Pentair (PNR +2.1%) and Roper Technologies (ROP +0.9%) are upgraded to Overweight from Neutral at J.P. Morgan, which believes the stocks have not received as much as credit as other electrical equipment and multi-industry stocks for anticipated Trump-related benefits.
On PNR, given low expectations set in October and less stock appreciation due to an already low tax rate, the firm sees potential for relative upside to organic growth in a better economy and less downside in a sluggish/steady-state economy, all at an attractive discount.
JPM downgrades TriMas (TRS +0.7%) to Neutral from Overweight, citing valuation following the stock's outperformance over the last three months; the firm also reiterates Honeywell (HON +0.5%), Ingersoll-Rand (IR +1%) and Danaher (DHR +0.3%) at Overweight, and Rockwell Automation (ROK +0.8%) at Underweight while naming General Electric (GE -0.2%) a "top avoid," expecting core operating performance to track below plan driven by weak fundamentals.
The potential EPS upside of U.S. tax reform should reach double digits for the four companies, while Eaton (NYSE:ETN) - already at a group-low ~10% global effective tax rate - should see only minimal upside, according to Winoker, who notes that tax deductibility of capex investment also would spark spending in the U.S.
Bernstein's covered companies derive between 10% (3M) and 60%-plus (Rockwell Automation (NYSE:ROK)) of revenues from customers’ capex spending, so the impact could be meaningful; the firm rates Allegion (NYSE:ALLE), DHR, Dover (NYSE:DOV), FTV, Honeywell (NYSE:HON), Ingersoll-Rand (NYSE:IR), Johnson Controls (NYSE:JCI) and Pentair (NYSE:PNR) at Outperform, with EMR, ETN, General Electric (NYSE:GE), Idex (NYSE:IEX), MMM and ROK at Market Perform.
"The purchase of Pentair’s (PNR -1.6%) Valves & Controls business adds definitive risk to Emerson’s (EMR -3.8%) earnings over the next several years," says Buckingham Research's Joshua Pokrzywinski, downgrading Emerson to Underperform from Neutral, and cutting the price target to $44 from $49.
“We believe the strategic overlap is less than ideal."
Also downgrading is Credit Suisse, to Neutral from Outperform. The price target remains at $57.
“Investors will be rightly cautious of this pitched ‘strategic deal’ at the wrong time of the cycle,” says Stifel's Robert McCarthy as he maintains his Buy rating. "The perception [will be] that Emerson has caught a falling knife in the same general end market where it struggled for the past two plus years.”
It's a move in line with Emerson's two core verticals, particularly combined with Emerson's planned multibillion-dollar divestitures of Network Power, Leroy-Somer and Control Techniques.
“This acquisition delivers on our strategic plan of investing in Automation Solutions and in markets where we have a global leadership position and see significant long-term growth opportunities,” says CEO David Farr in a statement.
The deal's expected to close in four to six months.
Emerson Electric (EMR +0.2%) has made an offer to acquire pump manufacturer Pentair's (PNR +0.8%) valves and controls business, in a sale could be valued at ~$2B (£1.5B), Reuters reports.
Such a deal would free PNR from a unit that CEO Randy Hogan considers a laggard in generating cash, while allowing EMR to expand within its core sectors as it seeks to shed its network power and motors and drives businesses, according to the report.
Pentair (PNR -1.3%) is upgraded to Buy from Neutral with a $70 price target, lifted from $59, at Seaport Global, which believes the worst margin performance is behind the company in its V&C segment.
The firm says it has increased confidence in management's forecast for a 50% reduction in decrementals in Q2 as "volumes increase seasonally and high-cost inventory is turned."
While expected Engineered Projects within V&C to remain challenged on the top line, Seaport says upside to its estimates is likely "if short-cycle spending re-accelerates, as we believe pent-up demand exists in the market, but timing remains uncertain."
PNR is working with Citigroup on a potential sale of the unit, which could fetch more than $2B, according to the report.
The valves and controls business is PNR's largest but its Q1 sales fell 10% Y/Y and income plunged 54%, in part because of declining energy demand; the company has predicted an 8% Y/Y drop in full-year revenue for the unit.