U U S S I I N N D D U U S S T T R R Y Y M M O O N N I I T T O O R R 2011 First Half Issue April 1 2011 【OVERVIEW】U.S. Industries steadily improving. Rising commodity prices are a concern The U.S.economy in the second half of 2010 steadily improved; the GDP growth rate was +2.6% in the third quarter and +3.1% in the fourth quarter. In addition to solid consumer spending reflecting improving stock market, favorable levels of capital investment are maintained predominantly in the machinery industry benefited by strong demand from emerging countries and in the IT sector bolstered by corporate equipment replacement demand. As a result, some companies are reporting earnings above the levels achieved before the Lehman Shock. Nevertheless, on top of some lingering negative factors such as challenging labor market and weak housing market, commodity prices (e.g., crude oil and grains) are rising attributable to demand expansion in the emerging markets as well as the political unrest in the Middle East and North Africa. Going forward, the impact of such factors to the consumer spending and corporate earnings is a concern. The processing and assembly sector remains solid. The U.S. light vehicle sales for 2010 increased to 11.6 million units, and 2011 light vehicle sales are estimated to exceed 13 million units. The machinery industry is expected to remain on the recovery track due to inventory rebuilding. In the electronics industry, while the sales of high-end mobile devices remain favorable, the growth in PC sales may slow down as cloud computing becomes widely adopted. In the materials related sector, rising commodity and fuel prices are exerting downward pressure on corporate profits; the key to maintaining favorable corporate performance seems to be how well the companies are able to pass on rising commodity prices to their products and services. Meanwhile, the energy industry is expected to remain favorable for the time being bolstered by rising crude oil prices. In the non-manufacturing sector, the retail industry is holding firm into 2011 after reporting favorable holiday sales. However, the impact of rising gasoline and food prices on consumer sentiment should be closely monitored. In the office market, vacancy rate and office rents are showing signs of improvement in Manhattan; the market is expected to remain on the recovery track going forward. On the other hand, the homebuilding industry is expected to remain weak for a while considering stubbornly challenging labor market and rising foreclosures.
Transcript
UUSS IINNDDUUSSTTRRYY MMOONNIITTOORR 2011 First Half Issue
April 1 2011
【OVERVIEW】U.S. Industries steadily improving. Rising commodity prices are a concern
The U.S.economy in the second half of 2010 steadily improved; the GDP growth rate was +2.6% in the third quarter and +3.1% in the fourth quarter. In addition to solid consumer spending reflecting improving stock market, favorable levels of capital investment are maintained predominantly in the machinery industry benefited by strong demand from emerging countries and in the IT sector bolstered by corporate equipment replacement demand. As a result, some companies are reporting earnings above the levels achieved before the Lehman Shock.
Nevertheless, on top of some lingering negative factors such as challenging labor market and weak housing market, commodity prices (e.g., crude oil and grains) are rising attributable to demand expansion in the emerging markets as well as the political unrest in the Middle East and North Africa. Going forward, the impact of such factors to the consumer spending and corporate earnings is a concern.
The processing and assembly sector remains solid. The U.S. light vehicle sales for 2010 increased to 11.6 million units, and 2011 light vehicle sales are estimated to exceed 13 million units. The machinery industry is expected to remain on the recovery track due to inventory rebuilding. In the electronics industry, while the sales of high-end mobile devices remain favorable, the growth in PC sales may slow down as cloud computing becomes widely adopted.
In the materials related sector, rising commodity and fuel prices are exerting downward pressure on corporate profits; the key to maintaining favorable corporate performance seems to be how well the companies are able to pass on rising commodity prices to their products and services. Meanwhile, the energy industry is expected to remain favorable for the time being bolstered by rising crude oil prices.
In the non-manufacturing sector, the retail industry is holding firm into 2011 after reporting favorable holiday sales. However, the impact of rising gasoline and food prices on consumer sentiment should be closely monitored. In the office market, vacancy rate and office rents are showing signs of improvement in Manhattan; the market is expected to remain on the recovery track going forward. On the other hand, the homebuilding industry is expected to remain weak for a while considering stubbornly challenging labor market and rising foreclosures.
Table of Contents
Industry Indicator Latest Data Page
Automobile 1. Car Sales / Production Jan 2011
Machinery 2. Machinery New Order Dec 2010 2
3. PC Shipment 4Q 2010 Electronics
4. Semiconductor Shipment Dec 2010 3
Steel 5. Steel Price/ Production / Import Dec 2010
Chemical 6. Ethylene Price Jan 2011 4
Paper 7. Paper Price Feb 2011
Pharmaceuticals 8. Pharmaceuticals Shipment Dec 2010 5
Retail 9. Retail Sales Jan 2011
10. Railroad Traffic 3Q 2010 6
Transportation 11. Airline Revenue Passenger Miles Dec 2010
vehicle sales rose +11% y/y in 2010 to 11.6 million units. What’s encouraging was that the 4Q/10 tally exceeded 12 million units on an adjusted annualized basis, and retail sales, as opposed to fleet sales, bolstered sales in the 4Q/11. This suggests that consumers have finally returned to showrooms after sitting on the sidelines for two years and delayed vehicle purchases. Major automakers saw solid volume increase with less incentives, better mix and higher transaction prices.
With improved credit availability and better consumer confidence, US light vehicle sales are projected to top 13.0 million units in 2011, although the sales level will remain well below what was considered normal prior to the recession. Meanwhile, a big spike in gasoline prices is raising questions about how the industry's recovery could be affected. Potentially, higher gas prices could slow the industry sales recovery, but automakers with a well-received lineup of fuel-efficient models should be
(Source: Ward's AutoInfoBank) (In Units: Thousand, %)
able to deflect some of the blow. Light vehicle production in the NAFTA region, including the US, Canada and Mexico, surged +39% y/y in 2010 to 11.9 million units, after plunging -32% y/y in 2009. Inventory restocking in early 2010 and strong export demand (+53% y/y) contributed to the uptick. During 2010, 16% of vehicles produced in North America were shipped to overseas market, up from 14% in 2009, while imports declined sharply as Japanese automakers shifted some of their production to North American facilities in order to counter the rising yen. Light vehicle production is projected to increase by 8-9% in 2011 to about 12.8 million units.
. Machinery Order Forecast: Inventory rebuilding to continue to drive growth in demand
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Machine orders remained strong in 2H/10, rising +22% y/y. The industrial (+49%), construction (+79%), machine tool (+24%) and power (+43%) segments showed the fastest rates of growth. The +79% increase in construction machinery orders was particularly stunning, as it was achieved despite a -23% decline in non-residential construction activity. Efforts to rebuild inventories by equipment distributors and rental companies were responsible for the growth in construction equipment orders. Inventory rebuilding has also been a key factor in other machinery segments.
Growth in orders of new machinery should remain healthy in 1H/11, thanks to the expected expansion in industrial production and the continued need to restore inventory levels. In the construction sector inventory related purchases of equipment should remain a positive force at least until late 2011.
North American Light Vehicle Production
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3. PC Shipment Forecast: Moderating, but still strong growth
Global PC shipments moderated to +2.7% y/y unit growth during 4Q/10 after increasing +13.6% y/y during all of 2010, according to IDC.
2010 growth was driven by healthy consumer demand (particularly in emerging markets) along with an enterprise refresh cycle.
Slowing growth during the end of the year was certainly a function of lost share to media tablets (specifically Apple’s iPad which represents ~90% of the market) taken with difficult y/y comparisons.
PC share loss to tablets was most notable in the US where 4Q/10 PC unit sales were off -4.8% y/y.
The global media tablet market grew 45% during 3Q/10 (latest data) with 4.8MM units shipped during that time according to IDC. 2010 unit sales are expected to come-in at 17MM before ramping-up to 45MM this year and 71MM during 2012 (compared to 92MM PCs shipped during 4Q/10).
In general, both consumers and enterprises enjoy more computing options as phones and tablets become more powerful and functional – this represents a secular headwind to long-term industry sales. This is especially true as cloud computing becomes more prevalent.
IDC expects high single-digit global growth during 2011 (back-end loaded) which seems reasonable to us given still strong PC fundamentals in emerging markets and from ongoing enterprise refresh offset by prospects of steadily ramping tablet share losses.
4. Semiconductor Shipment Forecast: Moderate single digit growth for 2011
(Source: Semiconductor Industry Association) (Unit: Billion Dollar, % )
According to the SIA, global chip sales grew +32% y/y during 2010 to $298B while Q4/10 sales increased +12% y/y as the recovery shows signs of moderation.
During 2010, geographical y/y sales growth was as follows: Americas +39%; Europe +27%; Japan +22%; Asia Pacific +34%. Notably, Asia Pacific represents 54% of the global market (the home to most of the world’s electronic manufacturing) while the Americas drive just 18% of total sales.
2010 chip growth has been broad-based, with all semiconductor product categories showing double-digit growth. The SIA attributes strong growth to the growing penetration of chips in electronic products.
Intel reported revenues increased +24% y/y during 2010 and +8% y/y during 4Q/10. Further, the company reported that its 2010 gross margin increased 10% to 66% which reflects sales leverage.
During 2010, Intel’s segment sales y/y growth was as follows: PC Client Group +21%; Data Center Group +35%; other Intel architecture group +27%; Atom microprocessor and chipset +8% (slowing netbook sales hurt by tablet share gains).
SIA forecasts moderate single digit 2011 growth which coincides with our expectation for reasonable electronic end-product demand this year after the 2010 rebound.
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5. Steel Price, Production / Import Forecast: Sustainability of price hikes questioned as scrap prices fall and restocking decelerates
(Source: AISI, Purchasing) (Unit: Million Tonne, US$/t)
US steel mills produced 89 million tons of steel in 2010, up +38% from 64 million tons in 2009. Full-year capacity utilization in 2010 averaged 70% compared with 52% in 2009. Steel production continued to improve in January 2011 to 7.3 million tons (+13% y/y), at a utilization rate of 72%. Better utilization was primarily a function of the end of destocking. Both service centers and end-users started restocking in early December on the back of modestly improved demand in auto, energy, agriculture, and heavy equipment, although key non-residential construction has lagged.
Better utilization also came in response to higher prices. Hot-rolled prices were quoted at high-$800/ton in February, after steelmakers had increased prices six times since early November. Supply limitations due to weather-related mill disruptions, supplemented by scrap shortages, and the surging costs for other raw materials, such as iron ore and coal, were cited as the driving forces behind the price hikes. Still, with scrap prices sliding and new supply coming, many steel buyers doubt the market is strong enough to allow further price increases.
Steel imports rose +23% y/y to 2 million tons in January 2011, and import penetration of finished steel in January inched up to 21%. Key finished steel products with significant import increases were rebar (+44%), wire rod (+34%), and oil country tubular goods (OCTG). Price hikes announced by domestic mills and their lean inventories created a short window of opportunity for imports in January, despite a weak US dollar, which generally discourages steel imports. However, given shorter lead time in the US and rising prices for imports, no meaningful pickup in import levels is expected.
Despite abundant supply of low-cost natural gas produced from shale, ethylene prices firmed up in 2H/10 on stronger demand and higher operating rates (currently close to 84%).
Surging oil prices, will lead to higher ethylene prices, as feedstock generally accounts for about 80% of total ethylene production cost. Since U.S. natural gas prices will remain low due to further growth in shale gas production, ethylene margins of U.S. ethane-based producers will widen.
Incremental ethylene capacity will be added at a modest pace in the next 3-4 years, following 2010’s large capacity expansion in the Middle East and Asia. With demand growth outstripping supply, global operating rates will rise.
Newly, the tumult in North Africa/Middle East threatens to cut short the global economic recovery. Should this occur, ethylene producers’ operating rates would decline rather than rise, putting pressure on both ethylene prices and margins.
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7. Paper Price Forecast: Stable pricing likely in the absence of input cost pressures
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Prices for major paper grades were essentially flat in 2H/10. In the uncoated freesheet (UFS) segment, the secular migration of demand from paper to electronic media offset cyclical growth and UFS consumption was down almost 2% in 2010. In the beleaguered newsprint segment a drop of nearly -6% in domestic demand was partially offset by strong export shipments (mostly to India). Containerboard demand has been relatively firm, rising over +3% in H2/10. However, with consumption levels still almost 10% below their peaks of 2006, supply has remained ample.
Currently supply and demand for major paper grades appear fairly well balanced thanks largely to continued supply discipline on the part of major producers. A number of paper companies have proposed price increases for early April. However, in the absence of a significant tightening in pulp prices or input costs there will likely be resistance to price hikes. Energy costs for paper producers are driven by natural gas, where prices are expected to remain relatively low.
8. Pharmaceutical Shipment Forecast: Patent expiries will drive decline in pharmaceutical shipments
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Although pharmaceutical shipments returned to growth in 2H/10, their level for all of 2010 declined for the second year in a row.
While last fall’s shipment recovery was aided by slowly receding levels of unemployment, allowing more people to fill their prescriptions, increased consumption in the U.S. entailed mostly low-priced generics. Branded drugs’ market share of total prescriptions slid from 25.5% in 2009 to 22.6% in 2010 and their dollar sales share slipped from 76.9% in 2009 to 74.7% in 2010.
While last year’s imports rose by +5.2%, exports rose by a meagre +1.9%, reflecting the fact that the majority of prescription drugs is manufactured overseas (e.g., Pfizer’s blockbuster Lipitor in Ireland). Major companies’ foreign sales benefited from the slide in the value of the dollar vis-à-vis the Euro and the British pound, which offset Europe’s restrained pricing due to its budgetary austerity measures.
2011 will be a difficult year for the industry, due to its loss of patent protection on more than 10 blockbusters with combined sales of nearly $50 billion. Generics will be the main driver of companies’ sales, fuelling further declines in domestic shipments.
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9. Retail Sales Forecast: Slow recovery continues, but rising gas prices could sap shoppers' spending in the spring
(Unit: Billion US$, %)(Source: U.S. Census Bureau)
According to Census data, total retail sales grew by +8% y/y in January 2011, which put the m/m total up +0.5%, marking a seventh straight monthly increase. While vehicle sales were relatively strong in January, sales of other big-ticket items, such as furniture and appliances, softened in the post-holiday season. Sales also dropped at apparel retailers and books/music stores. The biggest increase in sales came from gas stations (+1.4% m/m) due to rising fuel prices. Excluding gas and auto, retail sales rose a meager +0.3% m/m in January 2011. Department store chains showed sales gains (+0.5% m/m) after running into negative territory in December. Sales also rose by +1.4% m/m at grocery stores and by +1.2% m/m at online/catalog retailers.
Overall, retail sales gathered steam late last year and continued on a growth path to make a moderate start to 2011. Since the recession ended in June 2009, retail sales have advanced +12% and surpassed pre-recession levels by +0.4%. However, sales at some segments, including car dealers, furniture and appliance stores, building material stores, women’s apparel stores and department stores, have not returned to their pre-recession levels. Conversely, sales at online retailers and warehouse clubs/ supercenters have gained +28% and +11%, respectively, since the start of the recession in December 2007.
The recent gains in the stock markets and a Social Security tax cut that began in January are expected to contribute to sales growth, especially at retailers serving higher-income households. However, rising gasoline and food prices could dampen spending by the lower-income segment in the months ahead.
10.Railroad Traffic Forecast: Freight traffic growth to remain healthy despite severe winter weather
Railroad freight traffic growth expanded at double-digit rates in 2H/10. Growth was broad-based with automotive related sectors – motor vehicles, metals and metallic ores – continuing to lead the way. Intermodal business (up +14% in 2010) also remained an area of strength for the large railroads. Coal shipments recorded slow but positive growth (+3.7%) in 2H/10.
Severe winter weather experienced in early 2011 will have a moderate negative impact on Q1/11 shipments. The Chicago snowstorms significantly disrupted intermodal traffic flows from West Coast ports to Eastern population centers, and poor weather in other regions slowed train speeds generally. However, most of the lost volumes should be recovered in Q2/11. Railroad intermodal shipments should continue to benefit from the overall strength of freight demand and strong flows of containers into West Coast ports. In addition, the rails should win business from trucking companies, who are facing more stringent driver regulations.
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11. Airline Revenue Passenger Miles Forecast: Continued growth in air traffic likely, but rising fuel costs pose a threat
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Growth in revenue passenger miles (RPM) for U.S. airlines was +5.4% in 2H/10 as passenger demand continued to respond to the improved economic environment. Growth in international demand (+8.2%) was twice as fast as domestic growth (+4.1%). U.S. legacy carriers (LC) have been focusing resources on international routes, where competition is less intense and profit potential is greater. At the same time LCs have been exiting domestic routes where low-cost carriers (LCC) have strong positions. This is reflected in LCC RPM increase of almost +9% in 2H/10, which compares to the less than +2% growth for LCs. Carriers have kept capacity growth below the increase in demand, which has given pricing power to the airlines.
Air travel demand should remain firm in both business and leisure markets over the next six months leading to continued solid growth (6-12%) in airline RPM. Carriers should continue to take advantage of their pricing power to pass on increased fuel costs to passengers. However, if fuel prices continue to rise and approach their 2008 peaks, fare increases could result in significant demand destruction later in the year.
During 2010, US wireless service revenues grew +6% which represented a combination of +24% in data revenues and -0.4% in voice revenues.
During 4Q/10, total US revenues grew +7% (+23% data & +0.7% voice). National carrier ARPU fell -0.3% during 4Q with data ARPU growth of +16.5% not able to totally offset a voice ARPU decline of -7.5%.
In terms of subscribers, total customers grew +9% during 2010 (+4% postpaid and +24% prepaid).
Data services revenue growth reflects an increasing penetration of smartphones/integrated devices as carriers continue to market these premium phones which drive incremental data plans.
Conversely, peaking sub penetration rates (~96%) aggravated by family plan price competition and an increasing sales mix of cheaper prepaid phone plans has been pressuring the industry’s voice revenues.
Notably, growth in higher-end phones and accompanying data plans does entail higher costs in the form of expensive subsidies for these phones coupled with increased network capex as the carriers compete on 3G/4G network quality and coverage.
Resultantly, national carrier operating margins declined 40bp y/y to 36% during 4Q/10.
Notably, Verizon finally rolled-out its iPhone offering in February 2011 thus ending AT&T’s long held US exclusivity on this hugely popular smartphone. Analysts expect Verizon will sell 10MM iPhones for 2011 (25% of which will come from AT&T). From an industry perspective, Verizon’s addition of the iPhone should help drive overall growth.
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13. U.S. Offshore Rig Utilization / Dayrates
Forecast: Lower utilization and lower jackup dayrates. Floater dayrates should stabilize.
Utilization declined to 48% by the end of the 2H/10 from 57% a year earlier as the supply of rigs ticked up to the highest levels since 4Q/07 against a backdrop of declines in contracted rig demand. Permitting delays remained chronic due to the Macondo Gulf of Mexico oil spill accident.
Jackup dayrates declined 10% to the low 60s during 2H/10 while semi dayrates declined 26% to the low 300s from 400s. The declines were driven by newbuild supply that inundated a market with few new contracts. Drillship dayrates fared better declining only 4% to the 480s during 2H/10.
Utilization of offshore rigs is expected to remain weak in 1H/11 due to continued delays in permitting in the Gulf of Mexico and limited demand for natural gas directed drilling. Floater deliveries will continue at a rapid pace with 9-10 units arriving each quarter through at least 3Q/11.
Dayrates for jackups should decline in 2H/11 as lack of demand fails to absorb existing supply. Although some lower specification jackups will eventually be retired, it will not mitigate the expectation for continued oversupply as orders for 18 new units have already come through since October 2010. Semisubmersible and drillship dayrates should stabilize despite permitting delays as expectations of increased demand are driven by higher oil prices and as tendering activity (a precursor to demand) begins to exhibit signs of improvement.
14. Crude Oil Prices and Demand / Natural Gas Prices and Storage
Forecast: Oil prices will remain elevated but natural gas could get a boost in the near-term.
WTI crude oil price increased 10% to average $81 in 2H/10 from an average of $74 a year ago driven by continued growth in demand from the global economic recovery. The WTI discount to Brent has widened to an average of $3.60 from a historical average of $1 to $2 per barrel. This reflects the oversupply flowing into Cushing from Bakken tight oil and expectations for increased Canadian imports. As a result, Brent is more accurately reflecting supply concerns caused by tensions in the Middle East/North Africa (MENA) region.
Crude oil prices are expected to remain elevated due to continued growth in the global economy driven primarily by emerging countries as well as supply tightness caused by continued tensions in MENA that will take some time to resolve.
Natural gas prices increased to 11% to an average of $4.00 in 2H/10 from $3.60 a year ago, as a decline in storage alleviated some of the oversupply.
Although we expect oversupply to persist for some time, the recent earthquake in Japan could cause tightening in the global LNG market resulting in a near-term increase in natural gas prices in the U.S. to the $4.00 to $5.00 range from $3.00 to $4.00 levels previously.
Retail electricity demand increased +5.9% in 2H/10, continuing to maintain the positive momentum that began in 1H/10. Industrial sector strength of +9.0% was driven by the continued rebound in the economy. Residential grew by +7.6% as the U.S experienced its fourth warmest summer in over 100 years. Although wholesale power prices have risen +13% in 2010, current levels are still at half the peak prices achieved in mid-2008 before the downturn driven by persistent weakness in natural gas prices.
Retail sales of electricity are expected to flatten in 1H/11. Although industrial production is expected to continue to grow with BTMU Economic Research projecting a +4.3% increase in 2011, this could be tempered by decreases in residential demand as the EIA is projecting a 16% decline in cooling degree days. As there is no expectation of a decline in natural gas production to alleviate the current oversupply, this will keep a lid on natural gas prices and limit the gains achieved in wholesale power prices. Peak loads are not expected to exceed previous highs which could pressure capacity margins and further dampen pricing.
16. Ad Revenue Growth Forecast: Modest +3% growth during 2011
Total US ad spend is forecasted to have grown +5% during 2010 according to Magna Global estimates.
Components of 2010 growth are as follows: cable nets +13%; English TV networks +5.6%; local TV stations +23%; magazines +1%; newspapers -5%; online/digital +14%; radio +7%; directories -23%; direct mail +2%.
Last year’s growth was driven by economic recovery as ad spending levels rebounded from dramatic lows set in 2009 when US ad spending declined by -16%.
Specifically, 2010 ad spend was helped by a return in auto ad spend (which was sharply reduced during 2009) and by spending for the Congressional mid-term elections. Both of these 2010 growth drivers were particularly beneficial to local TV broadcasters.
Total 2010 US ad spend of $172B returns the industry back to 2002 levels (a high of $205B in 2007). According to Magna, US ad spending will only reach $195B by 2015 which is still below 2007 levels.
This reflects the magnitude of the reduction in overall ad spending as US corporations sharply trimmed costs during the recession to maintain margins. Also, we believe this reflects an overall secular decline in ad dollars allocated to legacy media channels as marketers look to more cost effective ways to reach their audiences. Also, we believe this reflects marketer consolidation (as the recession prompted weaker players to merge) along with less emphasis on new product launches as corporate America became more risk averse.
Magna expects total US ad spend will increase a modest +3% during 2011 which seems reasonable to us absent any even year elections or Olympic ad spend.
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17. Housing Start / Permit, Housing Price Index
Forecast: Housing market recovery not yet in sight
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After appearing on the mend in the spring, the housing market took a turn for the worse in the fall. The HPI’s steep decline since September was powered by a greatly expanded inventory of foreclosed homes, selling at deeply discounted prices. Foreclosures accounted for 37% of sales in January 2011.
Persistently high unemployment on top of the expired federal tax credit incentive for first-time homebuyers, crimped demand for new and existing homes, even as mortgage rates dropped to historically low levels. The number of existing home sales fell -17% from 1H/10 to 2H/10.
Home sales were also dampened by an increase in underwater mortgages, from 22.5% in 3Q/10 to 23.1% in 4Q/10, making people unwilling to sell their homes at a deep loss.
Against the background of weak demand, excess inventory, and low prices, new housing activity remains well below historical levels and is unlikely to come out of its deep freeze in the next few months.
Greatly improved housing affordability amid slowly receding though historically still high unemployment is among the few bright spots in an otherwise bleak housing market picture.
18. Office Rent (Manhattan Midtown) Forecast: Further improvement in New York’s office market conditions likely
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After registering three months of declines, midtown office vacancy rate in 4Q/10 hit its lowest level since 1Q/09, reflecting a surge in leasing activity amid limited new construction. Leasing activity for all of 2010 rose to 26.3 million square feet from 16.3 million square feet in 2009, a +61.4% increase. Midtown office absorption rate (after leasing and disposition) increased to nearly 5.8 million square feet in 2010, from a negative 6.6 million square feet in 2009
Although midtown Class-A rents remained well below both their 2008 peaks and their levels in 2009, they showed modest signs of improvement in the 4Q/10, rising to an average $70.5 per square foot, from $69.3 in 3Q/10. A factor in the firmer rents was reduced availability of underpriced sublease space, which is space available directly from tenants with excess inventory.
Against the background of a +1.6% growth in private-sector employment last year, to 3.2 million, increased leasing activity and an uptick in rents signal that conditions in the midtown office market are on the mend.
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Appendix 1 Company Financial Performance
Energy (Oil & Natural Gas)
The ENERGY sector recorded the fifth consecutive quarter of revenue increase, bolstered by a healthy fuel demand predominantly in the emerging countries. The crude oil prices rose to the US$90/barrel level for the first time in approximately two years, and an improvement in refining margin led to favorable results in terms of profitability. Currently, the crude oil prices remain on an upward track due partially to political unrest in the Middle East and North Africa; the sector is expected to maintain favorable results for the time being.
Materials （Chemicals, Metals, Container & Packaging, Paper & Forest Products）
All industries in the MATERIALS sector posted revenue gain attributable to the recovery in demand in the developed countries as well as increased sales in the emerging countries. CHEMICALS maintained a double-digit revenue gain. However, many companies are unable to transfer increase in raw materials (e.g. oil, metals) cost to products. As a result, currently the operating margin is declining. In the METALS industry, all nonferrous metals manufacturers posted revenue gain attributable to increase in sales prices and rising demand. Nevertheless, while steel makers posted revenue gain bolstered by increase in automotive vehicle production, the operating profit declined or some posted operating loss due to burden of fixed cost as a result of excessive production capacity and impact of rising raw materials and fuel costs. CONTAINER&PACKAGING posted higher earnings on higher sales bolstered by favorable demand from emerging countries and the recovery in domestic demand. While PAPER&FOREST PRODUCTS recorded four consecutive quarters of revenue growth due to higher sales in the emerging countries, increase in fuel cost was not passed on to product prices. As a result, the industry recorded four consecutive quarters of decline in operating profit.
The INDUSTRIALS sector posted four consecutive quarters of revenue gain against the backdrop of increase in sales due to recovery in the U.S. economy and demand in emerging markets. However, currently the operating margin is declining due to rising fuel prices.
MACHINERY posted two consecutive quarters of over 20% revenue growth. Renewal equipment investment by companies and sales increase in construction related machineries in the emerging markets as well as the demand for mining equipment rose against the backdrop of higher material resources cost.
AIRLINES posted four consecutive quarters of revenue gain bolstered by increased traffic due to economic recovery despite many cancelled flights in Dec. due to heavy snow. While the earnings sharply rose y/y, the benefit of cost cut from corporate restructuring seems to have subsided, and currently operating margin is declining due to rising fuel cost.
FLIGHT&SHIPPING posted 4 consecutive quarters of revenue and earnings gains. Although impacted by adverse weather (e.g., heavy snow), freight shipment volume including automotive related products and coal increased both in the domestic market and in the emerging countries. Nevertheless, due to rising fuel cost among other factors, currently the operating margin is somewhat declining.
Revenues and earnings of CONSTRUCTION&ENGINEERING continue to decline as the residential and non-residential investments trend downward. Against the backdrop of deteriorating state finances, public construction projects are expected to remain sluggish. The industry awaits recovery in private orders for the time being.
Media, Department & Specialty Stores) The CONSUMER DISCRETIONARY sector remains solid, albeit the growth in sales is slightly declining. During the favorable holiday sales, an increase in consumer spending for some items was apparent. AUTO&AUTO PARTS posted revenue and profit gains. In addition to favorable sales in the emerging countries, new car sales are steadily recovering as evident in Dec. new car sales reaching mid-12 MM units SAAR albeit largely below pre-2007 level of 16-17 MM SAAR. The new car sales in the U.S. for 2011 are forecast to reach around 13 MM units. APPAREL & FOOTWEAR and HOUSEHOLD DURABLES reported a double-digit revenue gain; revenues of HOTELS&RESTAURANTS and DEPT&SPECIALTY STORES remained solid albeit at a low growth rate. Despite the impact of heavy snow in Dec., the total holiday retail sales recorded a historical high (up 5.7% y/y); the result indicated increased consumer spending in some discretionary items. In industries readily impacted by raw materials cost such as HOTELS&RESTAURANTS, some companies reported a profit decline. Going forward, continued favorable results will depend on companies’ ability to pass on rise in raw materials cost into prices of products and services. In MEDIA, while TV posted favorable results benefiting from a rebound in ad demand along with the economic recovery, the business environment for publishers with predominantly traditional print media such as newspapers remain challenging. The key to improving financials seems to be companies’ ability to adapt electronic media going forward. HOMEBUILDING posted the second consecutive quarter of operating loss. Home buying is put on hold due to stubbornly challenging labor market. The deleveraging of household balance sheet continues; it will take some time for the recovery in the sector.
Consumer Staples （Food & Beverage, Household & Personal Products, Groceries, Drug & Discount Stores）
The revenues in the CONSUMER STAPLES sector continue to be stable attributable to increased sales along with the recovery in the U.S. economy and favorable sales predominantly to emerging markets. Nevertheless, the growth in operating profit is sluggish due to rising commodity prices. FOOD & BEVERAGE posted four consecutive quarters of double-digit revenue gain. While the demand increase in the emerging countries are one of the factors behind the revenue gain, benefits from M&A is even higher. In terms of profitability, rising raw materials prices were not absorbed in many items; currently the operating margin is declining. While HOUSEHOLD&PERSONAL PRODUCTS posted revenue gain led by sales increase in the emerging markets such as Latin America, currently the growth in revenue continues to decline. In addition, the industry earnings declined compared to the previous quarter, impacted by rising raw materials price. Currently the operating margin is also declining. GROCERIES and DRUG&DISCOUNT STORES posted a slight gain in revenue and earnings y/y. Due to increased purchases online, existing store sales for some companies are declining.
Healthcare （Biotechnology, Medical Equipment, Hospitals & Medical Services, Pharmaceuticals）
M&A activities for the purpose of business diversification and expansion continue in the HEALTHCARE sector. Going forward, in addition to the trends of M&A within the industry, the impact of the healthcare reform law (partial implementation of which has began) should be monitored. While PHARMACEUTICALS posted large revenue gain benefiting from acquisitions, due to increased cost associated with integration of businesses, the operating margin is declining. Patent expirations of many blockbuster drugs will peak in 2011; introduction of new drugs and progress in business diversification seem to be the key for improvement in corporate performance in the industry.
The IT sector posted a double-digit revenue and profit increase y/y. Not only major companies but also small- and medium-sized companies increased IT spending such as introduction of cloud computing as well as renewal investment in PCs and servers. In addition, business related to high-function mobile devices bolstered corporate performance; some companies recorded a historical high in earnings. Corporate acquisitions toward expansion of business foundations remain active in the sector. PC&PERIPHERALS continued to post a double-digit revenue gain reflecting favorable corporate performance attributable to increased investment in equipment renewal and increased sales in high-function mobile devices. Going forward, how well the companies are able to capture demand for IT outsourcing along with the advance in cloud computing seem to be the key to maintaining favorable corporate performance for each company. In SEMICONDUCTORS, the demand for high-function mobile devices continues to remain favorable. SOFTWARE&SERVICES posted five consecutive quarters of double-digit revenue gain and operating margin remain high at around 30%, as more companies incorporate IT into their businesses and online ads expand. In addition, ELECTRONIC EQUIPMENT/EMS posted three consecutive quarters of nearly 20% growth in revenue. Meanwhile, although COMMUNICATION EQUIPMENT posted the fourth consecutive quarter of revenue growth, the operating profit declined due to increased operating cost as well as declined orders from high-profit public sector.
Some companies in the TELECOMMUNICATIONS sector report favorable revenues attributable to increased sales of high-function mobile devices. Nevertheless, as the growth in subscribers decline, companies are striving to gain subscribers by offering low-priced plans. As a result, the size of the sector’s revenue and profit is leveling out.
The UTILITIES sector reported two consecutive quarters of revenue growth as a result of increased electricity demand along with the economic recovery. Nevertheless, compared to the last quarter bolstered by extraordinary demand from intense heat during the summer, currently the growth in revenue is declining. Going forward, wholesale electricity prices are expected to remain sluggish due to excess capacity in supply.
Household DurablesWhirlpool Corp., Mohawk Inds., Fortune Brands, Leggett & Platt, Newell Rubbermai, Snap-on INC, Stanley Works, Harman International
Apparel & Footwear Nike, Inc. , V.F. Corp., Coach Inc, Jones Apparel, LIZ Claiborne, Polo Ralph Lauren
Media
Gray TV, Sinclair Broadcast, Entercom, Emmis, Interpublic Group, Omnicom Group, DIRECTV Group , Comcast Corp., Cablevision Sys. , Shaw Communication , Time Warner, Walt Disney, News Corp., Viacom Inc. , CBS Corp. , Gannett Co., Washington Post, New York Times, EW Scripps, McClatchy Co., Media General 'A', Belo Corp, Dish Network
Department & Specialty Stores
Home Depot, Sears Holdings, Best Buy Co., Macy's Inc., J.C. Penney, Gap Inc., Bed Bath & Beyond, Radioshack Corp, Limited Brands
Food & Beverage PepsiCo, Inc., Kraft Foods, Coca-Cola, Con Agra Food, Gen'l Mills, Sara Lee Corp, Tyson Foods
