Fitch: Slow Growth and Challenges in 2013 for U.S. Diversified Industrials
The outlook for U.S. diversified industrials is generally stable, according to Fitch Ratings. The exposure of diversified industrial companies to single market sectors is largely limited, helping to mitigate the impact of weak or slowing demand in a number of areas including non-residential construction, European automotive, heavy duty trucks, military, mining equipment, and emerging markets. Many companies are benefiting from strength in commercial aerospace and U.S. automotive and the early stages of a recovery in U.S. residential construction.
Business cycles are being affected by the slow economic recovery and political considerations including the U.S. fiscal cliff, the debt crisis in Europe, and the change of government in China. These near-term concerns offset positive considerations such aging fleets of light vehicles and heavy duty trucks, and improving confidence among small businesses and consumers in the U.S.
Despite near-term economic risks, Fitch expects financial results in 2013 will be generally steady as companies and their customers confront an uncertain economic environment. Most companies have been cautious about adding costs even while revenues recovered after the previous recession, which could be expected to mitigate margin deterioration in a worsening economy.
Fitch expects higher rated companies will maintain sound liquidity levels, including cash and availability under bank facilities. Refinancing risk is mitigated by manageable debt maturity schedules and active debt issuance during 2012 to take advantage of low interest rates. Concerns are concentrated on companies which are in the middle of large capital spending programs or addressing operating and strategic challenges.
Planned capital expenditures are being reduced compared to levels expected earlier in 2012 when the economic outlook was better. The trend is partly offset by long-term competitive considerations as companies look to expand when demand eventually improves. Additional material pension contributions can be expected as discount rates remain low. Acquisition activity at some companies could be temporarily lower while they integrate previously completed acquisitions.
Stronger economic growth in the U.S. and emerging regions could boost demand across a number of sectors, especially in late cycle industries (non-residential construction) or where capital spending has been deferred (heavy duty trucks). Any economic improvement would be weighted toward the last part of the year. Political challenges to addressing the debt crisis make a recovery in Europe unlikely in 2013.
Negative developments are more likely in the near term than positive developments, in Fitch's view. However, the impact on credit metrics would be limited, except in a harsh economic downturn, as most companies have positioned themselves for a weak demand environment. Production capacity and inventory levels are less overbuilt than during the previous downturn, and liquidity is adequate to deal with a downturn.
The full '2013 Outlook: U.S. Diversified Industrials' is available at www.fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research: 2013 Outlook: Diversified
Industrials (Slow Growth, Material Risks)
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