Clouds Darken Over the Smokestack Sector

Bernard Layton, who leads the North American industrial group of the executive recruiting firm Stanton Chase International, agrees that the outlook for the industrial space is company-specific. Some firms are more heavily reliant on the consumer, some have burdensome debt loads, and others are anxiously watching commodity prices, which cut into their bottom line. Variables exist among those elements, but companies betting on stimulus dollars to line their coffers may have a long while to wait.

"There are areas where the planning and delivery of the packages -- roads, bridges, tunnels, those kinds of things -- they have approval processes in the way," says Layton. "It's going to take some time to get these things started, so I'd predict a period of 12-to-18 months to see a period of growth for those subsegments."

Layton notes that firms who preemptively cut production at the start of the downturn will do better than others. He cites the difference between Ford (F Quote), which didn't need federal rescue dollars because it took steps to prepare for weaker consumer demand, and General Motors (GM Quote), which teetered on the brink of collapse before Uncle Sam stepped in with a loan.

As the case of GM, and more recently LyondellBasel, made evident, aggressive, proactive management will be key for industrial firms to weather the economic storm. Robert Pavlik, chief investment officer of Oaktree Asset Management, suggests investors take a bottom-up approach and pick companies light on debt, heavy on free-cash flow, with decent earnings and revenue growth. He also says investors should view heavy-handed cost-cutting measures and profit warnings not as blanket bad news, but as responsible management of firms during a recession.