Things are looking up for the UK's listed engineering firms.
"For the future, Britain needs an economy with less financial engineering and more real engineering" -- Former Business Secretary Lord Mandelson.
Britain's engineering firms have bounced back with a vengeance since Lord Mandelson's political soundbite of early 2009.
Furthermore, a spate of recent surveys and reports suggests the recovery is set to continue.
The big picture
The UK Manufacturing PMI (Purchasing Managers Index) for August reported an 11th successive month of growth, "consistent with ongoing recovery in the sector."
The third-quarter manufacturing outlook from the EEF (Engineering Employers' Federation) reported output and new order balances at record levels, "which suggests growth in manufacturing output should at least continue into the next quarter." The EEF's latest forecasts are for manufacturing growth of 3.7% in 2010 and 3.2% in 2011.
Similarly, the British Chambers of Commerce (BCC) is forecasting manufacturing growth of 3.3% this year, compared to 1.4% for services. The BCC's chief economist notes: "Manufacturing has been doing better than services for the last three quarters; we have not seen that for a very long time."
Engineering companies
Most of the companies in the Industrial Engineering sector of the FTSE All-Share index have reported interim results in the last month or so.
There's perhaps no better indication of how far engineering firms have come since the dark days of recession than the likely announcement on Wednesday evening that Weir Group, which listed on the stock market in 1946, will be promoted to the FTSE 100 for the first time in its history.
UK and overseas
As both the EEF and BCC note, the strong post-recession performance of manufacturing firms has been powered by weak sterling and rising demand in overseas markets.
Judging by the latest round of company results, there seems to be only muted concern amongst chairmen and chief executives about the international outlook, with the UK economy the main focus of boardroom edginess.
Weir, for example, noted that "conditions in the Canadian and UK general industrial markets remained challenging," but overall "strong trading reinforces our confidence for the remainder of 2010."
IMI, which, like Weir, makes only 7% of its sales in the UK, was similarly "optimistic that the momentum seen in the first half will continue for the remainder of the year."
Fenner, another firm with limited UK exposure, reported "sustained momentum" in a pre-close trading update this week, adding: "We anticipate full year results to be at the top end of our expectations for 2010. We enter the first quarter of our 2011 financial year with confidence."
Meanwhile, Melrose, with something over a third of group revenues derived from the UK, was not fazed by the prospect of fiscal tightening: "Although it remains difficult to gauge the eventual impact of government debt reduction measures, particularly in Western economies, we are confident that our businesses will see further progress in the remainder of this year and into 2011."
Even structural steelwork firm Severfield-Rowen, which not only does over 90% of its business in the UK, but is also exposed to the blighted construction sector, was not too disheartened in its interims. It was bullish about a new Indian joint venture, which will expand its geographical footprint.
Investment and employment
The EEF survey reported two other pieces of good news in the third quarter.
First, the balance of companies investing turned positive for the first time since the second quarter of 2008, the EEF's chief economist noting that: "recovery in investment has begun much earlier in the cycle than after previous recessions."
Second, the balance of companies recruiting almost doubled -- the strongest growth since the survey began in 1995.
At the company level, the mood is captured in Goodwin's recent full-year results:
"By the end of the first half of the financial year the Board, with a greater level of confidence that the Group's financial performance was not going to be damaged by the global recession, embarked on a further £4 million of capital expenditure … The Group has engaged recently a further 38 managerial employees to help cope with our continued growth aspirations over the next five years."
But… there's always a 'but'. The EEF's chief economist put it like this:
"We have to maintain perspective that the recovery is coming from a very low base and the risks to the economy in the medium term haven't gone away. The rebound in exports and modest improvement in investment will need to become much more firmly entrenched if we are to see a much-needed rebalancing of the economy."
From an investor's perspective, of course, if we wait until the recovery becomes more firmly entrenched, analysts will have raised their earnings forecasts and share prices will already have made their next big leg up.
The forecast price/earnings (P/E) ratios in the engineering sector don't look too demanding on the whole, particularly if you believe, as I do, that there's more caution and outright 'double-dip' anxiety baked into the analysts' earnings consensus than the latest news from business associations and boardrooms warrants.
In the longer term, if Vince Cable, the new Business Secretary, takes up Lord Mandelson's mantra with a serious industrial strategy, the future of "real engineering" in Britain could be brighter than it has been in many a decade.
More on the markets:
> G A Chester holds shares in Goodwin.
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