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Is an Industrial Renaissance Underway?

About This

The Journal Sentinel focuses on one Wisconsin money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.

Investment Trends

Manufacturing holds promise

Next-generation companies can adapt to new economy

By Kathleen Gallagher of the Journal Sentinel
Aug. 31, 2013

industrev09182013From horizontal drilling to 3D printing and robotics, new technologies are changing the face of American manufacturing and ushering in what some say will be a renaissance significant enough to be considered another stage of the Industrial Revolution.

Rather than rely on old methods for screwing and welding parts together, workers using these technologies can design products on computers, make changes with the click of a mouse, and create them on the spot with a 3D printer, which produces objects from the bottom up by piling thin layers of material on top of each other.

The digitization of manufacturing promises a new era of customization, with products tailored to individual customers.

Meanwhile, vast deposits of natural gas and oil can be extracted at a reasonable cost from shale rock formations in areas such as North Dakota, Texas and Pennsylvania because of developments in technologies like horizontal drilling, said Paul A. Muzzey, president of Capital Investment Services of America Inc. in Milwaukee.

“So natural gas costs around $3 per BCF (billion cubic feet) here, and about $15 per BCF overseas,” Muzzey said.

All of this has important consequences for the economy because it is expected to drive productivity growth, which is good for wages and hiring, Muzzey said. There is already anecdotal evidence of some companies moving facilities back to the U.S. because of productivity increases and the cost of doing business overseas and shipping materials from those locations, he said.

“We don’t know if this is another leg to the Industrial Revolution, but it is a fertile field for investments,” Muzzey said.

Danaher Corp. (DHR, $65.52), Washington, is a global, industrial conglomerate that makes measurement tools and other professional, medical, industrial, and commercial products and offers related services.
Danaher has stable end markets that aren’t wildly cyclical or commodity-based, Muzzey said.

“It generates a ton of free cash flow by providing tools to other manufacturers to help make them more productive,” he said. That cash flow gives Danaher the flexibility to make acquisitions when the markets are down, he added.

Danaher shares have traded in a 52-week range of $50.63 to $69.02.

PrivateBancorp Inc. (PVTB, $21.82), Chicago, is the bank holding company for The PrivateBank and Trust Co., which provides business and personal financial services to middle-market companies and others.
As a business-focused bank, PrivateBank’s core mission is making loans to commercial and industrial companies.

“PrivateBank could certainly be in the forefront of helping these companies expand or buy the equipment they need to compete,” Muzzey said.

These companies — most of them too small to tap public markets — might be sitting on a line of credit, hardly using it, he said. As the economy picks up and their working capital needs increase, they will be more apt to draw more heavily on those lines and perhaps convert some of their borrowing to loans, he added.

If loan utilization started increasing as interest rates rose, earnings would likely follow, Muzzey said. PrivateBank shares have a 52-week trading range of $13.32 to $24.82.

The biggest risk for both of these stocks is the possibility of an abrupt economic downturn that might cause earnings to stall, Muzzey said. Both companies have the potential to have faster earnings growth than the Standard & Poor’s 500 index, he added.