Magazine article Business Credit

2006 CFO Outlook: A Survey of What Manufacturing Chiefs Expect

Magazine article Business Credit

2006 CFO Outlook: A Survey of What Manufacturing Chiefs Expect

Article excerpt

Nearly three out of four manufacturing chief financial officers (73 percent) expect their company's revenues to increase in the coming year--and nearly half (46 percent) predict increased profit margins. That's according to the eighth annual survey of mid-size and large U.S. manufacturing company CFOs commissioned by Bank of America Business Capital. Conducted by an independent research firm in September 2005, 600 CFOs were asked their opinions on the economy, financing, M&A activity, and their involvement in foreign markets. While CFOs are optimistic about the prospects for their own companies, they are concerned about economic expansion and growth opportunities for the manufacturing sector in 2000.

Manufacturing company CFOs continue to view the current state of the U.S. economy in a positive light. For the second year in a row, they gave it an average score of "66" on a scale ranging from 0 (extremely weak) to 100 (extremely strong). While more than half of respondents (58 percent) believe the national economy will expand in 2006, this is the lowest average score in four years and a significant decline from the all-time high of 77 percent cited last year (Exhibit #1--CFO Outlook for U.S. Economy). Although a majority of CFOs (60 percent) believe the actions taken by the Federal Reserve Board have helped the economy, this is down significantly from 72 percent last year and 83 percent the year before.

When asked whether the manufacturing sector would expand, contract or stay the same in 2006, only one-third responded "expand," a substantial decrease from the 44 percent last year and a decline for the fourth consecutive year (Exhibit #2--CFO Outlook for U.S. Manufacturing Sector). Nearly one-third of respondents (32 percent) believe the manufacturing sector will contract in 2006.

Cautious Optimism

Despite the tempered economic and manufacturing sector outlook, CFOs continue to see growth opportunities for their individual companies. Nearly three-quarters of CFOs anticipate revenue growth next year and 46 percent expect their profit margins to increase (Exhibit #3--CFO Outlook for Revenue).

This upbeat expectation could be a function of the generally positive state of manufacturing over the past 12 months. When asked, "How would you rate the current state of the manufacturing sector on a scale of 0 (extremely weak) to 100 (extremely strong)?" the average score was "59," up slightly from last year's rating of "58"

M&A And Global Expansion

Expectations for merger and acquisition activity are at an all-time high. Thirty percent of manufacturing companies surveyed expect to participate in a merger or acquisition in 2006, up sharply from 23 percent last year, and the highest percentage in the survey's history (Exhibit #4--Percent CFOs Anticipating M&A Activity). Likely due to considerable market liquidity, only 20 percent believe there are more businesses available at lower purchase prices, down significantly from the last four years.

Survey results also reveal that companies selling to foreign markets are considerably more likely to anticipate M&A activity in 2006 than those not selling to foreign markets--32 percent versus 19 percent. The same is true for companies expecting an increase in sales to foreign markets (38 percent) versus companies expecting foreign sales to stay the same (25 percent).

For the second year in a row, 84 percent of manufacturing companies reported competing in world markets. Of those, 67 percent sell to foreign markets while 72 percent buy from foreign suppliers. Also, there has been a steady rise over the last four years in the percentage of companies with operations outside the United States. That figure stands at 45 percent, up from 39 percent just one year ago and a mere 19 percent in 2002.

Increases in international trade growth are expected primarily in Asia (56 percent) and Europe (43 percent). …

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