Results provide a lift

25 April 2008

Murphy's Law states, “Anything that can go wrong will go wrong,” and anyone watching oil prICes this summer probably believed this whole-heartedly. Tensions in the Middle East are nothing new, but they hit new highs with Israel's bombing of Lebanon. This combined with civil unrest and a spate of kidnappings in Nigeria, as well as a production shutdown on BP's Alaskan oilfield following a pipeline leak.

This all kept oil prICes resolutely above US$70 per barrel, whICh threatens higher inflation and, therefore, interest rate rises. Despite this and the consequent threat to corporate earnings, the stock markets gained a little ground in August.

The Dow put on 1.84% between weeks 30 and 34, while Japan's Topix 500 bounced back more strongly with a 5.05% gain. In the UK, the FTSE 100 was disappointing by contrast, with a 0.5% loss, but the lifting sector was good, with IC's Share Index rising 3.73%.

Looking back to this time last year adds more perspective. Although it has been a fairly tough season for share prICes, these four indICators remain well above their position 12 months ago. Most notable, of course, is the IC Share Index, whICh is up more than 50% on its position at the end of August 2005.

So it is not all doom and gloom, and the reason is that despite some tough times, corporate earnings remain resilient. In the crane sector Manitowoc saw its net earnings for the first half of the year climb 135% compared to the first six months of last year. It is also interesting to note that the company's crane backlog continues to rise - the second quarter saw it move up to US$1.1 billion- worth of orders, 13% higher than it was at the end of March.

Terex also saw a good improvement in profits, and a marked climb in its backlog. As of the end of June its crane segment had US$807 million worth of machines on order, compared to US$315 million a year ago.

Outlook

The fact that order backlogs continue to grow suggests that the crane industry has not yet reached its cyclICal peak. Profits should improve further as the manufacturers fulfil these orders, so share prICes clearly have the potential to climb. Both Terex and Manitowoc's backlogs represent about six months of production at the current pace, so things look good until the end of the year.

But there is a danger these positive drivers could be offset by the bigger geopolitICal problems in the world such as conflICt in the Middle East and the continuing pressure on oil prICes. Businesses have so far resisted these downward pressures but they could have a greater effect if economIC growth also begins to slow.•

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