Are restructuring announcements from Cognex and Xylem the shape of things to come? If more companies start hardwiring temporary cost reductions into structural actions, we think this will be viewed as a clear bearish view on the cycle.
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FAST reported 14.9% daily sales growth in May. Note that there are two less selling days in the month of May (~3ppts benefit to ADS) vs. prior year, and this dynamic reverses in June. Fasteners (-15%) and Other Products (-6%) were firmly in negative territory, but better vs. April; Safety shipments accelerated M/M to +136%. Bottom line, there was no clear consensus, but the most positive call was for ~10%. So, despite the most bullish positioning in memory, we think this is more than good enough. Positive reads for GWW and broader sector given M/M improvements in Fasteners and MRO shipments.
Following 4-5 quarters of de-stocking activity, the distribution channel is in much better shape entering this COVID recession. Our proprietary IEX index indicates a continued modest bias towards de-stocking, but nothing close to as extreme as back in 2009, which we view as incrementally supportive for short-cycle demand. Commercial Aero, Machinery and Lighting stand out with highest de-stock risks; HVAC also somewhat heavy, while Auto looks too light....
Another positive trading update from SWK around Tools and Security (positive read to JCI) leads us to another round of modest EPS upgrades. Consensus is lagging badly behind the curve here, even if we assume current strength is unsustainable (which it is not). YE20 target price moves to $144.
This is a short note to highlight that the covenant issue is now completely off the table. Perhaps not a shock outcome, but the timing is much quicker than expected and without a penalty to the rate. The real good news is that this potentially speeds the path to a dividend announcement – the lack of a dividend today is a bigger hurdle to institutional ownership than was the covenant, per se.
It is precisely 2 months since Otis debuted as a public company, so we wanted to kick the tires as investors are still familiarizing with the story. Bottom line, performance has been very solid since spin, with increasing confidence on China OE and Service inflection. Moreover, as E&E comps have re-rated higher as estimates have rebased lower, we see scope to to modestly raise our YE20 target to $60. Risk/reward skews slightly more positive vs. EE/MI.
Global Industrials Trader #21: Stocks continue to claw back losses as investors continue to key off “less bad” data. The market is rotating from momentum to value, and this has to continue as long as the rally sustains: CARR, JCI, DOV, ETN, and HDS fit squarely into this category among our OP rated stocks.
CGMI has hit a new low of 33.3 in May, led down by the US, which is now the weakest major region in Cap Goods. Meanwhile, China continues to shine and offers an encouraging proof point for post-COVID recovery: the single month reading of 90.9 in May tells that the China recovery is extremely broad based. We are also seeing a bounce in the single month reading in Europe, albeit still in deep contraction.
WIW #646: Power market investment has been cut this year, with the outlook for gas investment down 15-20% - somewhat in line with the broader cap goods verticals. Wind (and Hydro) remains the sole pocket of stability in the global power market. Meanwhile, US T&D investment continues to point higher for 2020 – a positive for HUBB and ETN.
We are seeing some encouraging trends in HVAC industry data, but the macro data suggest a much worse outcome than the down 15% consensus anchor for the residential market. We continue to see a sub-$3 outcome for TT this year, with a valuation hurdle that we struggle to overcome at this point. We continue to prefer the multiple re-rating potential at CARR and JCI.
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