War in the Gulf Again Imperils Factory Sector

Unfortunately, things could get worse on the economic front, as long as the war has a paralyzing effect on consumer and business decisions. The latest figures for industrial production show that it was still on the rise, albeit modestly, through February of this year. Chances are the next reading will be down, and there could be months to go before it bottoms.

However, it now appears that much of this presumed economic weakness is already reflected in the industrial stocks. In just the last week, a slew of analysts lowered their earnings estimates or ratings on shares of Honeywell, Parker Hannifin and Emerson, to name a few. With March quarter conference calls coming up in the next few weeks, we should expect to hear outlooks that are anything but encouraging.

Best Bet

For more risk-averse investors, Emerson is still probably the safest way to play a manufacturing sector recovery at the moment, because there's so much uncertainty over when it will materialize. The shares are down 5.1% so far this year and now trade at a P/E ratio of 18 times 2003 estimates of $2.61 -- below the company's historical average multiple of about 20.

Even so, the stock still may be vulnerable to estimate revisions. Emerson reported February orders today, and they showed little, if any, improvement from January or from the same month a year ago. Should Emerson have to lower guidance, or if weak data emerge from the manufacturing sector, the shares could trade back down another 13% to their October lows of about $41. At that point, Emerson would trade at a P/E of 16 (the low end of its historical range of 16 to 23) on earnings of $2.55 a share -- the low estimate on Wall Street, which would also be roughly flat with what the company earned last year.

Should that happen, I have a hard time seeing the stock staying there. With strong free cash flow and a dividend yield of 3.2%, Emerson may be worth the wait.

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