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Show nib BRAKES ON FOR HEAVY TRUCK MANUFACTURE The slowing pace of auto and light truck sales has been well noted for some time, but the shrinking demand for heavy trucks has not received the same treatment in the press. Given the current economic uncertainties, there are some menacing albeit temporaryclouds tem-poraryclouds darkening the outlook for this year's sales and profits in the heavy truck manufacturing industry. We feel that a continuation of softness in demand will translate into less satisfactory results not only for the heavy truck makers themselves but for some of their regular suppliers of component com-ponent parts as well. BUSINESS BAROMETERS OF SORTS For the producers of heavy trucks the markets served reflect the basic strength of business. This is because heavy trucks, unlike the lighter vehicles, cannot be used for personal transportation or recreation in a practical prac-tical fashion. Since the sales level of heavy-duty trucks is closely related to the volumn of business in which they are used, it is evident that retail turnover of the "heavies" is actually an excellent barometer of economic acitivity...and vice versa. This has been true historically, including a dramatic slide in sales of heavy-duty trucks in the 1974-1975 recession. Because of this record, we look for the uneasy business climate expected this year to have a distinctly adverse impact on sales of large trucks. It should be noted, however, that sales of the heavies past recessions have been quick to bounce back as recovery set it. LABOR DIFKICI I.TIES A FACTOR The labor contract renewals with the automakers last year went relatively well. However, the negotiations between bet-ween the United Auto Workers and the heavy truck manufacturers ran into some trouble. In fact, at International Harvester a leading producer of heavies a lengthy strike occurred. Owing to the duration of that strike, employees at some component suppliers' sup-pliers' firms are still temporarily out of work and the echo of these labor difficulties dif-ficulties may well be another limiting factor in the profits picture for the 1980's. n I.H VI. I'KVk It should be noted, in addition, that the recovery in the production of heavy trucks following the previously mentioned men-tioned 1974-1975 recession has extended over a considerable length of time. Admittedly, Ad-mittedly, some weakness was observed in the turnover of heavy-duty trucks even before the labor problems in 1979. In fact, U.S. truck production in September 1979 was the lowest for any month since the early spring of 1975. Therefore, in our opinion, the most important feature of truck sales last year was this apparent signal that a cyclical peak may well have been reached. And the current market slowdown may be partly a reaction to the shift from the strong demand that has been experienced in this field over Vie past few years. TEMPORARY (.LOOM-NO (.LOOM-NO DESPAIR In a recent study of prospects for the heavy truck industry, the Research Department of Babson's Reports has concluded that current slowing activity represents only a cyclical correction. In other words, we have not given up hope for the longer term in this manufacturing manufactur-ing arena. Yet, owing to the poor near-term expectations ex-pectations in the field, Babson's believes the outlook warrants a re-evaluation re-evaluation of truck manufacturing common stock holding in the portfolios of many of our regular clients. Since we are of the opinion that several equities in this manufacturing segment are fully priced in light of the current uneasy outlook, an intelligent re-examination of portfolio contents could prove both timely and rewarding. Beyond the anticipated temporary reaction, however, longer-term prospects pro-spects arc generally healthy, and a return to an expanding economy would soon reflect favorably upon the fortunes of heavy truck makers. |