Destocking threat to industrial sector forecasts
Investors may need to look beyond the short-term as capital goods and industrial sectors come to terms with weakening demand. Profit warnings could be rife in these sectors in coming months.
‘Organic revenue assumptions are being pulled back and destocking is prevalent in industries such as steel, electronics and general industrial,’ says broker Peel Hunt.
Analysts at investment bank Berenberg anticipate heavy truck production to ‘deteriorate’ by 10% in Europe and 22% in North America as we enter 2020.
Component and equipment destocking can be brutal. ‘Say demand is 100 and then falls to 80, the company has to slow down to 60 to eliminate the excess inventory before returning to 80,’ says Peel Hunt, paraphrasing investors to whom it has spoken.
The subsequent impact of fixed costs through this period ‘has a significant impact on forecasts and this is what we are seeing at the current time,’ it adds.
This situation is expected to spark a series of earnings warnings in the final quarter of 2019 as analysts pare back over-optimistic estimates against the backdrop of a deteriorating economic environment.
‘Following poor data from major global economies including the US, China and Europe, in particular for manufacturing, a number of companies’ share prices now appear vulnerable in the UK as we near the end of the year’, says Mark Swain of asset manager Smith & Williamson.
But Swain also sees upside from foreign takeover interest. ‘The UK is still home to very good companies, and we expect M&A to be a key theme as a result,’ he comments.