One way to check the pulse of the industrial sector is to analyze the outlook statements from the industrial gas suppliers like Praxair (NYSE:LIN) and its rival Air Products (NYSE:APD). They always give great color on short term trends in global industrial markets, and there a very few companies with more overall exposure to the manufacturing sector.
Praxair and Air Products give their outlooks
Anyone looking for a blowout year for in the industrial sector would have been disappointed by the recent earnings reports from Praxair and Air Products. The general picture is of a year of moderate growth containing some significant regional differences. Praxair's management forecast a moderate year of global growth, while Air Products' global manufacturing growth forecast is for 2%-4% for the fiscal year.
It's hardly great news, but within the statements there were some interesting geographical sub-trends that investors can look to take advantage of.
First, a good way of looking at the current situation is to focus on merchant utilization rates. If you believe that utilization rates are a good proxy for current demand, then the following summation of the commentary on Praxair's conference call will be useful.
|Region||Merchant Utilization (%)|
|North America||about 80|
|South America||mid 80s|
|North Europe||mid 70s|
|South Europe||mid 60s|
While this table provides a pretty good summation of where the global industrial sector is right now, it doesn't say much about the future direction. Moreover, the regions with relatively low utilization have an opportunity to contribute more to Praxair's profitability should they turn up. The key is to look out the outlooks.
Developed world better
On a geographical basis there appears to be a distinction between better conditions in the developed world good and more risk in the emerging world. For example, Praxair's underlying sales growth in North America was up 6% with specific reference made to "process industries are continuing to take advantage of the low natural gas prices and high labor productivity, which makes them very competitive globally". In other words, the U.S. industrial renaissance continues to be fueled by the development of shale gas production.
Meanwhile, Southern Europe in particular could provide for some surprising upside n 2014. Praxair's overall European sales were only up 2% on an organic basis, but management spoke of signs of stabilization in Southern Europe. Moreover, it reported the "first quarter of positive base business growth" in Europe in over two years. Referencing the table above, it's clear that Praxair may have some upside opportunity in Europe thanks to the ability to expand from a low capitalization rates. Turning to Air Products, its European volume and pricing was flat in the quarter, and it's management are only expecting moderate improvements in 2014. While these outlooks may appear unexciting, they are better than the European industrial sector has heard for a while.
Emerging market risk
Long seen as the industrial powerhouse of growth for the global economy, Brazil and China are facing some uncertain prospects in 2014. Air Products's declared that manufacturing activity was below its expectations in South America in 2013, while Praxair has a positive, but uneven, outlook for Brazil in 2014. To a certain extent, Brazilian prospects rely on China. The country is Brazil's main export partner (around 17% of its exports compared to 11% for the U.S.) and makes up much of the key demand for its commodity driven export economy.
Air Products' management argued that manufacturing growth had stabilized in China, and it expects China to lead a "gradual acceleration of manufacturing growth" in Asia. Unfortunately, this sort of outlook is being challenged by recent falls in the China's purchasing managers' index. The index has fallen for the second consecutive month and, at 50.5, sits at the lowest level since July. Equity markets appear to be afraid that China's second half growth in 2013 is about to falter into sluggish growth again.
The bottom line
In conclusion, if Praxair and Air Products outlooks are a good guide, then Fools can look forward to some contrasting regional fortunes in 2014. North America can be expected to remain strong, while there may be some surprising upside from a relatively better performance in Europe.
The great imponderable is China, and its efforts to reaccelerate its economic growth. On a relative basis, the developed world looks set to outperform. However, if China's growth disappoints in a big way 2014, then the rest of the global economy is likely to face consequences. Investing Fools should favor the developed world for now.