A rush of industrials earnings this week is shining some light on the health of the U.S. economy.
Caterpillar reported a drop in third-quarter profit on weaker equipment demand, and 3M delivered an earnings beat on strength in its safety and health-care segments. Stanley Black & Decker, meanwhile, brought in a mixed quarter – topping profit estimates but falling short on revenue.
“There is a pretty clear takeaway,” Rob Wertheimer, founding partner and lead research analyst for the global machinery industry at Melius Research, told CNBC’s “Trading Nation” on Tuesday. “What we’re seeing is effectively a V-shaped recovery coming back with the shorter cycle products coming back first and consumer and health-care exposed products as well.”
That divide was highlighted in 3M’s report, where its safety and industrial unit, which includes adhesives and tapes, saw sales increase 6.9% year over year. Its transportation and electronics division, which includes automotive and aerospace units, fell 7.4%.
“What that means is big capital purchases that take a while to order and deliver, that’s going to take a little bit of time, but the stuff that can flow through more quickly we’ve seen bouncing back,” he said, speaking on the industrial sector generally.
As for Caterpillar, which experienced a 23% drop in sales, Wertheimer sees signs that sales can pick up over the long term.
“That’s the nature of cyclicals really – you have a downturn, you come back, so if you don’t sell a machine one year and people are still doing work, eventually they’ll need to buy another machine next year,” said Wertheimer. “The economy has come through a very, very difficult time with demand. Patchy in spots but existing, and so I do think that they’re going to see a recovery.”
One factor that could accelerate those recovery trends for the space is an infrastructure plan from either party following the 2020 election.
“The country has not spent as much as it could on infrastructure for quite a number of years. And so if we do get that kind of spending, you’ll see a broad-based impact for Caterpillar, for dirt-moving equipment from Caterpillar, Deere, Volvo, companies like that, for rental equipment from United rentals and Sunbelt Rentals, for construction software and … [the] digital sort of end of the industrial spectrum for companies like Trimble,” said Wertheimer.
The industrials sector has underperformed the market so far this year, falling 5% compared with a 5% gain for the S&P 500. The hardest-hit stocks include Boeing, down 52%, and General Electric, down 36%. Both are set to report earnings Wednesday.
