Industrials Momentum – CAT Winning and GE Losing

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

October 13th, 2017

Industrials Momentum – CAT Winning and GE Losing

  • Continuing our theme of operating leverage and momentum, we examine Industrials in the US to look for value where estimates are rising.
    • The eye catcher is CAT, which we will cover separately, but which has seen a major positive revision in a very short period – especially for a large cap stock.
    • We can see both upside and downside risk to CAT depending on the underlying assumption set and it warrants further review.
    • If the CAT estimates and momentum are appropriate – TRN, IIVI and GNRC look more interesting to us – see recent research.
  • At the other end of the scale is GE – where revisions remain negative and the corporate body language is doing very little to inspire confidence.
    • GE needs a radical strategy shift to restore confidence – see recent research.
    • This may not be enough to offset the negative reaction to a significant 2017/2018 earnings reset, a potentially alarming reconciliation of recent cash flows and earnings and an (inevitable) cut to the dividend.
    • Mr. Flannery must clean house completely to have credibility through year end. We remain concerned that the stock will need to go lower to find a stable floor.
  • Pricing/valuation anomalies include:
    • High values on Ag Equipment, despite a weak farm economy and no sign of recovery.
    • Sell side dislike of Pentair – despite activist involvement – activists have generally led to higher values even when campaigns have been unsuccessful, particularly Trian.
    • Expensive companies levered to the wrong industries (those not expected to grow well): DE, GGG, MMM, DCI.
    • Expensive companies too popular with the analyst community: NDSN, AME (possibly) and HON (possibly).
  • In Exhibit 1 we highlight the more interesting ideas – a complete table and some further comments are contained in the Addendum.

Exhibit 1

Source: Capital IQ and SSR Analysis

Addendum

As with Chemicals, there is no real correlation between revisions and recommendations – we are not seeing increasing estimates making analysts more bullish and decreasing estimates where analysts are more bearish. To a degree this is a function of analysts sticking to their stories, but it is also reluctance to chase a stock where valuations are high, despite the earnings momentum. If you have missed a 50% move you feel that you are late to the story and do not want to risk upgrading a company at the top; however, if the earnings momentum is real – see Exhibit 3 for this week’s IMF GDP forecast revisions – you may miss the next 50%.

Exhibit 2


Source: Capital IQ and SSR Analysis

Exhibit 3

Source: IMF and SSR Analysis

Exhibit 4 contains the data for all of the companies we chose to include in the analysis – we have added the number of analysts covering each stock, casting doubt on the relevance of some data where there are only one or two coverage analysts: BGC for example.

Exhibit 4

Source: Capital IQ and SSR Analysis

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