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U.S. Diversified Industrials Begin to Recover but Face Risks to Credit Improvement, Fitch

July 14, 2017, 07:49 AM
Filed Under: Economic Commentary

As the diversified industrial and capital goods sectors begin to recover, there are a number of risks to credit improvement, according to Fitch Ratings. These include mergers and acquisitions, activist investors, shareholder-friendly actions, and the potential for ongoing weakness in certain end-markets. Other factors that will affect credit profiles include the performance of captive finance companies, potential changes in tax and trade policies, slowing growth in China and digital strategies. Each of these topics has been the focus of attention in Fitch's recent meetings with investors.

Fitch expects U.S. diversified industrial companies will see improving sales growth in 2017 following sales declines in 2015-2016. Prospects for capital goods companies that produce machinery and engines are also improving, but at a slower pace.

The pace of improvement depends on each company's exposure to particular end-markets. Markets that have outperformed include commercial aerospace, North American residential and nonresidential construction, and autos, which should remain strong throughout the current year. Weak end-markets include heavy-duty trucks, rail, agriculture, energy and metals/mining. However, if recent favorable order trends continue in some of these sectors, revenues could begin to recover, albeit from low levels following an unusually deep commodity downturn.

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