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Quarter-End Insights

Industrials: Despite Bullish CEO Talk, Few Values

Among a mostly fairly valued industrials sector, some good values remain.

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  • At a gathering of diversified industrial CEOs at the end of May, bullishness was a predominant theme. Nearly every CEO reiterated that the macroeconomic outlook was extremely healthy, as was the case last year. Even so, we find few values in the general industrials sector, as the market-cap-weighted price/fair value estimate stands at 1.03, suggesting that industrials stocks are trading within a realm of reasonableness.
  • The CEOs also touted tax reform. We see wide-moat-rated industrial firms with operations based primarily in the U.S. disproportionately benefiting from this reform. Specifically, the latest changes to the Internal Revenue Code of 1986 encourage capital expenditures by allowing companies to expense these investments on a temporary basis.
  • After General Electric CEO John Flannery appeared to waffle on his company's commitment to its 2019 dividend at a recent industrials conference, GE’s board reaffirmed that commitment by declaring a quarterly dividend of $0.12 per share on June 8, 2018. Even so, we believe the company will continue to struggle with three primary issues, including weakness at its power segment, liabilities in the capital segment, and the need for capital, both for reinvestment and the dividend.

At a recent industrials conference in Florida, CEOs consistently preached macroeconomic bullishness, and nearly all expressed a near-uniform commitment to share buybacks. Implicit in these endorsements is that the underlying stocks of their companies are cheap. Even so, in aggregate, we find few bargains in industrials. Currently, the market-cap-weighted price/fair value estimate for the sector stands at 1. Fundamentals, however, remain attractive.  Honeywell International (HON) CEO Darius Adamczyk said he’s "quite bullish on 2018, 2019 and to the extent he can see 2020," and added that "overall, the markets look very, very good, almost without exception." Honeywell has the advantage of several long-cycle businesses in its portfolio. Adamczyk said that he observes Honeywell’s aerospace backlog increasing, as well as healthy order activity from some of its technology and automation offerings. Representatives for  3M (MMM) were also enthusiastic about certain newer, innovative offerings, particularly in the data center space, which we also see also as a faster-growing line of business. 3M's immersion cooling, which allows data center companies to dip their electrical components into a nonconducting liquid to prevent overheating, is the latest response to this rapid growth. 

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Joshua Aguilar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.