Europe. I do not care about Greece.
I do care about Germany, France, the
Nordics (collectively) and Central/
Eastern Europe. The weaker Euro benefits
exports, while lower commodity
prices and slowing China growth are
headwinds. Life will go on. Modest
growth will continue.
Middle East. Not sure what the Iranian
“deal” will do. My sense is nothing
as Saudi Arabia can still print money at
$50/barrel or lower. Right now they are
investing to keep their mature fields
working. Incremental growth in defense
spending is likely.
Latin America. Mexico continues
to grow, and capital investment in the
auto and aerospace sectors remains
strong. Brazil, Argentina, much of the
region seems set to remain in the tank
along with lower commodity prices.
China. Directly speaking, not a big
market for heavy capital equipment
shipments out of the U.S.; weak euro,
strong dollar exacerbate the situation.
Long-term I hope their government’s
increased belligerence and the recent
hack of U.S. government systems is
waking up even the densest pockets
of U.S. isolationism of either political
party if not their constituents. Asia gets
it. Japan is being pushed by the rest of
the region to build its armed forces and
Japan is changing its constitution to allow
overseas war fighting.
Oil & Gas. Assuming Iranian oil
comes back into the global market,
prices will be further pressured. We
continue to see negative comps for the
next 2-4 quarters before stabilizing at
lower spending levels.
Mining. Whole coal sector trading
like it’s about to go under and JOY
global results did not carve out much
of a silver lining; bad news for CAT, JOY
and others.
Power generation. U.S. power generation
remains weak, Band-Aid sales
(wind turbines) continue strong. Those
of you who supply GE on the gas turbine
side should be concerned with
the EU’s challenge of the Alstom-GE
hook up because a) the deal could fall
through entirely and b) the longer it
drags, the longer commercial uncertainty
can be used against GE in the
marketplace. GE has stated they offered
concessions. Stay tuned.
Transportation infrastructure.
More stability through 2016-2017, with
perhaps modest growth. I remain convinced
that lower oil prices will lessen the growth profile for oil shipped by rail.
Machinery. Agriculture remains
weak, as do cranes. Continue to see
modest demand growth as lower energy
related demand is offset by non-residential
and residential construction.
Consumer (auto, appliances). Auto
benefitting from old cars, improving
employment and capital investment
in Mexico. Residential construction
growth should help appliances. Magically,
not only is GE having a hard time
closing on Alstom (power gen) but the
U.S. DOJ is challenging the sale of GE
Appliances to Electrolux!
Aerospace / Defense. Global commercial
aircraft demand is rock solid
driven by economic growth, low fuel
prices and strong capital markets. Cargo
is also picking up. Defense spending
has troughed in the U.S. and international
growth strikes us as likely
though with little benefit to the U.S.
industrial base.
Boeing's 12-month stock performance.
- Click image to enlarge
Focus Company: Boeing (BA)
Pretty sure you already know they
make airplanes, but we will spend a bit
of time detailing the platforms, breadth,
and growth opportunities, along with
that huge backlog which ended 1Q15 at
$495 billion, i.e. — $435B commercial,
$60B military.
Unfilled orders (as of June) were
5,689 aircraft. A look by major platform:
|
737 MAX
|
2,831
|
|
737-800
|
1,181
|
|
747
|
31
|
|
767
|
39
|
|
777
|
563
|
|
787
|
803
|
The foreseeable future growth engines
are 787 and 737. Boeing’s No.
1 priority over the next 2–3 years is to
ensure supply chain performance so
they can capture margin on the huge
backlog.
Longer-term current and potential
suppliers to Boeing must focus on
three things:
- Long-term program decisions
- Potential insourcing
- Execution
The last is obvious; Boeing wants and
needs to execute on their backlog and
it is broadly believed the commercial
aerospace supply chain is stretched to
the limit. Meeting and exceeding their
expectations would be a minimum
hurdle for future programs, as existing
suppliers already know.
We will be interested — and so should
you — in how Boeing approaches vertical
integration in the coming years.
When current CEO Jim McNerney,
who is retiring, came in, he did what
all GE executives do — drive the company
with financial metrics and seek to
minimize capital investment and outsource
as much as possible to capture
higher returns on capital. When the
787 was in development, as much R&D
work as possible was pushed down
to suppliers. Unfortunately the move
proved “penny-wise, pound-foolish”
and delays and problems drove an incremental
reversal toward Boeing taking
more ownership. With McNerney
retiring and Dennis Muilenberg, a 30-
year veteran and engineer, taking over,
we anticipate a greater emphasis on
“owning” the development and supply
chain.
The key for component and systems
manufacturers is that demand is strong
and opportunities to position yourself
for future programs exists, but the bar
is high!
About Author
Brian K. Langenberg,
CFA, has been recognized
as a member of the
Institutional Investor All-
America Research Team, a
Wall Street Journal All-Star,
and Forbes/Starmine (#1
earnings estimator for
industrials). Langenberg
speaks and meets regularly with CEOs and
senior executives of companies with over $1
trillion in global revenue. His team publishes the
Quarterly Earnings Monitor/Survey — gathering
intelligence and global insight to support
decision-making. You can reach him at Brian@
Langenberg-llc.com or his website at www.
Langenberg-LLC.com.
