Manufacturers’ stock prices take a beating
Business Courier of Cincinnati - by Jon Newberry Staff Reporter
Investors might be leery of financial stocks, for good reason, but they seem to be abandoning shares of Cincinnati-area manufacturing companies, especially those whose fortunes are closely tied to a teetering global economy.
AK Steel and General Cable Corp. had been until recently two of the best-performing stocks in the country over the past five years. Both now have fallen more than 75 percent from their 52-week peaks. Ashland Inc. and LSI Industries Inc. aren’t far behind, and even mighty General Electric Co. and Toyota Motor Co. – which have major divisions headquartered locally – are off by about half.
The causes of the precipitous fall in stock prices include the same factors that earlier had propelled some of the stocks to all-time highs – global supply and demand, and the foreign exchange value of the dollar – as well as investors seizing a chance to take profits where they can before the opportunities evaporate.
Nat Kellogg, a cable industry analyst with Next Generation Equity Research LLC in Chicago who follows General Cable, said its stock price had fallen to “ridiculous” levels, largely driven by investor fears and a strengthening dollar that will cut into dollar-denominated profits from foreign sales. Following recent acquisitions, foreign sales now make up about two-thirds of the Highland Heights company’s business.
“Things have gotten kind of haywire,” Kellogg said. “I thought anything under $40 was a great value for General Cable, and I thought anything under $30 was ridiculous. This is a company with over $6 billion in revenue, and its market cap is down to something like a billion. When you think about that value, it just doesn’t seem to add up to me.”
‘This is a global issue’
At AK Steel, which has little direct exposure to foreign markets, the problem is imports.
Spokesman Alan McCoy said the latest data already show some increase in steel imports, which hurts domestic prices, and that’s expected to get worse as the dollar strengthens.
China, meanwhile, owns one-half of the world’s steel production capacity, he said, and when its domestic demand goes up or down just a few percentage points, it creates broad ripples on international markets.
“This is a global issue,” McCoy said.
On the other hand, AK Steel has decreased its exposure to the automotive industry in recent years, from nearly 60 percent five years ago to “a little more than 30 percent” in the first six months of 2008. At the same time, it has invested in capacity to make higher-margin specialty products such as electrical steel.
In one sign of sagging global demand, AK Steel on Oct. 6 announced that its November surcharges for electrical steel would be $632 per ton, down from $940 per ton in October and $1,040 in September. Those surcharges are based on the prices it pays for the materials and energy it uses to make the steel. Investors are interpreting falling commodity prices as a sign that demand also will fall for steel. Steel stocks began tumbling a few weeks ago following reports that large steel companies were cutting production in an effort to maintain prices.
McCoy said it was premature to talk about job cuts and said the company has not talked publicly about any plans to reduce production. He noted that it’s getting ready to announce its financial results for the three months that ended Sept. 30. Presumably, it will have more to say publicly about its outlook then.
Milacron’s problems
Elsewhere, Milacron Inc. recently laid off about a dozen production workers at its plant in Afton, east of Batavia, that makes plastics-processing machinery. The job cuts were the first in months by the struggling firm, and they were related to business conditions rather than the financial markets, Milacron spokesman Al Beaupre said.
The company had shifted into a cost-cutting mode long before problems arose in the financial markets. It announced in June that it is moving out of its Walnut Hills headquarters along Interstate 71 and relocating corporate functions to Afton. The move is expected to take place by mid-November.
At Ashland, spokesman Jim Vitak said the financial crisis should have no direct impact on Ashland’s Cincinnati-area operations, which include its corporate headquarters in Covington that employs “less than 100” people and a Valvoline packaging plant in Riverside. It’s also had no impact on its pending acquisition of specialty chemical producer Hercules Inc., whose shareholders are scheduled to vote on the $3 billion deal on Nov. 5.
If it is approved, shareholders are to get $18.60 in cash and almost a tenth of a share of Ashland stock for each share of Hercules. Ashland’s stock is worth a bit more than half as much as when the deal was announced, but it’s a relatively small piece of the overall price. And financing already was arranged.
“We’ve got confirmed financing. That’s still in place,” Vitak said.
The deal was approved by competition regulators in Europe this week, and it is scheduled to close by the end of the year.
Investors can only hope the rest of the global manufacturing economy continues to function smoothly. So far, the fallout has not had much of an impact on local jobs.
GE Aviation is contending with a monthlong strike by machinists at Boeing, but that hasn’t affected engine deliveries yet, said spokesman Rick Kennedy.
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