Dana, ArvinMeritor and Eaton all announced that third quarter earnings would be below Wall Street analysts' expectations.
Dana warned investors to expect 46 cents a share instead of 86 cents. ArvinMeritor expects third quarter profits to be about 45 cents a share compared to analysts' estimates of 60 cents. Eaton said its profits would be about $1.30 a share, below analysts' estimates of $1.75. However, Eaton anticipates meeting the analysts' expectation of $1.75 a share in the fourth quarter.
All three suppliers gave nearly identical reasons for the lower earnings: lower production of heavy trucks, lower production of consumer trucks and SUV's, and the weakness of the Euro currency. Each of three reasons is about equally responsible for the profits decline. And all three of them are short-term conditions, which may persist for a while but are not likely to worsen significantly.
Heavy truck production dropped below sales in the spring to correct an inventory surplus of 20,000-30,000 trucks. Truck manufacturers simply pushed out more big rigs than buyers could absorb. Truck sales fell 4,000-5,000 units a month during the summer because of depressed trade-in values. This forced a further decline in production schedules. At current sales and production levels, the surplus inventory will not be fully absorbed at least until the end of the year. Then truck production and supplier orders should return more than halfway to early 2000 levels because truck market fundamentals remain good. Freight volume is growing faster than overall economic growth. And economic growth appears likely to slow only to a 3.5-4 percent pace.
Consumer demand has slipped for trucks and SUV's as gas prices have risen, production was stopped at some assembly plants because of the Firestone tire problem, and interest rates rose several percentage points.
Finally, the profits from European operations are worth 20% less in U.S. dollars than they were a year ago as the new common European currency, the Euro, has depreciated against the dollar. Better investment opportunities in the U.S. have sucked in a large amount of European capital.