UBS Investment Research recently published a report entitled “US Research” on December 30, 2011. The report isn’t publicly available, but we will discuss its main points. In the report, they have listed their top stock ideas for 2012. The list includes UBS’s most-preferred and least-preferred stocks from a wide array of sectors. In this article, we will discuss the least-preferred stock ideas for the Industrial sector.
Northrop Grumman Corp. (NOC) provides products, services and solutions to the aerospace, electronics and technical service sectors. UBS has given the company a neutral rating because the company is at a greater risk to the declining Department of Defense budget, as opposed to its peers. The company also has high margins given its cost-reimbursable work. Northrop Grumman has a lot of exposure to the discretionary information technology area which is expected to be cut. Shares of the company are currently trading at $57.9 and are expected to reach a price target of $54 per share. The continued budget and earnings uncertainty is likely to put pressure on the stocks of the company.
Heartland Express Inc. (HTLD) operates as a short- to medium-haul truckload carrier. UBS has given the company a neutral rating, and it remains the most expensive trucking company in its coverage on account of its price-to-earnings and enterprise value to EBITDA ratios. UBS also expects the company’s stock to remain weak in 2012. A decelerated pricing growth is likely to cause significant compression in the company’s valuation multiples. The company also has a limited growth potential due to its focus on the truckload business. Shares of Heartland Express are currently trading around $14, and UBS has given the company a price target of $14. The company is trading at 17.2 times the 2012 price-to-earnings ratio versus the group average of 14.5x. It is also trading at 7.6x the 2012 enterprise value to EBITDA ratio versus the group average of 5.8x.
Southwest Airlines (LUV) operates as a passenger airline, providing scheduled air transport. UBS has given the company a neutral rating. Southwest Airlines has decided to change its network and customer base to fit its cost structure which will result in an increase in costs. Such costs are difficult to decrease in the airline sector. The recent bankruptcy of American Airlines will benefit Southwest Airlines and the company is expected to move higher along with Delta and the rest of the sector. The company is also integrating AirTran, which operates differently from Southwest. Shares of the company are currently trading at $8.5 and are expected to reach a price target of $9.5 per share. The price target is based on a 12x forward price-to-earnings and 7x the enterprise value to EBITDA ratios.
AutoNation Inc. (AN) operates as an automotive retailer in the U.S. It has been given a sell-rating by UBS because of a likely decline in vehicle margins. Luxury incentives are going to end, further impacting the company negatively. The low auto sales in 2007-2010 are likely to have a negative trailing effect on the parts and services segment for AutoNation. The company’s repurchase of shares has provided some earnings tailwind which is expected to be unsustainable. Shares of the company are currently trading at $33.40 and are expected to go south of $30 per share. The price target is based on UBS’s 15x earnings per share estimate for 2012. AutoNation generated a return of more than 32% in 2011. Edward Lampert has a huge position in AutoNation.
Monsanto Co. (MON) provides agricultural products for farming. It has been given a neutral rating by UBS. Unless the company is able to develop a strategic action that re-ignites high growth, the thinning pipeline of blockbuster products is likely to decrease Monsanto’s earnings growth to single digits. The company’s equity performance and valuation multiples are dependent on its earnings growth. UBS is of the opinion that the investors need to wait for a lower entry point on the shares. Monsanto’s shares are currently trading at $77.5 and are expected to go south of $72 per share. The company is trading at 10.3x 2012 enterprise value to EBITDA ratio and it generated a return of 2.2% in 2011.
Nucor Corp. (NUE) manufactures and sells steel and steel products. UBS has given the company a neutral rating. Nucor has the best balance sheet in the U.S. Steel sector along with high levels of liquidity. Also, it has continued to outperform its peers but the share price of the company is expected to decline slightly. The company’s cost inputs from integrated mills have been weakening, resulting in a relative margin squeeze. Nucor has significant exposure to the U.S. construction market which UBS believes is weaker than the automotive, tabular and manufacturing end markets. On the other hand, the new sheet capacity that has been added close to Nucor’s core sheet production facilities will provide headwinds for the company. Shares of Nucor are currently trading around $41 and are expected to go south of $40. UBS recommends waiting for the share price to bottom out before buying it. Jim Simons’ Renaissance has the largest stake in Nucor among the 350+ hedge funds we are tracking.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.