WIW #656: This week, we briefly recap on performance over 2Q20 earnings season, which is drawing to a welcomed close. As always, forward earnings momentum was the most reliable predictor of performance, with revenue factors more impactful than margin or positioning. We plan a deeper earnings postmortem next week, but highlight SWK and OTIS as middle of the pack performers, despite out-sized FY21 EPS momentum. We also note PH, CARR, IR and JCI as most attractively priced on a normalized earnings basis.
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We return to the mash-up format as we process our post-2Q diligence for RBC, IR, AME, and EMR. Inside you will find the key details on the quarter, in addition to our updated models:
Emerson reported $0.80 EPS ex-items, which compares to $0.64 WRe and guidance for $0.56-0.64; consensus was at the midpoint of guidance. We mark this as a 4c beat vs. our model, driven by lower corporate and stock comp costs vs. our model, with sales/segment EBIT in line. Taxes were also a significant driver of upside (5-6c). Free cash flow of $738m, represents 181% conversion. See Ex 1-3 for more detail on segment performance.
Global Industrials Trader #23: The HVAC stocks have been driving outperformance in the US as these stocks have benefitted from the infamously resilient US consumer and the hotter summer. Elsewhere, consensus revisions largely explain relative performance across cap goods, which accounts for lags in Japan and the A&D centric stocks.
WIW #655: We lean tactically positive RBC (upside to FY21e) and IR (negative positioning), while remain tactically cautious EMR (downside to FY21e). PH is a little too tough to call: we think FY21 estimates lean a little too low, but June order rates will still likely remain at the lower end of the cap goods spectrum. AME should be solid, but the expectation bar here may be a little too high.
Our WR CGMI index expanded by 12.5pts to 53.3 in July. Not only does this mark the first reading above 50 since COVID-19 hit the lexicon, it also brings us the highest reading since the halcyon days of 1H18, before trade wars and tariffs also entered into the equation. Momentum is improving across all major economic blocs and we see continued M/M strength in the T3M reading in Aug. This suggests that the top-line upside we have seen emerge through 2Q20 reporting season could extend into 3Q20, and supports a rotation into short cycle industrials at a reasonable valuation (ETN, PH, FTV, DOV, SWK).
WIW #654: Yes, it’s early. But we are seeing big beats and more companies are plugging back in guidance ranges. Earnings day reactions are volatile, but the market is generally selling revenue weakness, and buying consumer/residential strength (SWK, OTIS); WSO share gain in June/July is a positive read for CARR. We will be previewing the Week 2 reporters in more depth, in a separate note.
WIW #653: This week, we dig into some of the key trends from the early earnings reports and what to expect from the upcoming week when we will have HON, DOV, GWW and LII on deck.
We are 15% ahead of stale street, although upside is widely anticipated making for challenging set-ups – this is clearly no “see-through” quarter. On the long side, we highlight attractive set-ups for SWK, GWW, OTIS, RBC, DOV and HON. See pages 6-8 for more details on our EPS and YE20 Target Price revisions.
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