Non-ressie Construction is classic late cycle and likely benefits from supportive credit conditions in key US and China regions. Weak US ressie is a flashing amber and this is where we see earnings risk. IR remains favored play given its superior mix, while LII remains least favored given its heavy US residential exposure and premium multiple.
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WIW #586: 3M sales weakness has typically been a very reliable indicator of broader short cycle pressure. UP-rated ITW, ROK and PP-rated PH are highly correlated, while OP-rated GE, UTX and HUBB are most decoupled.
In response to some confusion around the incremental cash flow disclosures provided, we highlight that true Aviation FCF in 2019 was closer to $5bn (not $3bn), that net working capital pressure is likely no more than $3-4bn over 2019/20 and that GE has sufficient cash over 2019/20 to completely retire its unfunded pension, insurance and preferred stock liabilities. No change to our $15 target and OP rating.
3M’s new segment structure is more customer-centric and so could help drive long term growth. However, the near-term demand picture remains challenging and our latest model MtM sees us move further below consensus. We have reduced our YE19 PT from $202 to $200. Remain UP.
We realize that the 2019 reset and long term recovery story will not appeal to all. But, in our experience, a true, self-help turnaround story like GE, resonates with long term investors like nothing else in EE/MI. We continue to see 2021 path to $1 EPS/FCF and maintain $15 YE19 target price.
WIW #585: Out latest inventory tracker highlights heavy channels in MRO, electrical, auto and semi, which flags potential sell-in risks for consumables-rich industrials (3M, ITW, FTV) and electrical/automation OEMs (ETN, HUBB, ROK). Machinery channel inventories look too low across the board, which we view as a positive for ETN and PH. Our proprietary work suggests modest bias to inventory draw-down in the US, underlining short cycle risks.
It ain’t pretty, but that’s not a major surprise. There’s a lot of detail to work through – much more detail than we can capture in this quick summary – but the bottom line is that 2019 is a transitional year with most of the factors depressing earnings and free cash flow transitory in nature. Short term investors will likely ignore these factors, while long term investors will likely agree with us that there is a credible path to significant earnings and free cash flow expansion by 2021. The call is at 8/30am.
Wolfe Research Senior Multi-Industry Analyst, Nigel Coe, hosted a webcast to discuss topics including where we see 2019 earnings, what the outlook for improving cash flow is, and if power can be fixed.
We see signs of a Power market bottom in 2019, with a path to positive earnings and free cash flow over a 3 year horizon. This will not be easy - a game of inches to paraphrase CEO Larry Culp - but any optimistic comments on the upcoming Outlook Call, regarding the long range outlook for Power would be very well received by the market.
We see an outlook for flat earnings but with a path to $1 of EPS/FCF over a 3 year horizon. The only true wedge remaining between bulls and bears is the nature of the Power downturn and we will lay out in a separate note (tomorrow) why this business can be fixed. Reiterate OP and $15 target price.
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