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.
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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.
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.
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