Electrical Equipment & Multi-Industry
We are kicking off 2022 with an eclectic group of “Top Picks” that have as a common theme attractive relative valuation. All are demonstrating solid pricing power as we exit 2021 that could lead to margin upside in H2 2022 if input costs ease. Our sensitivity to valuation is magnified by the run the market has had over the last 2 years and the pivot at the Fed. With the exception of DOV, this group also lagged the market in 2021. DOV is the richest of this group, but we now see it fully “graduating” into the compounder class as excellent operational execution is being married with value-creative capital deployment on acquisitions and divestitures. Accretion from recent deals, plus the valuation umbrella provided by the compounder group positions the shares to move higher in 2022. The remaining 3 picks all have concerns that investors must overcome, but we believe these concerns are now largely embedded in the valuation. PH continues to be plagued by concerns about peak PMI and the optics of an eventual order deceleration. However, as illustrated in Figure 1 if we calendarize PH’s sales it still has a full recovery in front of it boosted by Auto, Aero and Industrial CapX markets. The close of the Meggitt deal sometime near midyear should get investors focused on earnings power that we see approaching $25 in 2025.
- Parker Hannifin (PH)
- Johnson Controls, Inc. (JCI)