Some key takeaways from the report include:
• Demand: U.S. demand has slowed to flat to LSD decrease y/y on average vs. our June survey where demand was up LSD to MSD: 44 percent reported a decline in demand y/y, 34 percent flat, and only 22 percent up, and about half our contacts missed their internal sales goals. International demand was mixed, with Germany relatively healthy though slowing (67 percent up y/y, 33 percent flat) and Mexico mostly growing (58 percent up y/y, 42 percent flat), but significant weakness in Brazil (43 percent down y/y, only 14 percent up y/y) and China (83 percent down y/y). Oil & gas and energy remain relatively strong with the automotive sector cited as weak in Europe but strong domestically.
• Pricing mostly up, inventories level: Generally, pricing is up in NA as Rockwell Automation put through its annual increase in late July/early August (MSD) while others expect Emerson will put through its annual increase in early C4Q12 (likely LSD). Mexico and Brazil contacts saw a broad array of price increases, and mixed in other regions. The vast majority of inventory levels are in-line and lead times stable.
• Outlook mixed: the U.S. outlook is weaker than our last check and more uncertain, though contacts remain more optimistic vs. recent demand trends: 43 percent expect an increase (vs. 48 percent in June), 34 percent are neutral (vs. 44 percent) and 23 percent are negative (vs. 8 percent). The international outlook deteriorated slightly with 47 percent positive vs. 56 percent in June, with Brazil and China contacts more optimistic than European contacts.
Investment Thesis
• No changes to our ratings; in general, given the level of uncertainty in industrial markets and the global slowdown we remain cautious on most industrial names and have difficulty seeing positive catalysts in upcoming quarters. We maintain our BUY ratings on Danaher and Eaton and remain NEUTRAL on Rockwell, Emerson, Ametek, Roper, National Instruments and Nordson. We note that Emerson's report of somewhat weaker orders in the three months ending August is consistent with our survey. Emerson’s F4Q12 (ending September) top-line will be weaker than 3Q and likely about 2.5 percent, below the company guidance of 3 percent to 4 percent.
Model Implications
• Based on the incrementally weaker survey and deteriorating global macro data, we are reducing our Rockwell estimates anticipating that it will have difficulty reaching the top half of FY12 guidance and that growth in 2013 will be challenged. Our F4Q12 falls from $1.39 to $1.32 ($1.33 consensus), FY12E from $5.15 to $5.08 ($5.10 consensus) and FY13E from $5.45 to $5.30 ($5.49 consensus). We are not changing our $3.38 projection for Emerson in FY12 (reduced guidance is $3.35 to $3.40; consensus $3.37) which includes $0.03 government CDSOA payment. Emerson usually relies on non-operating factors to meet its guidance (e.g. share repurchase, tax rate).
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