Good Signs on the Economic Front

Actuant and other industrial companies see hope for growth by end of 2010.

There finally appears to be solid signs that manufacturing is on the rebound and will help drive economic growth in the near future.

Here are just some indications based on a number of various economic reports that were released in the past two weeks. Manufacturing in the Philadelphia region grew in March at the fastest pace this year as factories finally began hiring, according to figures from the Federal Reserve Bank of Philadelphia.

(Find more breaking news on the economy at www.mdm.com/Economy.)

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The U.S. Labor Department reported that the employment market is gradually improving as first time jobless applications dropped by 5,000 to 457,000 in the week ended March 13th.

Companies are also shipping more products. FedEx reported recently that its quarterly profit more than doubled as businesses began restocking inventory and consumer spending rose.

There will be \”solid GDP growth\” in the U.S. in the near- term, led by gains in inventory restocking and manufacturing, FedEx Chief Executive Officer Fred Smith said in a conference call with investors and analysts following the announcement.

Actuant Corp., (www.actuant.com) a $1.2 billion diversified industrial company with operations in more than 30 countries recently reported that its results for the past quarter have increased markedly. Actuant sells products to a broad array of niche markets including hydraulic and electrical tools and supplies; specialized products and services for energy related industries and motion control systems.

Here is what Robert Arzbaecher, chairman and CEO of Actuant said in a recent phone conference with analysts. A transcript of the call is available from www.seekingalpha.com:

\”Given the improvements over the last three quarters, I can somewhat confidently say we are back. What do I mean by that? It means that we are back to spending more time focused on growth initiatives and less on firefighting, back to spending more time on portfolio management and acquisitions and more time on training and development of our people.

\”Let me give you an example. Prior to the recession, our ability to deliver predictable, consistent sales and earnings growth was primarily attributable to the diversity of our end markets, our geography and the customers we touch. While diversity didn’t help us in the synchronized global recession we just all endured, its benefits are back as evidenced by our improved second quarter earnings.

\”Earnings improvement came from our Engineered Solutions and Electrical in the second quarter and help mitigate lower sales in the later cycle Industrial and Energy markets. Industrial is trending better. … Energy will come back. Maintenance can’t be deferred indefinitely.\”

Arzbaecher also said that acquisitions are in the company’s plans. \”While we are slightly disappointed that we didn’t complete any deals thus far in 2010, rest assured we have plenty of activity going on, and we are not reducing our emphasis on acquisitions. We continue to see great prospects in the $10 million to $50 million-purchase price range. They are mostly focused on Energy and Industrial markets with some smaller attractive niche opportunities that fit the Electrical and Engineered Solutions segments.\”

The company expects to spend up to $150 million on acquisitions during calendar 2010, Arzbaecher said. Its lone acquisition last year was New York-based Cortland Companies.

The inventory correction that significantly slowed sales for many manufacturers during the Great Recession appears to be a thing of the past for Actuant and many other manufacturers that sell to OEMs and other industrial companies, Arzbaecher said.

In a separate interview with www.biztimes.com, Arzbaecher elaborated on some of his points. \”In most of our (sales) channels, we’re seeing orders ahead of sales,\” he said. \”You’re starting to get that normalized pattern where orders are slightly ahead of sales. When the economists and pundits finally analyze this thing, they’re going to figure out that the inventory correction was a big deal in this recession. It’s a hard number to get your arms around. But in my belief, it is behind us.\”

Actuant’s customers in the rail, power generation, industrial distribution maintenance repair and overhaul, and infrastructure categories have significantly increased orders for equipment and machinery over the last six months and will likely increase further in 2010, Arzbaecher told biztimes. The company’s customers that need maintenance on oil and gasoline refineries will likely show recovery in late 2010 or 2011, he added.

Meanwhile, broad-based MRO distributor Grainger reported that its sales for February in the United States were up 6% compared to February 2009 while Canadian sales were up 33%.

And Fastenal, one of the largest distributors in the country with sales of nearly $2 billion, also sees growth ahead. The company is featured in the latest issue of Barron’s magazine www.barrons.com, which noted that the company could see a strong year in 2010.

Fastenal reported daily revenue increases of 2.4% in January and 4.4% in February, its first year-over-year sales gains since November 2008. \”We are very confident that we will see double-digit sales growth in the second quarter,\” Will Oberton, CEO of Fastenal told the magazine. \”We also expect new-store openings will pick up and return to their historic rate of 7% to 10% by the second half of 2010.\”

The results seem encouraging. \”We think things are starting to return to normal,\” Holden Lewis, an analyst with BB&T Capital Markets in Richmond, Va. told Barron’s. \”We’re starting to see a pickup in manufacturing, which bodes well for Fastenal. The company seems headed for a solid year.\”

So all these are hopeful signs that business is finally picking up. But it may be some time before we can say we are in a strong and lengthy recovery mode.

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