By Scott Malone
BOSTON (Reuters) - With some of the United States' largest and most diversified companies ready to spell out their 2009 financial forecasts over the next two weeks, Wall Street is braced for bad news.
The question is how bad?
Investors expect many U.S. industrials to follow the lead of 3M Co
More job cuts are likely to be a key theme. Companies across all sectors of the U.S. economy, including Dow Chemical Co
A key worry for investors will be how order backlogs are holding up. Big-ticket capital goods such as jet engines, electricity-producing turbines and automation equipment are typically ordered months if not years in advance and industrial companies count on a backlog of orders to help smooth out results when the economy weakens.
"What are they seeing in terms of cancellations and how is the backlog holding up for projects that they've signed?" is a top concern of Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which holds stakes in GE, United Technologies and Honeywell International Inc
"If we're starting to already see large-scale cancellations and a rapid erosion of backlog, the stocks are definitely vulnerable for another leg down," Sorrentino said.
Industrial shares have been hit hard this year, with the Standard & Poor's capital goods industry index <.GSPIC> down about 46 percent, a steeper fall than the 38.5 percent slide of the broad S&P 500 <.SPX> and the 33 percent decline of the Dow Jones industrial average <.DJI>.
3M shares tumbled 5 percent on Monday after the company warned profit would fall next year.
LOWER GUIDANCE
Wall Street's expectations are already low ahead of outlook briefings from United Technologies, Danaher Corp
Analysts, on average, expect GE earnings per share to tumble 18.3 percent next year and Honeywell to fall 5.6 percent, according to Reuters Estimates. They look for United Tech EPS to grow 3.4 percent, ITT to rise 2.3 percent and Danaher to tick up 0.9 percent.
But even those forecasts may be too high, given the recessions in the United States, Japan and much of Europe, and fears that U.S. unemployment could near 10 percent next year.
"We sense that 2009 EPS forecasts are likely to be further trimmed by most companies," Sterne Agee analyst Nicholas Heymann wrote in a note to clients.
He forecast that, even in the wake of recent job cuts, major U.S. companies could slash payrolls another 20 percent next year as they make dramatic moves to cut costs.
Some observers have already warned aggressive job cutting could set off a self-reinforcing vicious cycle in the U.S. economy, which is highly dependent on consumer spending.
"Frankly, I hate to see it," Sorrentino said of the flurry of pink slips. "Typically, the first victim when you start doing layoffs is productivity, so in a way it almost amplifies the downward push on profitability when you get into this."
Another worry for the industrial sector is slowing demand in emerging markets, which had kept many diversified manufacturers on a growth footing even as the U.S. economy slowed over the past year.
"A recession among our trading partners has weakened the outlook for exports, which is one of the few remaining pillars providing positive support to the economy, particularly to the manufacturing sector," said Daniel Meckstroth, chief economist the Manufacturers Alliance/MAPI trade group.
MAPI forecast on Monday that U.S. manufacturing production would fall 4.2 percent next year.
While U.S. President-elect Barack Obama's plan for major investment in the nation's infrastructure, which sparked a rally in stocks on Monday, was a bright spot for the sector investors said the benefits of that plan might not be felt till the latter part of next year.
That leaves industrials facing an uncertain start to 2009.
"We would not be surprised if companies were to abandon quarterly EPS targets in favor of annual guidance updated quarterly," Deutsche Bank AG analyst Nigel Coe wrote in a note to clients.
(Editing by Andre Grenon)
