Even with good numbers, industrial companies can't get Wall Street backing.
June 22, 2003: 3:27 PM EDT
By Jui Chakravorty, Reuters
CHICAGO (Reuters) - High tech companies may have dropped like flies, but Wall Street analysts still buzz around them by the hundreds, leaving makers of industrial goods like engines and lawn mowers wondering how they can get more attention.
Wall Street brokerage firms have been cutting back analyst coverage, especially after a $1.4 billion settlement in April between U.S. regulators and 10 Wall Street banks that followed allegations by the Securities and Exchange Commission that analysts slanted their work to gain investment banking business for their firms.
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Only 3,688 companies nationwide have active analyst coverage now, down 24 percent from a peak of 4,824 companies in 1999, according to Thomson First Call of Boston, a global research network.
As of mid-June, the tech sector had 879 analysts while the capital goods sector had only 189.
"The tech sector is the only one that has not been hurt by the cutbacks," says Joe Cooper, research analyst at First Call.
Coverage of the industrial sector dropped 10 percent in the past two years, twice as much as the decline in its market capitalization, according to Reuters Research, formerly known as Multex.
By contrast, tech sector coverage has dropped 28 percent in the past two years, less than the 34-percent drop in the market capitalization of those stocks.
Heavy industry is unhappy
Many industrial companies do not employ investment banking services.
"For those of us who are not into investment banking, our companies are not attractive enough for analyst coverage," said Ira Gamm, manager of investment relations for NACCO Industries Inc., a lift-truck, housewares and lignite coal mining company.
The Mayfield Heights, Ohio-based company has no analyst coverage. "Also, we are diversified, and that's a lot of work for an analyst," Gamm said.
Many heavy industry companies feel there is a bias toward the tech market on Wall Street.
"Investors are still partial to tech companies. They are more likely to trade based upon a tech recommendation as opposed to a nontech one," said John Whitten, chief financial officer of Applied Industrial Technologies of Cleveland, Ohio.
Modine Manufacturing, which makes heating and cooling products for vehicles and buildings, has lost all analyst coverage.
"It has definitely hurt us. We'd like to get our shares more widely held by investors. Analysts can help get our story out there," said Nick Lucareli, business development manager at the Racine, Wisconsin-based company.
"We think our company deserves a higher stock price, and we believe that analyst coverage has the ability to give us that," he said.
Fewer analysts, less coverage
Heavy industry was not a "sexy" business even before the tech bubble, Lucareli said, when Modine had only one analyst covering the company. Then in 2000, as the economy began sliding, brokerage firms began giving analysts pink slips.
"There were fewer analysts, and firms had to budget their placement," he said. "The obvious choice was to pull analysts from industrial companies that weren't very attractive to the public and focus coverage instead on what appeals to investors, which is tech."
Lawn mower maker Toro, based in Bloomington, Minnesota, has only one analyst covering it, despite a strong stock performance for the past two years.
"It's a Catch-22. If you don't have someone touting your stock, it's hard to build up trading volume, and analysts won't cover you until you have trading volume," said Tom Larson, Toro's assistant treasurer.
But interest in Toro is starting to pick up as the company's results have improved.
"No one else has picked us up just yet, but we do have other analysts tuning in to our conference calls," Larson said.
After the tech bubble burst, analysts began to realize that other sectors had sound business models, he said.
"They are coming around to the fact that there is long-term value in the industrial sector," Larson said. "There are some good success stories to tell in this sector, and I think analysts will start telling them soon."
But First Call's Cooper disagreed.
"Tech is hot, tech is always going to be hot," he said. "Tech is the driver of earnings. Tech is the future."
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