巴克莱-美股-投资策略-投资组合变化：并购加大搅拌不是万能药-2019.3.8-23页 (2).pdf

CORE Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 17.Equity Research 8 March 2019 Restricted-Internal U.S.Multi-Industry Portfolio Change M&A stepping up;Churning is not a panacea Portfolio change and capital deployment are two differentiating factors for the Multi-Industry sector,given the breadth of businesses that many MI management teams preside over,the success of the compounder business model over time,and the wide choice of target industries and assets for entry/exit.Several portfolio changes have been announced in recent months,which have generated considerable debate with investors.What we find most interesting in the context of these discussions:M&A may step up:In our last Portfolio report(Portfolio Change Divergent approaches;July 16,2018)we noted that compounders(who have typically proved the most adept at portfolio management/capital deployment)were divesting assets.Their balanced approach has continued,with a step-up in M&A,some equity issuance and further divestments.We think the compounders moves may presage more M&A in broader MI,given lower organic growth,lower leverage for many companies,and low interest rates(see our ISC takeaways;February 25,2019).Most MI stocks,though,have not performed particularly well following large M&A(excluding the compounders).High recurring sales,but not necessarily Software,M&A targets:The range of assets being acquired is striking(Healthcare IT,car wash equipment,PLCs,electrical switchgear,pumps,Life Sciences,and orthopedic devices),underscoring the continued Multi-Industry aspect of the sector.Despite all the rhetoric on Digital,few companies except ROP and FTV are rushing to undertake software M&A.Most current M&A deals do reflect,though,an effort to render ones portfolio less cyclical and more recurring,possibly reflecting that we are late in the Macro upturn.Fairly disciplined M&A so far:(i)MI companies are acquiring assets for only small premia to their own valuations;(ii)More clarity is provided to investors around M&A financial criteria today than in the past,and most management teams seem to stick to their goals;(iii)MI companies are tending to buy companies with high profit margins,rather than fixer-uppers,which may reduce the risk of unpleasant surprises(Alstom Power,Sound Solutions).While the ROIC on many acquisitions is not exactly spectacular(we estimate 8%by Year 3),the cost of capital is also low today.Asset exits:Over the past 9 months,4 spin-offs/IPOs have been announced,along with several large divestments.Beyond the compounders,MI stocks rarely outperform during the spin period.Post-spin,the share price performance of Spins and RemainCos is similar(+15%rel.).Divested assets tend to be clustered in similar end-markets.Too much change can be a bad thing CFXs portfolio actions over the past 18 months have prompted very mixed investor reactions.Many companies(excluding compounders)who have undertaken major portfolio change in the past 5-10 years have seen their share prices underperform(by 35-40%).How about too little change?Several management teams have retained largely the same portfolio for the past 5 years(although this does not mean they undertook no M&A);interestingly,many of these stocks have outperformed(by 25%).The message is fairly clear over time,there is no substitute for operational execution,and unless one really excels at M&A as a process,one should tread carefully.INDUSTRY UPDATE U.S.Multi-Industry NEUTRAL Unchanged U.S.Multi-Industry Julian Mitchell+1 212 526 1661 BCI,US Lee Sandquist+1 212 526 3717 BCI,US Jason Makishi+1 212 526 5335 BCI,US Barclays|U.S.Multi-Industry 8 March 2019 2 Compounders are stepping up M&A and this could presage more M&A activity across the MI sector.The deployment of the vast majority of their FCF on M&A is central to the value proposition for the serial MI compounders(DHR,ROP,FTV).After a muted 2017-2018,we have seen DHRs acquisition activity pick up;we would expect FTV post-ASP,and particularly ROP,to follow suit over the balance of 2019.We think the compounders will not be alone in this regard.Slowing organic sales growth(which increases the appeal of acquired sales/earnings),accompanied by a low cost of debt and low balance sheet leverage,will likely incentivize other US Multi-Industry management teams to follow suit on M&A.FIGURE 1 Following a three-year lull,compounder M&A activity has accelerated Source:Barclays Research,Company Data,Refinitiv;Data includes M&A spend,net of divestitures for DHR,FTV,ROP FIGURE 2 US Multi-Industry organic sales growth is moderating FIGURE 3 And the cost of debt remains very low,partly due to Western central bank actions/rhetoric in 2019 Source:Company Data,Barclays Research Source:Moodys,Bloomberg Analytics 05,00010,00015,00020,00025,0002013201420152016201720182019M&A Spend,net of Divestment Proceeds($m)Annual Combined Compounder Transaction Value(ROP,DHR,FTV)-20%-15%-10%-5%0%5%10%Organic Sales Growth(%)US Multi AverageUS Multi Median23456789Moodys AA Corporate Bond Rates(%)Barclays|U.S.Multi-Industry 8 March 2019 3 FIGURE 4 While many MI balance sheets are less-levered than in the past Source:Barclays Research,Company Data,*Excludes recent deal impact,CFX DJO,FTV-ASP,GE BioPharma-4-3-2-1012UTXROKPHMMMEMRHONSWKDOVGE*NVTLIIIRRBCETNKMTALLEFTV*CFX*FLOWRXNROPGTESGDIPNRHDS2019 ND/EBITDA vs 2014-2018 Avg.(X)2019 vs 2014-2018 AvgAverageBarclays|U.S.Multi-Industry 8 March 2019 4.This could be a dangerous time for the non-Compounders Per the Audience Response System(ARS)data from our recent Industrial Select Conference,investors seem more wary than in the recent past on M&A for our sector,and a slightly higher share of ARS respondents now view Capital deployment as a major potential risk when assessing the investment case for MI stocks.One encouraging point is that the M&A in the sector over the past 12 months has been fairly disciplined.For one thing,M&A target multiples have tended not to reach a large valuation premium to the buyers own multiple,which reduces the risk of value destruction from the transaction.FIGURE 5 ARS data indicates that investor enthusiasm for Multi-Industry companies undertaking M&A has declined FIGURE 6 And Capital Deployment seems to be a larger investment issue/risk than in prior years Source:Company Data,Barclays Research,Data is from our Audience Response System Survey,which was collected during our Industrial Select Conference on February 20-21st Source:Company Data,Barclays Research,Data is from our Audience Response System Survey,which was collected during our Industrial Select Conference on February 20-21st FIGURE 7 Over 2018-2019 M&A has not typically occurred at a large premium to the acquirers own valuation Source:Barclays Research,Company Data,Refinitiv 0%5%10%15%20%25%30%35%2016201720182019%of Respondents in response to Uses of Excess CashBolt-on M&ALarger M&A0%2%4%6%8%10%12%14%16%18%2016201720182019%of Respondents in response to Significant Investment IssuesCapital Deployment0.05.010.015.020.025.030.0Target Multiple vs Buyer Multiple(EV/EBITDA,X)Acquisition MultipleCompany MultipleIncreased Shareholder ValueAverage Pre-Synergy Acq.Multiple Premium:10%Barclays|U.S.Multi-Industry 8 March 2019 5 There is more clarity and communication around M&A financial criteria/intentions from management teams today than in the past,which may reduce the risk of over-paying or blind-siding investors.Most of these managements are sticking with their stated criteria.The ROICs generated by recent acquisitions on average appear to reach 8%by Year 3(our estimates),which is respectable enough,in an environment of low rates.FIGURE 8 Management teams are clearer today with their M&A criteria Source:Barclays Research,Company Data TickerGeneral Guidance or Specific Acquisition?ROIC TargetROIC Target YearEPS Accretion TargetEPS Accretion Target YearOtherSourceALLEGeneral12%3Accretive2May 2017 Investor MeetingCFXDJO10%5Accretive(exc-charges)1CFX-DJO Acquisition CallDHRGE Biopharma+HSD5Accretive(exc-charges)1DHR-GE Biopharma Acquisition DOVGeneral10%3Sep 2018 Investor MeetingEMRV&CAccretive2Cash Accretive Year OneFeb 2017 Investor MeetingETNGeneral300bps WACCAccretive2Feb 2019 Investor MeetingFLOWGeneral10%Accretive10%EPG 2017IRGeneralROICWACC3AccretiveWACC2Q4 2018 Earnings callPHClarcor+HSD5Accretive(exc-charges)1PNRGeneral+DD3Aug 2016 Investor MeetingRBCGeneralROICWACC3Accretive1Feb 2018 Barclays ConferenceROPPowerPlanImmediately Cash AccretiveEPG 2018RXNGeneralROICWACC1-3Nov 2018 Sell-Side ConferenceSWKGeneralAccretive(exc-charges)1CFROI 12-15%UTXRockwell CollinsAccretive1Nov 2018 Separation Investor Call FIGURE 9 And most companies are sticking by them,with M&A deals generating a high single digit ROIC Source:Barclays Research,Company Data,*MMM Acquisitions were:Membrana,Capital Safety,and Scott Safety and the returns are on a 5-year basis 0%2%4%6%8%10%12%EMR-TXT(Tools&Test)MMM-VariousCompanies*FTV-ASPCFX-DJOIR-PFSUTX-COLFTV-AccruentAverageYear 3 Cash ROIC(%)Barclays|U.S.Multi-Industry 8 March 2019 6 However,M&A does seem to pick up later in the Macro cycle,and animal spirits have clearly been driven higher among MI CEOs given the rebound in industrial equity prices in recent months.The risk is that this M&A discipline starts to erode.The history in this sector has been that large M&A is rarely rewarded by shareholders,beyond the compounders.FIGURE 10 US Multi-Industry:Cumulative Share Price Performance post-Large M&A Source:Barclays Research,Company Data,Refinitiv-2%-5%-7%-12%-33%-42%-47%-52%-100%-33%-150%-100%-50%0%50%100%150%UTX-COLEMR-V&CPH-ClarcorSWK-Black&DeckerUTX-GRETN-CooperJCI-TYCPNR-Tyco FlowGE-AlstomAverageShare Price Performance Since Deal Close(%)Vs S&PAbsolute PerformanceBarclays|U.S.Multi-Industry 8 March 2019 7 More emphasis on recurring sales and high margins in most M&A;many Industrial companies are steering clear of large software M&A,for now Despite the push for portfolio simplification over the past 6-7 years,most companies in our coverage are still acquiring across a very diverse range of industries and product types.One common theme among this disparate group of assets is that many of the targets were,or are,viewed as offering a high share of recurring sales.We show below an example from one of the more active MI acquirers(FTV),whereby the share of recurring sales is much higher than the acquirers average share.FIGURE 11 Recent Acquisitions in Multi-Industry Source:Barclays Research,Company Data FIGURE 12 FTVs acquisitions/divestments have been accretive to its recurring revenue profile Source:Barclays Research,Company Data AcquirorTargetDateEnd Market/ProductDHRGE(BioPharma)02/25/19BioPharma/Life SciencesIRPFS02/11/19Flow Control/PumpsDOVBelanger01/16/19Car WashingPNRAquion&Pelican Water01/07/19Water FiltrationMMMM*Modal12/19/18Healthcare ITGDIMP Pumps12/13/18Industrial PumpsCFXDJO11/19/18OrthopedicsEMRGE(Intell.Platforms)10/02/18Process AutomationHONTransnorm10/01/18Warehouse AutomationFTVAccruent07/31/18Construction SoftwareAccruentGordianASPLandauerIndustrial Scientific Corp.Orpak Systems LimitedeMaint EnterprisesAutomation&Specialty0%10%20%30%40%50%60%70%80%90%100%0500100015002000250030003500Share of Sales from Recurring RevenuePurchase/Sale Price,$mFTV PF Recurring Revenue,as a share of sales increased from 20%to 30-35%Barclays|U.S.Multi-Industry 8 March 2019 8 Also,most of the targets enjoy high operating margins.There has been very little appetite for most management teams to acquire turn-arounds;some of those which were undertaken in this cycle(DOV Sound Solutions,GE Alstom Power)did not turn out too well.FIGURE 13 Profit margins tend to be high among the M&A targets Source:Company Data,Barclays Research For all the high growth opportunities offered by rising IT penetration in the Industrial world,and the fact that every MI CEO now discusses Digital or IoT strategies,management teams for the most part remain reticent to undertake large software acquisitions,with the exception of ROP and FTV.Most investors we speak to are not keen for MI companies to make a big inorganic push into software ROKs acquisition of a stake in PTC raised many questions among investors as to the strategic merit as well as price of the transaction.Many investors are also concerned as to the execution/integration around FTVs Gordian and Accruent acquisitions,given the company paid a high price,and FTV had no large existing software assets.0%5%10%15%20%25%30%35%40%45%DHR-GE(BioPharm)FTV-AccruentMMM-M*ModalIR-PFSHON-TransnormFTV-ASPUTX-COLCFX-DJOPNR-Aquion&Pelican WaterEMR-TXT(Tools&Test)AverageTarget EBITDA Margins(%)FIGURE 14 Announcement of Software deals have done little to drive share price outperformance at FTV and ROK Source:Barclays Research,Company Data,Refinitiv-6%-4%-2%0%2%4%6%8%10%12%14%FTV-AccruentROK-PTCFTV-AccruentROK-PTCShare Price Perf vs S&P(%)Share Price Perf in 12M Prior to Deal AnnouncementShare Price Perf since Deal AnnouncementBarclays|U.S.Multi-Industry 8 March 2019 9 We show below the main industries where we think various companies in our sector will choose to deploy capital.Aerospace will no doubt remain a popular area for M&A;both ETN and PH have cited their appetite to invest in this market.FIGURE 15 Potential Markets that Multi-Industry companies are likely to acquire in Source:Barclays Research,Company Data FIGURE 16 Global Industrial M&A Transactions by Market($m)Source:Barclays Research,Company Data,Refinitiv CompanyAreas of Potential InterestALLEBolt on Doors/Locks;Software CapabilityCFXHealthcare(DJO acquisition)DHRHealthcare(BioPharma Acquisition)DOVBolt-on M&A for existing platformsEMRDiscrete/Process AutomationETNAerospace,Electrical,e-MobilityFLOWBolt-ons in Industrial,EnergyFTVSoftware,High recurring Revenue,Healthcare(ASP)GDIBolt-on M&A for existing platformsGTESBolt-on M&A for existing platformsGEN/MHDSBolt-on M&A for existing platformsHONSoftware,Warehouse automation,ProductivityIRHVACKMTN/MLIIHVACMMMHealthcare,Industrial,Safety,Factory AutomationNVTBolt-on M&A for existing platformsPHAerospace,Engineering Materials,Instrumentation,FiltrationPNRWaterRBCBolt-on M&A for existing platformsROKSoftware,Process automationROPSoftware,Healthcare,High recurring RevenueRXNBolt-on M&A for existing platformsSWKBolt-on Tools,IndustrialUTXN/M010,00020,00030,00040,00050,00060,00070,00080,00090,000Total M&A Deal Value by End Market($m,since Jan 1 2012)Barclays|U.S.Multi-Industry 8 March 2019 10 Given high public valuations,we are seeing some of the better portfolio managers still selling businesses/issuing their own equity,while undertaking M&A All