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WIW #577: This week, we dive into the HVAC market where we are turning more bearish on the outlook for replacement volumes. We also see risk to industry pricing disciple in 2H19 and are now more skeptical on the outlook for industry consolidation. We continue to see downside to 2020 estimates for UP-rated LII; we maintain PP on JCI and OP on UTX and IR.
This quarter, we have refreshed our EPS preview by directly addressing 10 key debates around the quarter, while also developing a new tactical screen. This highlights IR and UTX as our favored tactical longs. We are tactically cautious LII and ROK.
Our 4Q18 survey shows solid growth in the quarter, although it’s evident that tariffs have created a tailwind viz pre-buying and could unwind through 1H19. Respondents were broadly bullish on Commercial Aerospace, Commercial Construction, and Electrical Equipment. Pricing appears to be keeping pace with inflation, but concerns around Amazon (AMZN, OP, $1,617.21) continue to grow.
FAST opens the curtain on earnings season for the WR EE/MI and Distributor universe of stocks. This continues the streak of early reporters that are US-centric and hence somewhat less indicative of what to expect for the broader coverage that follows post-MLK. Given the terrible November EU industrial production data and December China trade data, that is a good thing. In a nutshell, the reads from MSM (NC, $79.11) and our 4Q18 US Distributor Survey (which we shall release tomorrow) show that FAST’s 4Q is likely to be a very similar set up to 3Q – robust top line volumes, gross margin pressure and earnings that all track largely in line with consensus expectations.
WIW #576: Across a broad range of metrics that we track, the outlook for US capex over the next 6-12 months has significantly softened. The question is whether anyone is surprised in light of December volatility and significant economic, trade and political uncertainty. With oil prices higher and a more dovish Fed, we are currently in a mini risk-on rally, but we are not out of the woods yet. We bias towards cyclical beta, as we laid out in our 2019 Outlook, but we also prize earnings visibility and self-help (LINK).
We present our December update for the Global Cap Goods sector, which rounds out performance, consensus revisions and valuation trends for the 102 stocks that we track in the WR Global Cap Goods universe.
The Wolfe Research Industrials Capex Expectations Index (CXI) is a proprietary Wolfe Research index that measures the outlook for US capex on a 6-12 month lag.
Folks – as we come into 2019 and heading into 4Q18 earnings season, I wanted to send you a complete and up to date compilation of our models. Our Model Book also includes summaries and cheat sheets for each company. Note that we have included a link if you would like to access our live models/databases from the Wolfe website.
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