Asia lifts US manufacturers` profits, shares

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US industrial companies got a lift from sales in Asia in the latest quarter, and manufacturers like Emerson Electric Co and Cummins Inc posted better-than-expected results and set off a rally in industrial shares.

But while the companies highlighted growth in emerging markets like China, several said the prospects for recovery in Europe and the United States remained uncertain.

"The more exposure you have in (Asia), the better your numbers look, at least for now," said analyst Matt Collins of Edward Jones in St. Louis. "China's stimulus was put together better than ours was and is helping to drive capital spending in the region."

Emerson's earnings and revenue beat Wall Street estimates as the industrial conglomerate benefited from strength in emerging markets and cost cuts.

The St. Louis-based company also forecast 2010 earnings above analysts' average estimate, and its shares jumped 8% to USD 45.85.

"Emerson nailed it," Collins said. "The quarter put the prospects for 2010 earnings growth back on the table."

The company rarely surprises with higher-than-expected revenue, he added.

Profit margins improved in three of Emerson's five units, but sales were higher in only one: climate technologies. In Asia, sales jumped 52% in that business, which is considered an early-cycle segment because of its exposure to industries like housing and transportation.

Cummins' quarterly earnings also beat estimates, lifted by sales of engines and power generation equipment in the developing world. Cummins shares rose 7% to USD 50.21.

The company said it expects sales in China and India to return to pre-recession levels in 2010, with solid growth also expected in Brazil. But it said conditions in the United States and Europe would remain "extremely challenging" in the first half of the year.

Coast cut's don't cut it

"We're at the point now where we're about growth," said Jeff Markunas, lead manager of the RidgeWorth Large Cap Core Equity Fund. "Simple cost cutting to drive better EPS is not being rewarded by anyone this quarter, so for these industrials it's time to show bottoming and reacceleration."

Markunas said the opportunity for investors in cyclical stocks - those that move up and down with economic cycles - was to find companies able to grow earnings during a recovery at a faster pace than investors currently expect, whether because of their mix of products or because they are exposed to the right markets.

"The question for Emerson and for all these guys is, what's the trajectory of earnings power in recovery, and how much of that is above or below consensus," he said. "A number of cyclicals have the opportunity to leverage larger in recovery than people are expecting."

Markunas' fund owns shares of Emerson, United Technologies Corp, Eaton Corp and Goodrich Corp.

The earnings season has done little to change views about the pace of economic recovery, and important uncertainties remain. It is not yet clear what will happen to the recovery once the US government begins to withdraw stimuli such as the housing tax credit. Also, Asia could overheat, Markunas said.

Beating expectations

Bearings maker Timken Co reported sharply better-than-expected fourth-quarter earnings before special item and forecast a rebound in 2010 profit. Industrial equipment maker Pentair Inc also beat Wall Street expectations and raised its forecast.

Timken cited expected strength in Asia as a potential driver of its 2010 forecast for earnings growth of 5% to 10%.

"Sales in the process segment are expected to be up slightly as growth initiatives in energy and Asia more than offset declines in other areas," the company said in a statement.

Timken shares were up 1.3% to USD 24.40, while Pentair rose 1.2% to USD 31.72.

Pentair, a maker of water filters, electrical enclosures and other industrial equipment, said global electronic sales were down 7% as growth in Asian markets could not overcome declines in North America and Europe.

Thomas & Betts Corp shares also rose, gaining almost 3% to USD 35.44. The electrical components maker also topped profit expectations, helped by cost cuts, but said pockets of growth in some markets were being offset by weakness in others.