NEW YORK/CHICAGO (Reuters) – U.S. industrial multinationals continued to post mostly higher-than-expected earnings, with many raising their forecasts, but their reports also left plenty of reasons for caution about the pace and breadth of a global economic recovery.
Although the results suggested the recovery was broadening out beyond early-cycle manufacturing markets to consumer segments like electronics and autos, several companies noted continued weakness in areas like aerospace and nonresidential construction, which typically move late in a cycle.
Hints of a consumer pickup came from diversified U.S. manufacturer 3M Co. (MMM.N), maker of Scotch tape and medical products, whose better-than-expected profit stemmed from demand from the consumer electronics industry.
"To see the growth across almost all the businesses, where before it was more patchy, speaks to the effectiveness of management's restructuring," said Morningstar analyst Adam Fleck.
Sales at 3M were also above Wall Street estimates, but its shares fell 7 percent after the company said recent acquisitions would dilute full-year profit more than expected.
3M's results showed multiple reasons for caution, Nomura analyst Shannon O'Callaghan said in a research note, listing concerns about demand for video displays and the company's disappointing healthcare margins. Nomura recommends investors reduce their 3M holdings.
Shares of Brunswick Corp (BC.N), whose products reflect discretionary spending, gained more than 2 percent after it reported stronger demand for its boat engines and its quarterly loss narrowed more than expected.
TRUCK, AUTO RECOVERY
While consumer spending has supported economic growth in China and other developing markets, concerns persist about shoppers in Western Europe and the United States.
Recovering truck and auto markets could temper those concerns. Bearings maker Timken Co's (TKR.N) results were boosted by demand for its components used in heavy trucks and off-highway vehicles, as well as in cars.
Tyco Electronics Ltd (TEL.N), whose customers include automakers such as Ford (F.N), said the global economy was recovering and would continue to be led by emerging markets. Results from the world's biggest maker of electronic connectors beat expectations, and its shares rose nearly 1 percent.
Specialty truck maker Oshkosh Corp (OSK.N) posted a 43 percent sales increase, but earnings were reduced by one-time charges.
Still, if demand does not broaden out beyond industrial markets and fast-growing places like China, the year-old recovery could have trouble gaining traction.
U.S. industrial companies are among the most geographically diverse of any U.S. stock sector, and the group was one of the few where earnings expectations rose coming into the reporting season. Like international peers, they also tended to report large profit increases, driven by sales to emerging markets.
3M cited such markets, especially China, as did industrial tool maker Kennametal Inc (KMT.N) and Timken, two multinationals that beat analyst forecasts and raised full-year estimates.
Kennametal also announced a stock buyback of up to 8 million shares, and the stock rose nearly 2 percent.
OBSTACLES TO GROWTH
Timken stock also rose nearly 2 percent, but the bearings company was among those expressing caution about certain markets. It said demand remained lower from commercial and general aviation customers and that it saw some weakness in the defense market.
Another note of caution came from Harsco (HSC.N). Its results beat estimates, and its stock rose, but the provider of construction equipment said conditions in its infrastructure business remain "very difficult."
Indeed, fewer U.S. manufacturing executives are optimistic about the U.S. economy. A quarterly survey by the PricewaterhouseCoopers consultancy found 33 percent feel optimistic about the next 12 months, down 10 points from the previous study. The percentage who describe the economy as growing fell to 27 percent, from 31 percent.
"Manufacturers are approaching spending and overall business decisions in a cautious and conservative manner, certainly in the short-term," said Barry Misthal, U.S. industrial manufacturing leader for PwC.
Corporate executives have said a lack of clarity on issues like taxes remains the key obstacle to stronger growth, even as they have largely stopped worrying about a renewed downturn.
"The good news is, we see no signs of any broad scale, broad-based double dip," 3M CEO George Buckley said on the company's conference call, but added that unemployment remains "the key to the puzzle particularly in the United States."
Overall, industrials' earnings results reflect a maturing economic recovery -- the U.S. recession officially ended more than a year ago -- so big profit gains are going to be harder to achieve when compared with last year's numbers, said independent analyst Brian Langenberg of Langenberg & Co.
"They simply get less easy, and if anything, the cyclical recovery is being delayed by the political and economic uncertainty surrounding the U.S. election."
U.S. President Barack Obama's Democratic party is expected to lose seats in the U.S. House and Senate in midterm elections next Tuesday amid voter frustration with persistent high unemployment and widening deficits.
The U.S. jobless rate is expected to stay at 9.6 percent when the government reports October payroll data next week.
(Editing by Derek Caney and Lisa Von Ahn)
BRUSSELS (Reuters) – The European Union signaled on Thursday it was ready to back calls by Germany and France for limited changes to the bloc's main treaty to shore up Europe's defenses against any new financial crises.
EU leaders were expected at a two-day summit to sign off on a new set of budget rules, including sanctions for states that fail to keep deficits and debt in check [ID:nLDE69I1FB], to help cope with any new sovereign debt problems like those in Greece.
Despite initial hostility to the proposals from Germany and France, the bloc's dominant powers, comments by leaders showed support was growing for changes to the Lisbon treaty so that a permanent system can be created to handle sovereign debt crises.
Some leaders oppose far-reaching changes, partly because amending a charter that took eight years to negotiate and became law only 10 months ago would struggle to win public support, but many said they would back limited changes if they were needed.
The leaders are aware that any sign that they are scaling back efforts to tighten budget discipline could unsettle financial markets worried by debt problems in euro zone countries such as Portugal, Ireland and Greece.
"I will make clear today that, in my view, a politics that puts the euro as a whole in danger, that brings the monetary union in danger, is a politics that also rocks the basic tenets of the European Union," German Chancellor Angela Merkel told reporters as she arrived at the EU headquarters for the summit.
"We need a mechanism that also includes banks and funds that earn high interest and that it is not just the taxpayer who has sole responsibility," she said, reiterating how she believes the permanent system should work.
She repeated calls for euro zone countries to have their voting rights suspended at meetings if they fail keep their budgets in check. But most other countries said this was unacceptable and the demand was expected to be blocked.
Germany wants limited treaty alterations to ensure there is a permanent and legally sound crisis-resolution system in place for countries that use the euro. It has threatened to block the budget reforms if no deal is reached.
Many of the EU's 27 member states see the logic in Germany's proposal and could support it in principle, but need convincing that a change to the treaty is needed to set up the mechanism, and want any agreed amendments to be narrowly defined.
Any change to an EU treaty must be approved unanimously and ratified by all member states, either in a vote of parliament or via a referendum. The European Parliament should also agree.
In a sign that momentum toward treaty change was growing, countries such as Finland, Greece, Sweden and Britain, along with Poland, Slovakia and Ireland, signaled they would support limited amendments, although Warsaw linked its support to a deal on pension reforms.
"The euro area needs a credible permanent crisis mechanism to ensure the financial stability of the euro area as a whole," said Finnish Prime Minister Mari Kiviniemi, whose country had said earlier this week it opposed such moves.
"If this new system requires treaty change, then treaty change should be done.
European Commission President Jose Manuel Barroso said treaty change could be discussed if it was needed to improve the EU's ability to respond to economic and financial crises.
France's European affairs minister, Pierre Lellouche, said in Berlin that countries were warming to the Franco-German position, which he called a gift to Europe.
MANDATE FOR COUNCIL, COMMISSION
EU sources said the leaders were expected to give a mandate to the Commission and to Herman Van Rompuy, the president of the EU Council which represents the member states' governments, to work out how the treaty could be amended.
"Van Rompuy will receive a mandate to talk to the 27 member states on the opportunity for a treaty reform. And the Commission will receive a mandate to explore the technical modalities of such a reform," a senior EU source said.
In an agreement struck in the northern French town of Deauville on October 18, Merkel and French President Nicolas Sarkozy said they wanted concrete treaty change proposals on the table before an EU summit next March.
Germany wants to have the changes in force before the 2013 expiry of the EU's temporary mechanism for handling the euro zone debt crisis, a 440-billion-euro ($600-billion) IMF-backed fund called the European Financial Stability Fund (EFSF).
The EFSF is taxpayer-funded and Germany fears it could violate a clause in the Lisbon treaty against bailouts. It has faced legal challenges in Germany's constitutional court.
Britain, which opposes any treaty amendments that could transfer more power to Brussels, has indicated it could back the proposal if it affects only the euro zone. Ireland said it hoped to avoid holding a referendum on treaty change.
(Additional reporting by Brussels bureau and by Stephen Brown in Berlin; Writing by Luke Baker and Timothy Heritage; Editing by Rex Merrifield and Sonya Hepinstall)
NEW YORK (Reuters) – Motorola Inc (MOT.N) made money from its phones for the first time in more than three years, helped by smartphones running Google Inc's (GOOG.O) Android software, and its shares rose 2 percent.
While analysts applauded the profit, which came a quarter earlier than expected, they questioned Motorola on how it would battle new competition once Verizon Wireless starts selling Apple Inc's (AAPL.O) iPhone -- widely expected in early 2011.
The sale of Motorola's Droid phones at Verizon Wireless has being largely responsible for putting the phone maker back on the map after years of losing out hugely to rivals.
Motorola, which plans to split itself in two early next year, said it would counter new competition with more marketing spending, diversifying its phone lineup with more mid-range phones and deepening ties with operators other than Verizon.
Sanjay Jha, co-chief executive and head of the phone unit, warned of first-quarter pressure due to competition and a typical dip in sales when the holiday shopping season ends.
But he was confident he can keep strong ties with Verizon, which has promoted Motorola Droid phones heavily.
"In our business we don't get assurances," Jha told Reuters, but added: "It's a matter of understanding the economics that drvie each of the partners. I believe Verizon will continue to support the Droid franchise."
Morgan Keegan analyst Tavis McCourt said investors were happy to hear Jha was at least planning for a Verizon iPhone, which he sees hurting Motorola sales for a quarter or two.
"We'll see how well they manage around it," he said. "They'll be impacted but ... there's plenty of business for Motorola to be profitable, despite the iPhone coming to more carriers."
Jha said full-year smartphone unit-sales would hit the high end of Motorola's previously announced target range of 12 million to 14 million.
This implies a fourth-quarter smartphone sales of as much as 5.2 million and likely means that concerns about rival devices such as the Galaxy Android phone from bigger rival Samsung Electronics Co Ltd (005930.KS) were overblown, McCourt said.
"There was some fear competition at Verizon had gotten fierce enough that Motorola wouldn't see the normal uptick in sales in Q4 but, it appears they will," the analyst said.
Since the end of 2006, Motorola has been losing out to rivals such as Apple, Nokia Corp (NOK1V.HE) and Samsung due to the lack of stand-out phones after its once-lauded Razr matured.
But in the third quarter, it shipped 9.1 million phones, including 3.8 million smartphones, which was ahead of the average expectation for 3.57 million smartphones, according to six analysts contacted by Reuters.
In the third quarter Motorola said its phone unit posted a $3 million operating profit, compared with a year-earlier operating loss of $183 million.
It promised its mobile phone operating profit would rise this quarter, despite an expected increase in marketing spending around new product launches.
Motorola's total third-quarter profit rose to $109 million, or 5 cents per share, from $12 million, or 1 cent per share, a year earlier. On an adjusted basis, earnings per share were 17 cents, compared with the analysts' average estimate of 11 cents, according to Thomson Reuters I/B/E/S.
Revenue rose 6 percent to $5.8 billion, compared with Wall Street expectations of $5.66 billion. It includes $871 million from the network equipment unit, which Motorola is selling.
Motorola expected fourth-quarter earnings per share of 14 cents to 16 cents from continuing operations. The forecast excludes items such as earnings from the networking unit, which it is selling to Nokia Siemens Networks.
Motorola shares were up 14 cents at $8.23 in midday trading on the New York Stock Exchange.
(Reporting by Sinead Carew; editing by Derek Caney, Lisa Von Ahn and Andre Grenon)