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.
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.
We think end market footprint may be less impactful this year, with potentially narrower growth differentials than last year. But organic sales growth/acceleration will likely be important alpha factors. In this report, we lay out our detailed top line framework for 2020.
This week we explore the top 10 debates for 2020. We think GE will take a gigantic step towards simplicity this year, while SWK could evolve into a beat/raise story. The MAX is a (contained) risk to UTX guidance, meaning traders may prefer to play Otis/Carrier spin discounts via arb strategies.
There is such a balance of pros and cons that we remain Market Weight the Industrials, following massive 2019 outperformance. We have a preference for more global, short cycle and quality exposures in the coming year. We upgrade our ratings to OP for ETN, FTV and JCI; we upgrade to PP for GWW and MMM; we downgrade to PP for AME, HUBB and IR.
January 2020 Update: The pain distribution from global trade fell disproportionately on APAC stocks during FY19. The question is whether it is time to pivot more global as we exit our teens. Certainly, from a US stance, we have a preference for more global exposure in 2020. More details to follow in our upcoming EE/MI 2020 Outlook report.
Our survey points to continued tactical caution for the distributors as volumes remain subdued (albeit stable Q/Q) and price/cost spread flattens, consistent with the view that the competitive environment continues to deteriorate. We remain most cautious FAST since we see both volumes and margin risk during 4Q, given high manufacturing and tariff leverage. The reads for Commercial Construction and HVAC end markets are among the most bearish we have seen, in many years.
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