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Three analysts and top management from sixteen sector firms examine the industrial manufacturing sector in this special 83-page Industrial Manufacturing issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info522.htm

TWST: John, what are your favorite names in the group today?

Mr. Inch: We’ve talked a lot about the cycle. So the question is where can you get exposure to the cycle without buying a stock that is ahead of itself. I would still put new money into Ingersoll-Rand (NYSE:IR) , and I would be more aggressive if the stock were to pull back, perhaps in tandem with its peers, in the near term. This is a company that is a fairly leveraged play on the cycle. It has mid-40s debt to cap. It’s in a series of what I consider to be very well-run businesses, but they are generally more cyclical businesses: Thermo King, air compressors, road machinery, production tools, and Ingersoll also makes bearings. Several of these end markets have been relatively beaten down as the industrial manufacturing recession has ensued, so there is a nice demand base that has been formed. Ingersoll has also been restructuring. There’s about a $0.50 bottom-line savings that should be realized this year from Phase I of the company’s restructuring that has already been complete. Now, IR is moving into the Phase II that is going to tackle overhead, or looking more at cutting SG&A. The company recently reincorporated in Bermuda, which, post-Enron and with Tyco, may have also created some negative sentiment spillover. I would argue that Bermuda is a positive as it will create real tax dollar savings, and concerns surrounding Enron and Tyco will eventually fade as they pertain to other stocks. IR also has $0.70 of goodwill on the books. And now that goodwill is no longer being amortized, it looks to me as if Ingersoll could generate well over north of $4 in earnings power (per share) in 2003 while still trading at only around $50. Also, Ingersoll generates very good cash flow. It’s less capital intensive than some of its peers, which means that its returns on invested capital should be greater over time. So that’s one name that would fit with more of a cycle play that still isn’t too expensive.

TWST: John, are there any specific end markets investors should avoid at this point?

Mr. Inch: We began the conversation noting that autos and housing looked peakish. And, for all I know, we’re in a housing bubble. I’m not in a position to call for a major housing contraction, and for that matter I’m not sure that one is imminent. Consumers have been able to benefit from lower mortgage rates and refinancing while the economy has begun to strengthen. In the auto sector the OEMs have been giving cars away at 0% financing. A flat assumption here may actually be too aggressive. As we mentioned before, commercial aerospace is the other large problem zone, although the defense aerospace business looks pretty good right now. There aren’t a lot of those properties (defense companies) to buy, which should keep those stocks robust near term. That’s not to say either that commercial aerospace is going to get worse; it probably gets better relative to expectations. The demand forecast was slashed by 20% relatively quickly. Today, measures like revenue passenger miles suggest a slow climb, but a climb nonetheless, off of those down expectations. All three of these sectors — housing, autos and aerospace — are collectively close to a third of the GDP of the sector. While that sounds like a lot, you generally never have all sectors moving together. Overall, recovery can still come because a lot of end markets, such as heavy trucks, machine tooling and lots of general industrial, are down from where they peaked in 1998 by 50% and higher.

This special issue includes:

1) Industrial Manufacturing - In an in-depth (10,700 words) Analyst Roundtable, Wendy D. Caplan, Managing Director at ABN AMRO, John G. Inch, Analyst at Bear, Stearns & Co., Inc. and Gregory M. Macosko, Senior Equity Analyst at Lord, Abbett & Co., examine the outlook for the sector including inventories, stock performance and share specific stock recommendations.

2) TWST confidential Off-The-Record survey of management performance of twelve sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO interviews (average 2,500 words). Top management of sixteen sector firms examine the outlook for their firm and the sector.