Six weeks ago, the engineering sector looked unstoppable. It had risen more than 50 per cent since June last year and just hit an all-time high. But earnings upgrades implied by record valuations haven't materialised. Instead, the first warning of a busy quarterly reporting season has forced analysts to cut forecasts, creating an air of unease that has the City asking whether this is a one-off, or the start of something more nasty.
The 9 per cent slump in first-quarter organic sales at precision instruments maker Spectris (SXS) was a shock. It has a reputation for sure-footedness, yet customers are lacking in confidence and putting orders on hold. Worryingly, like-for-like sales tumbled 15 per cent in Asia, 10 per cent in North America and 6 per cent in Europe. Management thinks £10m of cost cuts should offset the drop in sales and protect profits.
Analysts, however, need more convincing. "For everything to be moving down at the same time is unusual, so it has to be a broad macro issue," says Chris Thomas, an analyst at Arden Partners. That's a concern, but Scott Cagehin at Numis Securities isn't jumping to any conclusions just yet. "Uncertainty is unsettling and it's currently hard to call the direction, although Spectris certainly shifts the sentiment balance to the negative side," he concedes. "That said, I want a few more updates and hear what they are saying."
Well, Bodycote (BOY) avoided major problems this week, but some are taking no chances. The closest read-across from Spectris - automation and Far East exposure - secretive peer Renishaw (RSW) has seen its shares slump by 10 per cent. We'll find out if that's justified in a third-quarter update next Friday, 3 May. Rotork (ROR), Weir (WEIR), Melrose (MRO), IMI (IMI), Spirax Sarco (SPX) and Morgan Advanced Materials (MGAM) confess their sins over the next few weeks, too.
