Capital Goods Companies Most Vulnerable to

Portfolio Strategy Weekly Audio:
Bull Case Intact, But Avoid Industrials
Downside to Industrial Earnings Still Underappreciated
A 5 Minute Audio Brief
Chris Senyek, CFA, CPA
Head of Macro Research
Chief Investment Strategist
646-845-0759
[email protected]
Chip Miller, CFA, CPA
646-845-0752
[email protected]
Adam Calingasan, CFA, CPA
646-845-0757
[email protected]
January 21st 2015
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Rising Global Liquidity =
Strong Dollar & Downward Pressure on Commodities
•
We expect the ECB/BOJ/PBOC to ease, while the Fed remains on hold.
•
However, overall market behavior — including U.S. dollar strength, falling oil & commodity
prices, and higher volatility — are consistent with our base case.
•
Ultimately, rising global liquidity should lead to double-digit stock returns in 2015.
2
Sources: Wolfe Research Portfolio Strategy, Central Banks News Releases and Press Conferences, and Bloomberg.
Rising Global Liquidity =
Boost to the Consumer / Energy Capex Cuts
•
As we wrote about two weeks ago, lower energy prices should provide a significant boost to
consumer confidence and spending.
•
However, we expect Energy & Materials to significantly cut capex in the quarters ahead.
3
Sources: Wolfe Research Portfolio Strategy.
Consumer Confidence Jumps,
While CEO Confidence Stagnates
•
Our views are being confirmed by recent confidence readings.
•
In January, U. Michigan consumer sentiment rose to its highest level since 2004.
•
Readings on business confidence have been flattish. Combined with downward pressure on
oil prices, we expect significant Energy company capex cuts.
Consumer
confidence leads
spending by
roughly four
months
Notes: Durable Goods orders exclude Transportation.
Sources: Wolfe Research Portfolio Strategy, Bureau of Economic Analysis (BEA), Census Bureau, CEO Magazine, University of Michigan, and Bloomberg.
We believe that
December’s weak
retail sales report
will prove to be a
temporary pause
4
Underweight Industrials on Global Growth & Capex Cuts
•
We’re Overweight areas most exposed to consumption: Tech, Staples & Discretionary.
•
We’re Underweight sectors most exposed to commodities: Materials, Energy & Industrials.
•
The Industrials sector faces macro headwinds from lackluster global growth.
5
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Commodity Research Board (CRB), JPMorgan, and Bloomberg.
Energy Capex Cuts = Capital Goods Downward Revisions
•
Historically, oil prices have led Energy sector capital spending by roughly two quarters.
•
Within the S&P 500, the Energy sector now accounts for a third of total capex.
•
We believe that there could be several ‘waves’ of capex cuts, starting with upstream E&Ps,
and extending to midstream and downstream companies if oil prices remain depressed.
6
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Compustat, Thomson Financial, Bloomberg, and FactSet.
Energy Capex Cuts = Capital Goods Downward Revisions
•
Energy Capex and Capital Goods earnings have been highly correlated.
•
We believe equipment made for ‘later-cycle’ end markets is generally ‘higher margin.’
•
We expect Capital Goods companies to experience significant downward revisions.
7
Sources: Wolfe Research Portfolio Strategy, Standard & Poor’s, Compustat, Thomson Financial, Bloomberg, and FactSet.
Capital Goods Companies Most Vulnerable to Capex Cuts
Construction & Engineering — End Market Revenue Exposure (%)
Name
Ticker
Cap
($B)
Oil & Gas
Chemicals
Mining
Power /
Utilities
Other
Infrastructure
Gov't
Non-Resi
Const
Other
Industrial
Health
Care
Other
Construction & Engineering
Fluor
FLR
8.5
42
0
14
5
4
10
10
8
4
2
Quanta
PWR
6.2
29
0
0
69
0
0
0
0
0
3
Jacobs Eng
JEC
5.9
25
23
7
2
11
18
6
4
4
0
AECOM
ACM
2.9
17
0
17
17
17
17
0
17
0
0
EMCOR Grp
EME
2.9
10
0
0
10
25
10
10
25
10
0
28
4
11
14
10
12
6
10
3
1
OnHighway
Marine
Total
Heavy Machinery — End Market Revenue Exposure (%)
Name
Ticker
Cap
($B)
Oil & Gas
Mining
Power
Infrastructure
Non-Resi
Const
Ag
Rail
Other
Heavy Machinery
Caterpillar
CAT
52.1
10
35
8
11
15
4
0
7
4
7
Cummins
CMI
25.9
3
3
26
0
5
5
50
3
3
2
PACCAR
PCAR
22.9
0
0
0
0
0
0
92
0
0
8
Joy Global
JOY
4.3
0
100
0
0
0
0
0
0
0
0
Wabtec
WAB
8.0
0
0
0
0
0
0
0
0
100
0
Trinity Ind.
TRN
3.9
5
0
5
12
0
0
0
0
66
12
Osk Kosh
OSK
3.2
0
0
0
16
42
0
6
0
0
36
Terex
TEX
2.5
5
12
5
16
39
0
0
0
0
22
Notes: Data represents Wolfe Research Portfolio Strategy estimates based upon company reports & filings, and disclosures in publicly-available databases
Sources: Wolfe Research Portfolio Strategy Company Reports, Presentations & Filings, Bloomberg, and FactSet.
8
Capital Goods Companies Most Vulnerable to Capex Cuts
Electrical Equipment — End Market Revenue Exposure (%)
Name
Ticker
Cap
($B)
Oil & Gas
Chemicals
Infrastructure
Distrib'd
Power
Utilities /
Power
Resi &
Non-Resi
Const
Aerospace
Auto &
Truck
Diversified
Industrial
Data / IT /
Software
Other
Electrical Components & Equip
Emerson Elec
EMR
41.5
19
5
0
4
5
14
0
0
41
11
Eaton
ETN
30.5
1
0
0
0
8
26
8
18
27
11
0
0
Rockwell Auto.
ROK
14.3
10
10
10
0
0
0
0
15
30
0
25
AMETEK
AME
12.1
15
23
0
3
3
0
15
3
12
0
26
Industrial Conglomerates — End Market Revenue Exposure (%)
Name
Ticker
Cap
($B)
Oil & Gas
Other
Energy
Mining
Distrib'd
Power
Utilities /
Power
Resi &
Non-Resi
Const
Aerospace
Diversified
Industrial
Health
Care
Other
Industrial Conglomerates
GE
GE
238.8
13
5
1
4
10
0
15
1
13
38
3M
MMM
102.4
5
1
0
0
0
6
1
26
18
43
Danaher
DHR
58.3
9
4
0
0
0
0
0
36
47
4
Roper Ind
ROP
15.1
14
2
0
2
2
0
0
24
28
28
Carlisle Cos
CSL
6.0
0
0
2
0
0
52
18
26
2
0
Notes: Data represents Wolfe Research Portfolio Strategy estimates based upon company reports & filings, and disclosures in publicly-available databases
Sources: Wolfe Research Portfolio Strategy Company Reports, Presentations & Filings, Bloomberg, and FactSet.
9
Capital Goods Companies Most Vulnerable to Capex Cuts
Industrial Machinery — Geographic Revenue Exposure (%)
Americas
Name
Ticker
Cap
($B)
United
States
Canada
Europe, Middle East & Africa
Other
Americas
Total
Americas
Europe
Middle
East &
Africa
Total
Europe,
M. East &
Africa
Asia Pacific
China
Australia
Other
Asia
Pacific
Total
Asia
Pacific
Other &
NonDisclosed
Industrial Machinery
ITW
36.3
43
0
7
50
28
0
28
0
0
17
17
6
Parker Hannifin PH
ITW
18.2
0
0
59
59
0
0
0
0
0
0
0
41
Ingersoll-Rand IR
16.3
59
0
0
59
0
0
0
0
0
0
0
41
Stanley B&D
SWK
14.7
47
5
7
60
29
0
29
0
0
10
10
0
Pentair
PNR
12.2
46
0
0
46
26
0
26
0
10
18
29
0
Dover Corp
DOV
11.4
52
0
10
62
15
0
15
0
0
18
18
5
Pall Corp
PLL
10.7
0
0
0
0
73
0
73
0
0
27
27
0
Snap-On
SNA
7.8
64
0
0
64
20
0
20
0
0
0
0
16
Flowserve
FLS
7.6
34
0
0
34
0
42
42
0
0
11
11
12
Xylem Inc
XYL
6.3
37
0
0
37
36
0
36
0
0
12
12
14
IDEX Corp
IEX
5.8
49
0
0
49
26
0
26
0
0
15
15
10
Lincoln Electric LECO
5.1
47
0
0
47
0
0
0
8
0
0
8
45
Donaldson
DCI
5.0
41
0
0
41
29
0
29
0
0
21
21
8
Graco
GGG
4.6
45
0
0
45
0
0
0
0
0
0
0
55
Nordson
NDSN
4.6
30
0
7
37
29
0
29
0
0
34
34
0
ITT Corp
ITT
3.3
36
0
0
36
11
0
11
0
0
0
0
53
SPX Corp
SPW
3.4
46
0
0
46
17
6
23
5
0
0
5
27
CLARCOR
CLC
3.1
69
0
0
69
8
0
8
0
0
9
9
14
Valmont Ind
VMI
2.9
63
0
0
63
0
0
0
3
15
0
18
19
Timken
TKR
3.6
67
0
9
76
0
13
13
0
0
11
11
0
Notes: Data represents Wolfe Research Portfolio Strategy estimates based upon company reports & filings, and disclosures in publicly-available databases
Sources: Wolfe Research Portfolio Strategy Company Reports, Presentations & Filings, Bloomberg, and FactSet.
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Wolfe Research, LLC Fundamental Stock Ratings Key:
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Expect the industry to outperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12 months.
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Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12
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Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) by at least 10% over the next 12
months.
Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of December 31, 2014):
Outperform:
41%
2% Investment Banking Clients
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50%
1% Investment Banking Clients
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0% Investment Banking Clients
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