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.
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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.
We have seen a strong start to the year. Valuations are extended, but are reasonable on a relative basis. Meanwhile, data points will likely be more supportive – note the sharp improvement in South Korean exports in December, and we expect today’s ISM report to show a bit more light than shade.
2019 was an outstanding year. History suggests that 2020 could follow-on nicely, but we need to battle cycle-high multiples that really demand an upward inflection in EPS estimates that we see no credible path to, at this stage. Relative alpha in 2020 will once again be driven by estimate achievability, and we think that this will be rather more stock specific than 2018/19.
WR CGMI increased ~2ppts to 49.5 in December, with acceleration in US and Europe, partially offset by a modest step back in China - although China remains at extremely strong levels. This tells us that the extraordinary monetary and fiscal stimulus that built through 2019, is holding momentum flat. However, there is little evidence of the strong surge in momentum that we need to see to support this rally (and these multiples). As we show in Ex 19, the gap between sector performance and CGMI - one of the tightest correlated charts we produce - has diverged to an uncomfortably wide level.
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