(Bloomberg Opinion) -- Soothing words on the economy were in short supply on a jam-packed day for industrial earnings reports on Tuesday.
General Electric Co. and 3M Co. both technically left their full-year guidance for their underlying businesses intact but buried the outlooks in a grab bag of concerns. Executives insist that demand remains healthy. “I can’t say that an industrial recession is high on my worry list today,” GE Chief Executive Officer Larry Culp said in an interview. Concerns about rising interest rates and China’s Covid policies are understandable, but “we don’t have a demand challenge. We have a challenge fulfilling those customer requirements.” Still, both GE and 3M used the words “uncertain” and “uncertainty” liberally during their earnings calls, and the tone was more tempered than it was in January, when industrial companies broadly predicted an easing in supply chain and inflation pressures as the year progressed.
At GE, inflation, lingering supply chain disruptions and the impact of Russia’s invasion of Ukraine are weighing on earnings and cash flow, and the company is now trending toward the low end of its outlook. GE also flagged the burgeoning Covid lockdowns in China as an additional watch item, particularly for its aviation and health-care businesses. A loss of $434 million for the renewable energy unit in the quarter amid rising costs and lower volumes is particularly outsize relative to the company’s forecast for a $500 million to $700 million loss for the entire year, and GE now expects to fall short of that target. Barclays Plc analyst Julian Mitchell called out the surprising lack of share repurchases in the first quarter despite a $3 billion authorization announced in early March and recent weakness in GE’s stock price.
“Inflation pressures have become more acute in certain areas,” Culp said on the company’s earnings call. The company is “watching closely what happens here in China. We know we were hit both from a demand and from an output perspective in the first quarter with the lockdowns, particularly in and around Shanghai. How that plays out isn’t something we have a handle on. I don’t think anybody really does.”
3M, meanwhile, said that its expectations for automotive and smartphone production this year had weakened amid continuing semiconductor shortages and geopolitical knock-on effects and that industrial production and gross domestic product gains broadly would be more sluggish than previously anticipated. Overall, supply chain constraints have worsened since its guidance call in February, as has raw material and logistics inflation, 3M said. Staff shortages and patient cancellations are also crimping the outlook for elective health-care procedures in the U.S., pressuring demand for 3M surgical products. Overall, sales in April are off to a “slow start,” Chief Financial Officer Monish Patolawala said.
Raytheon Technologies Corp. outright lowered its revenue guidance because of the impact of global sanctions on Russia on its commercial aerospace businesses. The company should benefit in the long run from increased defense spending among members of the North Atlantic Treaty Organization, but those dollars don’t magically appear overnight on income statements.
The cautious messaging contrasts with the more optimistic tone sounded by industrial companies that reported results earlier in the earnings season, including most of the U.S. airlines, distributor Fastenal Co. and railroad CSX Corp. But as Nigel Coe of Wolfe Research commented on Monday, “early reporters tend to be early in the queue for a reason.” Distributors, for example, have a long history of successfully pushing through price increases to manage inflation, and because they’re in the business of supply chain management, they have navigated the choppy environment better than most. The sour tone is also notable because many of the worry points are on the industrial side of the economy.
There will naturally be a slowdown in consumer purchases of physical goods after two gangbuster years of spending. To that end, 3M’s consumer unit — which sells everything from Post-it notes to Scotch tape — reported organic sales growth of 3.4%, compared with a 4.9% pace in the fourth quarter and 7.8% a year ago. United Parcel Service Inc. also reported results on Tuesday. While the parcel delivery company continued to benefit from price increases and a focus on higher-paying small businesses, total U.S. domestic package volume declined 3% in the first quarter — a sign that consumers are venturing back to stores or perhaps spending a bit less on goods as they return to move theaters, restaurants and concert venues. But there has been some debate recently as to whether the trendline on industrial expansion might diverge from the consumer and stay more positive. Tuesday’s results test that argument and indicate that at best it needs to be narrowed.
Manufacturing companies that are focused primarily on the relatively insulated (for now) U.S. economy will likely fare better than those with more global businesses, complex supply chains and greater exposure to currency swings. There will likely still be bright spots: Supply chain pressures and labor shortages will continue to encourage spending on factory automation; the aviation recovery has further to go; and the impact of the geopolitical disruptions on energy prices will be a boon to the oil and gas sector. But for the sector writ large, the macroeconomic noise may simply be too loud for selective optimism around certain markets to gain much traction.
In these times of geopolitical uncertainty, it’s not particularly helpful that these companies keep adding their own idiosyncratic complexities to their results. 3M, for example, said it was changing its definition of adjusted earnings to back out certain “significant” litigation and environmental cleanup costs. The company’s efforts to remediate legacy manufacturing and disposal of per- and polyfluoroalkyl substances (PFAS) at a Belgian factory dragged down its unadjusted earnings per share by 26 cents. Portions of the facility have closed amid scrutiny from local officials, creating rippling disruptions throughout its business. Litigation costs — including 3M’s defense against claims by military veterans that it knowingly sold defective combat earplugs — took another 13-cent bite out of profits. Theoretically, separating out these liabilities and their impact on earnings creates a cleaner picture of the underlying business, but they are an eyesore and a reminder of 3M’s massive (and growing) legal headaches. GE, meanwhile, took an $800 million writedown related to the divestiture of its steam power business, $200 million of charges related to the impact of Russia’s invasion of Ukraine and global sanctions and another $200 million impairment related to a runoff portfolio of Polish mortgages.
This was always likely to be a messy earnings season, but companies aren’t giving investors much reason to look through the chaos to better days ahead.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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