This week, we return to the subject of capex, with our latest survey data pointing to continued solid outlooks for US and global regions. With that said, these surveys were taken against the backdrop of a US/China trade entente cordiale, i.e. not quite where we sit today. Nevertheless, the data continue to point to greater levels of resilience in long/late-cycle stocks.
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Well as simple as we can. There are many bridges for bulls and bears to cross, but one debate that we view as effectively settled is around leverage. We look at the balance sheet at the consolidated level and see a credible bridge to total consolidated financial leverage to fall to 2.6x EBITDA over the next two years, and as low as 1.2x if the GE Capital balance sheet ex-Insurance is completely liquidated.
Strong market share in 1Q19 with 3 H wins in Japan tells us that GE has viable technology. However, the real positive is a line of sight on Power backlog stability, which is a major component of improving free cash flow.
We have no idea how US/China trade tariffs will play out - maybe this is just classic "Art of the Deal", or maybe this is a real risk. But the stakes are clearly higher and so we remain cautious SWK, GWW and FAST given overweight China import exposure; despite guidance embedding 25% tariffs, there could be a delay on price recovery and this could put some near term estimate pressure on HUBB given typical price/cost recovery lags. We also see growing risks to near term estimates for short cycle names, especially those levered to semi/electronics markets (MMM, ITW, FTV).
Earnings season was all about the divergence between long-cycle and short-cycle fundamentals, and we believe that this remains a sustainable investment theme into 2Q based on our assessment of the fundamentals. See links below for tariff-related content.
We present our April update for the Global Cap Goods sector, which rounds out performance, consensus revisions and valuation trends for the 102 stocks that we track in the WR Global Cap Goods universe.
Folks – I wanted to send you a complete and up to date compilation of our models post-1Q19 results. Our Model Book also includes cheat sheets and bull/bear target price spreads for each company.
Please find attached a slide deck summarizing our latest thoughts on GE and key analysis charts, updated for 1Q19 results. Let us know if you have any questions or comments.
Should we Sell in May or will May flowers spring forth? The reality is that cap goods momentum remains positive ex-Europe, and that valuations are basically in the ball park of their normal trading ranges. We still think it is too early to rotate into early-cycle stocks.
JCI's May 1 announcement to deploy the bulk of its surplus capital into buybacks and debt reduction, is tantamount to a Mayday signal for near term HVAC consolidation. With UTX and IR also clearly signaling an internal focus, we believe the market reprices LII away from M&A scenario math and back towards fundamentals, and this could drive 10-20% downside risk from multiple compression. Carrier, via UTX, remains the best way to play this theme.
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