By Robert McCutcheon, Partner, US Industrial Products Sector Leader
Companies in the industrial products (IP) sector generally did well in 2013. Environmental factors in the United States helped the manufacturing sector achieve record-breaking after- tax profits. This profitability was in large part due to cost control rather than robust demand. While auto sales were up and the housing market improved in some areas, the partial government shutdown and the ongoing sequester reduced the country’s growth rate and muted consumer spending. But US manufacturers were able to hold down their costs on fuel and labor. The significant increase in shale oil and gas production provided lower-cost fuel alternatives, and high unemployment and productivity gains put a lid on domestic wage growth.
The revival of the manufacturing sector has led to a feeling of optimism among CEOs of IP companies about their near-term prospects. A whopping 82% said they expect positive revenue growth for their companies over the next 12 months; only 2% forecast negative growth. The CEOs expect much of the growth to come from the domestic economy, especially since the euro zone is still experiencing low demand, high unemployment, and internal conflict. Companies are primarily focusing on growth through major capital investments, new product/service introductions, and new joint ventures and strategic alliances. (See our Manufacturing Barometer for details.) In addition, the majority of IP companies are planning to increase hiring over the next year.
An uptick in recent deal activity also reflects optimism about the US. Our latest report on M&A activity for IP companies showed a 23% increase in value from the prior quarter. But, indicating caution about the global economy and a sustained but modest US growth rate, deal volume was flat and most deals were small and middle market transactions in the domestic market. Strategic investors rather than financial investors were the primary drivers of deal activity, reflecting a focus on longer-term investment opportunities.
Question to consider: What’s your view on how the industrial products industry fared in 2013?