Product and Service
Companies included in engineered components –spring& wire form& fabric sector in furnishing industry are primarily manufacturers of engineered components including spring, wire form, rod, and fabric for use in bedding, home and work furnishing, and automobile.
Demand for Product and Service
As our sales volume indicates, the demand for products in this sector has been strong and growing but may go down as cost/price rises. Competition in this sector has been turned to market share and margin from price and profitability of companies hurt while sales increase.
The Sector
Sector’s current, trend, causes behind trend, and future
Current and Trend
- The demand for spring, wire form, and steel rod has been strong in US market in the past several years, especially after entering 2017, driven primarily by strong demand from automobile and aircraft segments.
- The growth in demand has been accelerating in second quarter of 2018 driven by increase in more segments including bedding and furniture. However, increasing costs and thus price presents negative factor to growth in demand.
- While competition has been focused on price before 2018 when facing low price competition, currently companies are focusing on balancing sales growth and passing increased cost to price.
- The profitability of companies will have to depend on how much market share can be grabbed from low price foreign competitors. However, it seems that increased sales have not been able to offset decreased margin so far since profit has been diluted by domestic raw materials industry.
Causes behind the trend
Govern policies seem to have been playing more important role in recent changes in this industry than economy and business themselves.
Economy situation/consumers spending, particularly represented by purchasing activities in durable goods, is also one factor influencing demand for engineered components from bedding, furniture, and automobile customers.
Competition from low costs foreign manufacturers may also play role in this industry.
Industry Future
In a long period of time, the demand will probably continue to be strong but present a downward trend as price rises. Profitability of companies will keep shrinking. However, international impacts will also continue as they further lower price/cost of their products.
Numbers
General Financial Performance of Companies In the Sector
While demand for spring, wire form, and steel rod has been strong as indicated by sensitive economy elasticity of sale volume to price, the sales of companies really depended on price before 2018. Companies, benefited from decreased price and promotion, have gained growth in sales volume from automobile and aircraft customers, but experienced decrease in sale volume in bedding and furniture segments due to low price impact of foreign manufacturers in the most of time in the past several years.
However, it seems that the demand has been growing fast in the second quarter as indicated by large increase in sale volume of this company (8% annual growth in sales volume from typical company) all across its segments, which present a fundamental change in this industry (driven by true increase in demand and less competition of foreign manufacturers).
Before 2018, while facing huge pressure on price due to competition, companies still managed to improve their margin slightly since 2014 thanks to decreased raw materials. However, margin went down in 2018 as a result of increasing raw materials price, which seems not to be able to be passed to final product’ price by those companies. Typical gross margin is about 21% in 2018. The average SG&A as percentage of sales is about 10% and the operating margin is about 10% in 2018.
The typical stock Price/cash flow ratio: 26 (interest/EBI ratio of 18%).
