Electrical Equipment & Multi-Industry
The United States is now in the longest economic expansion in history and the current bull market is also the longest in history. These facts do not mean we have to have a downturn imminently, but some caution is warranted. We argued earlier in this expansion, that it could run for a long time, because it was subpar in amplitude and rolling slowdowns along the way kept things from overheating. So far that has been the correct interpretation. We still do not see corporate behavior that would suggest business is overinvesting in a way that sows the seeds of a downturn. On the contrary, we see a relative muted outlook that points to discipline on capital spending (CapX). This could result in somewhat mediocre growth, but importantly the continuation of growth. Good companies should be able to grind out growth in such an environment with new products, aftermarket and share gain.
While we expect growth to be slow in 2020, indicators are starting to look a little bit better. Comps will make things at least look better in H2, but actual growth will likely still be muted. Also on a broader macro basis we have some positive developments such as a) the relentless strengthening of the dollar appears to have finally run its course; b) the yield curve is no longer inverted; c) Oil has been stable and Copper has moved higher pointing to some reflation tailwinds. This all appears supported by central banks remaining accommodative. The proposed Phase 1 trade deal between the U.S and China, assuming it is signed, is more of a truce and an end to escalation rather than a cessation of hostilities. We could have a relatively calm H1 on the policy front, but H2 could bring elevated uncertainty on the political front in the US. Estimates look fairly well dialed, but we see risk the stocks are discounting more.
Two of our three top picks for 2020 are UTX and EMR, but in actuality these may only be Q1 or H1 picks. DOV could have more runway. UTX will be completing its spin-offs of Otis and Carrier and merging its Aerospace business with Raytheon likely in the March-April time frame. We see sum of the parts upside in the separation and therefore favor the shares into the split. However, our ratings on Otis and Carrier will be dependent on how they are valued at the time of separation. Our view on EMR is also a bit short term focused, although we like secular trends in downstream CapX which could keep us engaged longer. We see a potential catalyst in calendar Q1 out of EMR’s outlook meeting (Feb 13). DOV continues to be an interesting self-help story. We see clear margin upside in the Refrigeration (link) and Fueling (link) segments as recently outlined in the referenced links.
- United Technologies Corp (UTX)
- Emerson Electric Co (EMR)
- Dover Corp (DOV)
- ITT Corp (ITT)
Jeffrey T. Sprague
Andrew M. Shlosh