JP Morgan (JPM) has published the outlook for the Capital Goods/Industrials sectors. Below you can find commentary on the various industries and top picks in the sectors.
Aerospace and Defense
The year 2012 looks to be a promising one for the aerospace and defense industry. It is expected that airplane deliveries will increase by up to 40% in the next five years. Demand for aircrafts will remain solid, despite the economic turmoil. Growth in this industry is expected to increase further, following the recovery in 2011. The Congressional Super Committee has been unable to reach a mutual agreement, forcing the defense side of the industry to remain stagnant. Sales in the defense industry are expected to decline in the next few years, sending a bad signal to the investors.
Boeing Company (BA) is J.P. Morgan’s top pick in the aerospace and defense industry for the year 2012. The company has had a solid demand for its aircrafts even after the economic downturn. Despite the termination of the 787 aircraft, Boeing expects to rebound with a strong demand for its 737 MAX airlines, the launch of the new 787-10, and a revitalization of the popular 777 aircraft. Boeing’s current share price is $70.87 and it is expected to go north of $80.65. With an enormous market capitalization of $52.67 billion, Boeing remains one of the top aerospace and defense corporations. Boeing has earnings per share of $5.05 and this could be coupled with a dividend increase in 2012. Billionaire Ken Fisher has more than $300 million invested in BA at the end of third quarter.
Airfreight and Surface Transportation
Costs of production are expected to decrease for the next year and prices are expected to remain stable for this industry. J.P. Morgan expects earnings per share to grow and operating costs to remain low. The cyclical industry groups, namely Werner Enterprises (WERN), Swift Transportation (SWFT), J.B. Hunt Transport Services (JBHT), and a few others face a greater risk due to a slowing down of the economy.
Union Pacific (UNP) is the top pick in this industry due to the repricing of old contracts, giving it a substantial revenue increase. Repricing will also cause the earnings to grow by up to 10 percentage points. UNP relies heavily on PRB coal; making the company less prone to a change in the export coal demand and, thus, decreasing the overall risk. The current price per share of $102.84 may fluctuate between $108 and $77 but is expected to remain high. Union Pacific has a market capitalization of $49.7 billion and an EPS of $6.30 with an overweight ranking by JP Morgan. Chris Hohn had nearly $300 million invested in UNP at the end of September.
Electrical Equipment and Multi-Industry
The year 2011 was not a good year for this group, marked by a 9% downturn over the previous year. The sovereign debt crisis along with other macro uncertainties has led to retardation in the industry’s growth. The current structural problems are also responsible for the low valuation of the industry.
SPX Corporation (SPW), a global manufacturing and industrial equipment supplier, is the best pick for this industry. With a slow recovery due to an underperforming stock, SPX Corporation is expected to benefit fully from its earnings cycle in the year 2012. The transformer business run by SPX is finally out of the trough, signaling an increase in the EPS. Another benefit for SPX is the continued increase in pricing and successful restructuring efforts. Additionally, the Clydeunion deal is expected to add to earnings per share. Shares of SPX are currently trading at $62.82 per share and are expected to go north of $87 while earnings per share are $3.59.
Engineering & Construction
Cyclical businesses in the E&C industry are expected to perform rather badly, thus it is advisable to invest in companies that are secular in nature; namely Natural Gas and Transmission & Distribution. Q3 has shown that E&C has not faced any disruptions due to adverse economic conditions. J.P. Morgan has chosen E&Cs that are exposed to the private sector market such as Oil & Gas and mining but they remain cautious when it comes to public sector markets.
Chicago Bridge & Iron (CBI) is the most favored company because of a business mix that will give more opportunities to the international energy markets and fewer opportunities to the unfavorable public sector markets. Chicago Bridge & Iron have a diversified portfolio of projects, giving it an edge over its competitors. A share price of $39.47 (which is expected to go north of $45) as well as a P/E ratio of just 15.7x makes it the top company in the industry.
Despite the presence of a low-growth environment, the environment services sector has remained fairly consistent. Sales and cash flows have not decreased even in the recession and a recovery is expected to be beneficial for the industry. The slow recovery, however, makes pricing a downfall in intense competition. Companies can increase shareholder value through share buybacks and dividends. Two companies, one dealing with solid waste and the other dealing in specialty waste, have been nominated as good stock investments for 2012. They are described below.
Waste Connections (WCN) is a company that provides solid waste collection, transfer, disposal, and recycling services. It has a beneficial business model that protects it from adverse conditions. Coupled with the consistent cash flows and new acquisitions, Waste Connections is a solid investment opportunity. Currently, its shares are trading at $32.83 and are expected to remain within a range of $25 to $36 per share. Waste Connections has earnings per share of $1.43 and market capitalization of $3.67 billion
Clean Harbors (CLH) is a market leader when it comes to dealing with the disposal of hazardous waste. J.P. Morgan forecasts that the company will continue growing in the long run and the recent acquisition has also shown benefits to investors. The current price per share is $61.36 .Clean Harbors has earnings per share of $2.11 and market capitalization of $3.04 billion.
The agricultural sector is not severely impacted by the macroeconomic trends, thus the agri commodity prices have remained consistent. A bountiful October harvest has improved the supply side of the sector, which has also led to an increase in the demand for equipment purchases. The demand side has risen due to the historic high in the global food price index.
Deere & Co. (DE), the global leading manufacturer of agricultural machinery, was nominated as the best stock for this sector. Solid pricing of crops, dairy, livestock, sugar, wheat, and soybeans in different parts of the world have contributed to farm cash receipts. The company’s recent earnings report was above expectations and this upward trend is expected to continue in 2012, with equipment sales, net income, and EPS showing higher-than-anticipated values. Deere’s stock is currently trading at $78.38 and is expected to go north of $99. It has a large market capitalization of $32.4 billion and has earnings per share of $6.62. Ken Fisher has also a large position in DE. Billionaire Jeff Vinik also likes Deere.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.