NEW YORK & CHICAGO--(BUSINESS WIRE)--Depressed commodity prices and slower growth in China and other emerging regions continue to suppress demand for capital goods and other industrial equipment, according to Fitch Ratings.
Sales trends for diversified industrials and capital goods manufacturers were weak in 2015, with most companies reporting sales declines and many reporting steeper declines in the fourth quarter than in prior quarters. Lower sales reflect a combination of low or negative organic growth and the adverse effect of the strong dollar. Fitch expects sales and margin weakness will continue through 2016 and potentially into 2017, particularly in important end markets such as mining, oil and gas and agriculture and maintains its negative outlook for the diversified industrial and capital goods sector.
Amid this weakness, Fitch revised its Rating Outlook for Kennametal Inc. and Dover Corporation to Negative from Stable in December 2015 and February 2016, respectively. We see the potential for more negative rating actions, especially if low commodity prices persist. However, most Rating Outlooks are Stable as risks surrounding cyclicality are reflected in the ratings. Furthermore, there are areas of strength in certain business segments within commercial aerospace and construction in North America. However, downside pressures predominate, and there are few scenarios where Fitch sees strong positive trends.
Many diversified industrial companies continue to repurchase their shares, although at a reduced pace in some cases, while also pursuing acquisitions. Together with the effect of lower EBITDA, this may cause financial leverage to remain elevated for some issuers. Companies that have undertaken large share repurchases include CAT, Cummins Inc., Eaton Corporation plc, Parker-Hannifin Corp. and United Technologies Corporation (UTC). Fitch downgraded UTC by one notch to 'A-' in 2015 due to the company's increased focus on shareholder returns.
For more detailed information on this topic, please see our special report titled "U.S. Diversified Industrials and Capital Goods Handbook," dated January 2016, which is available on our website at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
U.S. Diversified Industrials and Capital Goods Handbook