our near-term expectations.
The sector's valuations have drifted ahead of our fair value estimates, with an average price/fair value of 1.07. Auto manufacturers continue to trade at a discount to our fair value estimate.

Mixed signals from the global economic environment have provided the backdrop for industrial activity in the third quarter, as has been prevalent for the last several quarters. The purchasing managers' indexes have hugged 50 (any reading over 50 suggests positive growth expectations) for the non-U.S. regions that we track, though, surprisingly, Europe pushed over 50 for two consecutive months, led by the British service sector; this has not happened since July 2011. August PMI in the United States was 55.7, continuing a trend of recent strength. Offsetting the improvement in Europe and the U.S., Chinese growth continued to moderate in the quarter as the country's PMI struggled to break 50.

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Daniel Holland

Daniel Holland  Daniel Holland is a senior analyst with Morningstar.

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