This new product addresses the special situation themes of M&A, portfolio restructuring and strategic change in the Multi-Industry sector, since these are becoming ever important themes. Our OP ratings on GE, UTX, ETN, EMR and HDS are predicated (to a greater or lesser degree) on alpha generation from such actions.
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If you are bearish non-ressie, make sure you are paying attention to the improving trends in the key data that we lay out in Ex 7-10. HDS is our favorite play on this recovering trend.
The news that the MAX is now grounded until mid-2020, with production probably shut down longer, will likely be the key topic this quarter – a theme that filters deeper into the US industrial sector than just the aerospace supply chain. MAX risks temper our enthusiasm for GE and UTX into the quarter; we also see more elevated risks for PH, but believe that HON is well positioned among suppliers. More generally, we skew positive HON, JCI, MMM and ETN this quarter; skew more cautious ITW, LII, PH and RBC.
In line earnings and the 13% dividend bump were enough to contain the downside, despite normal propensity for significant earnings day volatility. But the outlook for weaker than expected sales and GM mix headwinds of >50bps in 2020, suggest downside risks to estimates and keep us at UP rating. YE20 target price remains $33.
FAST reported a weaker than expected 4Q on the key metrics of sales and gross income, precipitated by a sharp slow-down in December daily sales growth to 0.9% ex-FX (vs. 4-5% bogey), and gross margin of 46.9% (down 80bps Y/Y) vs. >47% guidance. EPS of 31c was in line on better SG&A control and a slightly lower tax rate of 24.4%. Note that free cash flow continues to be weighed down by higher capex, which amounted to $246m in 2019, vs. $195-225m guide and $176m prior year.
While we understand the skeptic’s perspective on the trade deal just signed, this has to be seen as a positive step for US Industrials over the short to medium term with GE, EMR, MMM, FTV and SWK standing out as potential beneficiaries. This development also supports our “Go Global” call as it relates to 2020 positioning.
WIW #627: We have engaged with a large number of investors since our 2020 outlook and we wanted to provide a little bit of context on the main topics of debate and pushback to our stocks calls. We highlight the following 5 broad areas of feedback – note that our call for more global and defensive positioning was supported by the majority, as was the idea of limited scope for multiple expansion. Indeed, we sense an undertone of bullish fatigue at these multiples, but not many investors want to fight the Fed. What this suggests for upcoming earnings is debatable and something we will discuss in our upcoming 4Q19 EPS preview.
It is tough to call a single month or even a quarter, but we are concerned December ADS could miss ~4.5% bogey given continued deterioration in manufacturing fundamentals and unfavorable holiday timing. List 3 at 25% tariff roll-in could also pressure gross margins in 4Q19, and incrementally through 1H20.
The AXE deal is strategically coherent, but accentuates the high degrees of financial and operating leverage inherent in the WCC model. While normal P/E and P/FCF multiples point to considerable equity upside potential, we think EV-metrics will continue to rule. This leads us to an unchanged $65 YE20 target price. Reiterate PP rating.
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