While we are forecasting deceleration to 2-3% core sales growth in the back half of 2019, this may not be enough as we highlight below. As such, it is not the right time to get more cyclical, unless the odds on a meaningful trade deal improve markedly over the next 2 weeks.
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This file contains annual KPI across a wide spectrum including organic growth, margin profile, earnings growth and more; that is relevant to our Industrial coverage universe over the last 10-years.
FM weakness in May (-2.4%) and consequent pinch to FY18 guidance was disappointing. But this feels very different to the 2015/16 supply chain and market share issues, while C&I sales acceleration since weak Feb (-2.4%) show us that one single negative data point is not necessarily the end. Lower ests lead to a lower YE TP of $49 vs $51 prior: stock has de-rated close to its floor at 9x NTM EBITDA, and we see scope for management to support the stock with up to $500m of share repurchases over the remainder of the year. Reiterate OP.
There will be a deluge of May economic releases over the next 1-2 weeks, but the early reads suggest US short-cycle demand may be stabilizing at low levels, although tariffs may be distorting the math a little. International trade remains weak and semi demand took another step-down. The key watch item for next week is Mexico trade negotiations and here we highlight that the market has basically priced in a complete resolution.
Bottom line: Daily sales were at the upper end of 9-10% bogey. On M/M basis growth of +2.5% was slightly above normal seasonality +2.3%. Both National (+15% Y/Y) and non-national accounts (+2%) growth improved modestly from April, but still substantially below 13% run-rate prior to April. With potential Mexico tariff looming, we need to watch how demand pares down vs. expectations. National account outgrowth and employee adds could signal incremental margin pressure.
The outlook for global capital spending remains subdued in low single digit range, but highly bifurcated. It is notable that capex growth is being dragged down by traditional short cycle markets (Auto, Truck, Semi), while traditional long cycle markets (O&G, Mining, Downstream) remain pretty robust. As such, we remain long positioned in these growth verticals, especially as short cycle headwinds likely accelerate into 2Q19. GE, UTX and EMR are our favorite long ideas here; HON, IR and AME are also well positioned.
This file contains annual capital expenditures, capital intensity, and capital spending growth by end market over the last 10-years.
We sit ahead of the street for 1Q19 at $0. 84, despite a more bearish outlook for C&I sales. We sit modestly below the street for FY19 and would expect guidance to remain largely unchanged at the midpoint, although we have no benefits from capital allocation captured in our model. The general business environment viz. residential construction, inflation and tariff counter-measures, and capital deployment will be key debates for the call. Our YE19 target price remains $51 and stock remains OP given 20% upside and discounted multiple of 12.5/14x EPS/FCF (fully taxed).
Stocks were hit pretty hard on Friday by the announcement of the 5% tariff that will be placed on all imports from Mexico from June 10 and that will be stepped up by 5ppts each month to a full rate of 25%, unless Mexico takes steps to safeguard the border. We have been here before, with initial threats around the border adjustability tax and then the direct imposition of tariffs related to NAFTA 2.0 negotiations. But this is clearly an escalation.
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