European industrial shares defy earnings gloom
* Shares in European industrials expected to outperform
* More than 60 percent of firms miss Q2 earnings forecasts
* A.P. Moller-Maersk surges on better-than-expected results
LONDON, Aug 16 (Reuters) - With hopes growing that a European economic recovery is finally in the works, investors have put aside a poor set of quarterly results for the industrial sector to bet on better days to come.
The sector has been the clear laggard over a month of second quarter reports, 62 percent of firms failing to meet market consensus forecasts on earnings according to Thomson Reuters Starmine data.
Yet investors have pushed share prices for the sector higher on expectations that wide-ranging programmes of cost-cutting begun in tough times will pay off as global growth improves.
A glimpse of the brighter future many expect was evident on Friday in market reaction to results from Danish shipping and oil group A.P. Moller-Maersk.
Shares in Maersk surged 8.4 percent, the top performance in Europe, after it reported a smaller-than-expected drop in net profit due to a sharp improvement in its container unit and tighter cost control.
"The topline numbers have been disappointing, but the share performance is being driven by the fact that the companies have been able to cut costs and as expectations for topline revenue growth are rising," Lorne Baring, managing director of B Capital Wealth Management in Geneva, said.
"We are bullish on industrials as, if Europe is coming out of recession, then we might see some revenue growth. Recent PMI data and other production indicators suggest earnings forecasts are probably going to be raised."
This would support industrials' share prices.
Finnish ship and power plant engine maker Wartsila has bounced nearly 11 percent from a June 24 low, despite only eight of 21 analysts recommending buying the stock.
The sector index, of which Maersk is part, has risen in six of the past eight weeks, defying earlier warnings by analysts, and is up 11 percent this year, almost in line with the STOXX 600 index.
For comparison, financials and telecoms, where only 18 and 27 percent of firms have fallen short of estimates, are both up around 12 percent.
The squeeze on demand in their home European markets has forced engineering and other industrial companies to look hard at their businesses and cut costs wherever possible, resigned to recovery being a long slow road.
Siemens, riven by leadership strife this year, is mid-way through a 6 billion euro programme of cost cuts. German steel giant ThyssenKrupp is looking to resolve its business problems in the Americas and has sold off a number of less productive assets and targetted cost cuts of 2 billion euros.
Shares in Swiss ABB are up 20 percent over 12 months, helped by a promise to pull out of low-margin engineering, procurement and construction operations in more than 10 countries in favour of higher-margin software and systems activities.
The expectation is that those sorts of streamlining programmes will put companies in better shape to take advantage if a more robust upswing materialises after France and Germany pulled the euro zone out of recession in the second quarter.
Graham Bishop, senior equity strategist at Exane BNP Paribas, says investors are trying to "pre-empt" an expected increase in sales and profits as the outlook brightens.
"People's appetite for cyclicals is definitely rising," he says. "You could expect outperformance from sectors like industrials."
(Graphics by Blaise Robinson; editing by Patrick Graham)