Can These Historically High Manufacturing Margins Continue?

One of the companies Isaac and Blake discuss that's a major part of the high-margin manufacturing trend is 3M. With over 50,000 products, 3M plays a role in making everything from computers to power cables. A long history of invention and innovation has driven the company to its wide reach, but a focus on operational efficiency may be hurting the creative culture that once created Scotch Tape and the Post-It Note. A new leader has taken over and vows to return innovation to the forefront. Does this mean the stock will become more than a dividend, returning to its former glory as a growth stock once again? Find out whether 3M has what it takes to pull it off in The Motley Fool's comprehensive new research report on the company. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out — simply click here now to claim your copy today.

Blake Bos: Hello, this is Blake Bos, I'm with The Motley Fool. Today I'm here with Isaac Pino and we're going to be talking a little manufacturing -- Honeywell (NYSE: HON  ) , GE (NYSE: GE  ) , all the big players here. We've seen margins at historic highs in manufacturing recently.

The thing with the stock market, a lot of times you'll see a reversion to the mean. My question to you today is, with these historically high profit margins, do you expect this trend to continue? Are we going to see a reversion to the mean, and these come down?

Isaac Pino: Yeah, it's somewhat contentious today about whether profit margins can continue to increase. In the third quarter of last year we saw, as a percent of GDP, corporate profit margins were about 11.1% -- the highest it's ever been in history.

Of course, simultaneously you see labor wages as a percentage of GDP, so any of the labor costs, actually shrinking. That trend seems to continue. You have really robust reports from General Electric, Honeywell, as well as 3M (NYSE: MMM  ) , some of the large manufacturers out there, in the fourth quarter of 2012, so there's this debate.

Looking forward in 2013, do you really expect these companies to continue to grow the bottom line for shareholders? Is this a time to get into the market, or do you just assume that reversion to the mean is likely to happen because, in the past, that's always been the trend?

When I look at it, I think investors should take a little bit of a step back; perhaps not focus on the macroeconomic picture, because sometimes that can be a little bit confusing. We're in a different market now than we've been in the past.

Blake: Definitely confusing.

Isaac: Things are more global, yeah.

At The Motley Fool we preach, "Buy and hold stocks that you believe in for the long term. Really focus on the fundamentals of those companies."

If you look at General Electric, they're doing a lot of things to increase the efficiency, maybe decrease some of the labor costs by introducing robots in the manufacturing. They're also investing heavily in the industrial Internet. That could increase efficiency. They predict that it will touch $32 trillion of different economies or different markets and sectors, so you look at those investments.

You have Honeywell investing in turbo-charged engines that are going to make cars more efficient, four cylinder engines are growing rapidly. As these companies invest in innovation that increases their corporate profit margins, perhaps labor stays relatively stagnant or minimal.

Freelancing is becoming more popular. Companies are able to hire people for short periods of time, so I look at the companies and I look at the sector and understand what they're saying in their annual report.

I highly encourage investors to take a look at the annual report and get a sense of, "Are these costs actually creeping up on companies? Are they mentioning it in their conference calls?" and "What are the innovations that are going to offset these costs in the future?"

I think corporate profits are set to grow pretty nicely in 2013, at least within the industrials and manufacturing sector.

Blake: I got you ... so this time could in fact be different, which sometimes can be some dangerous words to utter, but things could be changing just because of technological change, it sounds like; Increased automation, less labor costs, less fixed costs associated.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2246329, ~/Articles/ArticleHandler.aspx, 10/22/2014 6:04:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement