Akzo Nobel / Philips Premium

Two of Europe’s large industrial companies are in the wrong gear

One for sorrow, two for joy . . . if only profit warnings were like magpies. Over the past week, two of Europe’s large industrial companies warned they would make less profit this quarter than the market expected. Conglomerate Philips blamed weakness in consumer demand and construction activity in developed markets. Paint and chemicals company Akzo Nobel also blamed the construction market for its less severe warning, along with rising raw materials costs that it has not yet passed on through higher prices.

Investors already knew consumer spending and construction were weak in Western Europe and the US. Do the latest warnings add anything more? If they indicate a deepening malaise in developed countries, they cast a harsh light on the recent spate of deals in the industrial and chemical sectors. Last month, Ashland bought speciality chemicals company International Specialty Products for $3.2bn in cash – about 9 times earnings before interest, tax, depreciation and amortisation. DuPont paid 13 times ebitda for Danish food ingredients company Danisco. These are top-of-the-cycle valuations for deals struck when much of the global economy can barely remember what the top of the cycle looks like.

Still, the two warnings do not necessarily bode ill for the entire sectors. Both Philips and Akzo Nobel are wrestling with internal problems. The former keeps falling short on innovation and competitiveness. The latter’s laborious transformation from broad conglomerate to a more focused company was sensible, but has not yet done anything for growth or profitability: the company has about the same annual revenue as almost a decade ago (€14.6bn in 2010 compared with €14.2bn in 2001) and the same profit (€747m compared with €702m). Meanwhile, both companies talk the talk on emerging markets but still get two-thirds of revenue from developed countries.

In the two-speed global economy, Philips and Akzo Nobel are in the wrong gear.

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