What The Latest Manufacturing Numbers Are Telling Us — And Why It Matters…
Today’s pop quiz: Manufacturing accounts for approximately what percentage of domestic GDP?
The answer is B. According to the Federal Reserve, manufacturing currently represents around 12% of the U.S. economy. But if you’d asked the same question when today’s Baby Boomers were in grade school, the correct response would have been D.
Source: Federal Reserve Bank of St. Louis
This sector employed nearly one-third of the nation’s workforce in the 1950s. Today, less than 9%. We could discuss some of the root causes, such as automation and increased productivity. But that’s a topic best left for another day.
You can understand the movement to bring outsourced production of certain goods back within our borders, particularly strategic products hampered by supply chain delays. Case in point, Uncle Sam has set aside $50 billion in grants, tax credits, and research subsidies to boost homegrown production of semiconductors.
Nothing against Taiwan, but we need a few advanced chips fabricated in Arizona and Ohio.
While service-related sectors (like hospitality and healthcare) employ far more people than factories these days, manufacturing is still vital to the economy’s health. It’s also a good gauge for business spending. And right now, the needle is pointing in the wrong direction.
The Institute for Supply Management (ISM) tracks ten sub-categories of manufacturing activity. Last month, every index component fell below the 50 threshold (the dividing line between expansion and contraction) for the first time since 2009. After 30 consecutive months of growth, the overall composite has now slipped for five straight months.
It sunk to a multi-year low of 46.3 in March.
By contrast, a similar reading on the services (non-manufacturing) side just came in at a healthier 51.2.
What Can We Learn From This?
What does that mean? Well, it’s a pretty good indication that the supply and purchasing executives surveyed are tightening their pocketbooks and reining in spending on equipment and capital goods. Perhaps they are battening down for recession. While activity continues to rise in some groups (such as petroleum and machinery), it has cooled in chemicals, lumber, plastics, electrical components, textiles and many other sectors.
It’s just another data point for investors to weigh – but a fairly influential one. Needless to say, I’ll be watching to see whether this manufacturing slowdown deepens. Fortunately, a number of our holdings over at High-Yield Investing have bucked the trend.
Another Big Winner…
For example, on April 12, Brookfield Infrastructure (NYSE: BIP) made a bold $4.7 billion offer for Triton International (Nasdaq: TRTN). Both were holdings in our portfolio over at High-Yield Investing.
For newer readers, Triton owns about 8 million metal shipping containers, which are leased to shipping lines worldwide. Robust global trade propelled strong freight rates and container demand, driving the firm’s fleet utilization rate to 99.1% last year. It made the most of savvy investments and sound market fundamentals, outperforming the S&P by more than a 2-1 margin since its IPO.
According to terms, TRTN investors will receive $68.50 in cash and $16.50 in Brookfield stock – for total of $85 per share. That’s a hefty 35% premium to TRTN’s $63 closing price before announcement. The next morning, investors were greeted with a nice pop, with the stock opening at $82.56 – not far from the proposed bid.
Typically, shares of the acquiring company sell off modestly. But BIP also gained ground, suggesting the market likes both the strategic pairing and the price.
This deal comes during chronic shipping delays and fatigued supply chains, underscoring Triton’s unique capabilities. The company boasts a rarely-seen return on equity (ROE) approaching 30% and has systematically created wealth for stockholders – culminating in a 700% return since 2016.
As the top transportation logistics provider in its respective field, Triton (and its contractual cash flows) will be a great fit for Brookfield. Triton’s board has blessed the deal, and it is expected to close in the fourth quarter. Meanwhile, we will continue to hold BIP — which has been a big, longtime winner for us.
I don’t expect any regulatory obstacles. But TRTN was trading close to the offer, so we cashed out our profits with a total return of approximately 105%.
In the meantime, we will continue to monitor the macro situation and keep readers updated.
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