Quarter-End Insights

Industrials: Despite Bullish CEO Talk, Few Values

Joshua Aguilar
  • 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.

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