GOLDMAN: Here's What The Biggest Industrial Companies Are Telling Us About The Economy

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According to a recent Business Insider study, Goldman Sachs ranked second among Wall Street’s best equity research teams.Goldman’s industrials and materials analysts including Steve Song, Terry Darling, Robert Koot and John Marshall publish a weekly sector report that draws on exchanges with company management, talks with clients, and analysis of relevant macroeconomic factors including high energy prices.

What follows is an industry-by-industry roundup of the analysts’ assessments based on the most up-to-date information.

The aerospace and defence sector expects deceleration in the US, but sees opportunities overseas

Following a strong earnings season, management in the aerospace sector is now warning of slower traffic and tougher sales comps, which signals near-term deceleration.

With defence, management teams have accepted budget declines. They expect contractor revenues to decrease and cost reductions and changes aimed at improving efficiency are helping profit margins. There is however room for overseas growth.

'Investors saw positive news on the F-35 program this week, including a $16 bn order from Turkey for 100 units with the first two deliveries expected in 2015, and continued progress on flight tests. We do not expect any significant catalysts in defence for next week.'

Source: Goldman Sachs

Production cuts in the agribusiness sector have helped boost fertiliser and nitrogen prices

Spring demand has helped strengthen nitrogen prices. Mosaic Company led the group by a favourable solution to the permit dispute tied to its South Fort Meade mine. Meanwhile, Potash Corp. are Saskatchewan extending production cuts to to manage its excess supply.

Source: Goldman Sachs

Improving inventories and strong consumer demand should help drive 14.3 million in annualized US auto sales in February

Improving inventory levels at Toyota and Honda, and strong consumer demand have got Goldman analyst Patrick Archambuly to expect a February seasonally adjusted annual rate of 14.3 million, ahead of the January figure.

Source: Goldman Sachs

US natural gas-based commodity chemical producers will benefit from higher oil prices

US natural gas-based commodity chemical producers will be the primary beneficiaries of higher oil prices. Naphtha (key oil derivative to make commodity chemicals) hit an all time high in Europe this week and is pushing global commodity chemical prices higher.

Meanwhile, ethane (what US producers use to make the same commodity chemicals) hit a 30-year low on February 14, and has only bounced slightly higher since. This higher-selling-price and lower-costs dynamic should produce powerful 1H2012 earnings for Buy-rated WLK, LYB, and EMN.

Source: Goldman Sachs

Engineering and construction sector remains anemic, but investors are flocking to their cheap stocks

The engineering and construction sector outperformed the market this week. Investors want to own engineering and construction stocks because of the underperformance relative to other commodity sectors. KBR Inc is Goldman's top pick because its profit margin is expected to grow, it met expectations on guidance clarity and is cheap.

'The fact that the market is willing to give these stocks a pass on results is a very bullish signal and tells us that investors were worried about the bookings/guidance going into the quarter and want to own these stocks given the underperformance relative to other commodity sectors.'

Source: Goldman Sachs

Homebuilders are benefiting from improving housing market metrics, but could get hurt by cost inflation

New home sales declined 1 per cent, but existing home sales increased 4.3 per cent in January. The 5 per cent downward revision to existing home sales however was a negative surprise. Pending home sales beat expectations and Case Shiller is expected to show that home prices for December are flattish.

Flooring manufacturer Mohawk's (MHK) profit showed pressures from material inflation. Meanwhile, Toll Brothers continues to gain market share in the luxury housing market, where share gains are more likely to stick.

Source: Goldman Sachs

Demand for machinery and diversified industrials are strong in the U.S., Asia and Eastern Europe

Caterpillar's earnings showed continued strength in North America for machine demand, while demand in the Asia Pacific region increased as well.

Meanwhile, Volvo earnings showed European delivery had slowed because of the slowdown in core European economies, though shipments to Eastern Europe stayed strong.

Source: Goldman Sachs

China's rate cut has been positive for metal prices, however steel prices are down despite strong demand

Weaker scrap prices and strong imports are pushing down steel prices despite strong demand. Current expectation is for March scrap prices to be flat at February levels.

The 50 basis points reserve requirement ratio cut by China's central bank was positive for metals. But the market needs more clarity regarding bank lending.

Source: Goldman Sachs

Multiindustry stocks aren't seeing the underlying industrial momentum pick up, but there are some good signs for non-residential construction

Macro headlines have not indicated a pick up in industrial momentum underlying multi-industry stocks. Emerson Electric Co. reported modest order growth because of challenges in the U.S. and heating, ventilation, and air conditioning (HVAC) markets.

Eaton Corporation on the other hand raised its long-term segment margin target and is positive on the outlook for U.S. non-residential construction.

Source: Goldman Sachs

Sluggish demand in the packaging sector reflect the slow North American and European economies

Weakness in Bemis Company Inc and Sealed Air Corp can be attributed to higher oil prices. Oil prices put upward pressure on the cost of resin which is crucial to both companies.

Packaging companies cited favourable/stable trends in early 2012 compared with fourth quarter levels, but said demand is sluggish in North America, limited visibility in Europe, though emerging market demand is strong.

Source: Goldman Sachs

Waste management trends signal strength in the oil & gas and industrial sectors

On Clean Harbors: 'We were particularly impressed by the robust activity in their more cyclically levered O&G and Industrial segments.'

Source: Goldman Sachs

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