Electrical Equipment & Multi-Industry
We expect 2018 to be a strong year for Industrial fundamentals as tax reform provides a catalyst for capital spending. 2017 saw a short cycle recovery coming out of the 2015-2016 industrial recession. Clearly “animal spirits” were unleashed by the 2016 election results and the business friendly (e.g. regulatory roll back) posture struck by the Trump administration. We argued that this recovery was a necessary pre-requisite to bridge to higher CapX. Now with the passage of tax reform featuring lower corporate tax rates, accelerated depreciation and the unlocking of unrepatriated earnings, the Industrial economy should have self-sustaining fuel into 2018 and likely beyond. We are not calling 2020 peak, but we are assuming earnings grow uninterrupted until at least 2020. Industrial CapX should pick up with tax relief and immediate expensing. The combination of lower tax rates and unlocking unrepatriated earnings could drive more M&A. Continued business momentum and positive earnings revision will likely trump valuation concerns. Therefore, we maintain a positive bias on our group.
Our Top Picks and Buy ratings reflect the continuing recovery of Industrial fundamentals in 2018. PH, HUBB, ROK, and EMR are our favorite plays on CapX. IR and HON are favored for CapX and Non-Resi exposure. DOV is a special situation and we see SWK continuing to put up outgrowth bolstered by a stronger economy and new product momentum. We also like names with either robust balance sheet capacity (ROK, IR, HUBB), deal synergies (PH), and/or portfolio optionality underway (HON, DOV) to increase shareholder value.
- Emerson Electric Co (EMR)
- Hubbell Inc (HUBB)
- 3M Co (MMM)
Jeffrey T. Sprague
Andrew M. Shlosh