Electrical Equipment & Multi-Industry
Although stocks have rallied on trade optimism we are concerned that companies have already hit the CapX pause button. Business confidence has taken a hit. It seems unlikely that activity quickly ramps back up even with a trade truce, although the cost relief of tariffs would certainly be welcomed. We think we face a multi-quarter Industrial slowdown, but not an outright general economic recession. General consumer resilience should provide some indirect support into industrial markets.
Stocks are clearly looking through macro concerns and anticipating relief on trade. While the odds of some positive resolution do seem higher now than in past period of trade hope, it’s difficult to see the catalyst for a meaningful acceleration of activity. Easy comps will help with optics in H2 2020, but election uncertainty could be an issue at that point. Global monetary stimulus has ramped up, which could continue to support share prices, but may not have much effect on fundamental business investment decisions. Estimates have drifted lower for 2020 in general, but there are few cases of actual down earnings expected. As a result, there is not a notably depressed base to recover from. Valuations look relatively full/fair especially given an earnings base that is not really depressed.
UTX, DOV and HON are our Top Picks for 2019. We view DOV’s restructuring story as both an idiosyncratic and defensive play. We continue to be impressed by DOV’s improved execution. We view HON as a stalwart and expect it to continue to outperform. While the debate will continue to rage about shifting from quality/defensive names like HON, to more cyclically levered stocks, we continue to like HON shares in this uncertain macro environment. Valuation is no longer cheap, but the re-rate the company has experienced was properly earned through portfolio changes and operational execution. UTX continues to be an interesting value story with its commercial businesses trading cheap to building products peers on FCF yield and strength in its Aerospace businesses.
- United Technologies Corp (UTX)
- Dover Corp (DOV)
- Honeywell International Inc (HON)
- ITT Corp (ITT)
Jeffrey T. Sprague
Andrew M. Shlosh