Industrial and capital good, secular trends balance macro difficulties

USA February producer prices 08 month 10 year

(Finance) – Slower global economic growth, including the looming risk of recession in the United States, will exert pressure on sales and margins for diversified capital goods companies (capital good in English) e industrial in 2023, although short-term operations will benefit from pent-up demand. This was stated in a new report from Fitch Ratings, which emphasizes that companies aligned with secular growth trends will be better positioned to amortize weaker demand.

Furthermore, the impact of a cyclical downturn will not be uniform across the sector. Fitch estimates one revenue growth at a “midsingle-digit” rate in 2023, driven by higher prices. Supply chain problems limit sales volumes, but the backlog is likely to provide a cushion in the event of a recession. Taking the United States into consideration, the research states that companies with exposure to cyclical end markets, such as Kennametalthey are more vulnerable to an economic downturn.

On the contrary, the companies exposed to secular growth trendsincluding the rise of electrification and the use of digital technology, should outperform in the short and medium term. Among the examples cited by Fitch are Carrier Global, Honeywell, Eaton And Hubbell.

THE EBITDA margins of companies in these sectors have largely recovered to pre-pandemic levels in 2021 and are expected to remain relatively stable in the future. “Companies have generally managed to raise prices to outweigh cost increases, albeit sometimes with a delay that temporarily put pressure on margins – the report reads – Most issuers showed a greater operational discipline in the last two years, which should moderate the decline in margins in the event of a decline. “

Finally, noting that M&A and share buybacks have accounted for more than half of the industry’s operating cash flow in recent years, Fitch says it sees “some risk that acquisitions could accelerate if a weak economy lowers current and high valuations. ”