瑞信-全球-机械与建筑业-全球机械与建筑行业投资策略分析-2019.5-26页.pdf

Jamie Cook,CFA Themis DavrisKevin WilsonAlexander Khan Research Analyst Research AnalystResearch Analyst Research Analyst 212-538-6098+44 207 888 1060 212-325-5079 212-325- DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse 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.WHATS COOKININ MACHINERY AND ENGINEERING&CONSTRUCTIONEARNING THE HARD WAYCATALYST WATCH5/7GTES Q119(Q1:$0.28;FY19:$1.24)5/7JEC Q219(Q2:$1.09;FY19:$4.58)5/7Brazil Tractor Data5/7Brazil Truck Data5/8ACM Q219(Q2:$0.63;FY19:$2.75)5/8EIA Petroleum Status Report 5/9MTW Q119(Q1:$0.00;FY19:$1.27)5/9-10(est.)US Tractor Data5/9-10(est.)German Tractor Data5/10WASDE5/10Baker Hughes Rig CountWHATS HOT AND WHATS NOTMachinery:The Machinery group largely declined this week,while CMI and AGCO outperformed the group following earnings.CMI rose after beating Q119 consensus estimates by 11%on a better top line and margin print and raising FY19 estimates on an improved margin outlook.The improved margin forecast was largely driven by good execution and lower material costs.However,CMI did disclose the company is reviewing its emissions certification and compliance process for its pickup truck applications,specifically the 2019 Dodge Ram 2500 and 3500.CMI does not assume any potential impact from the review of the emissions certification process and compliance in its forecast,which will likely be a slight overhang on the stock.Additionally,AGCOs stock jumped after the company more than doubled Q1 street estimates($0.86 in adj.EPS vs.street at$0.42)and raised its FY adj.EPS outlook by$0.30.We think the beat and the stock performance was mostly tied to performance in EME which is AGCOs highest margin segment.Meanwhile,PH and CAT were down on the week,following PH announcing the acquisition of LORD Monday morning and reporting earnings on Thursday,and CAT hosting its analyst day on Thursday.Regarding LORD,the acquisition further improves Parkers market positioning and exposure to Engineering Materials.Additionally,the deal is consistent with Parkers strategy to refocus the portfolio on higher growth,technology-driven offerings,and the timing makes sense with the CLC integration largely complete and given the strength of Parkers balance sheet.However PH paid a healthy multiple for LORD at 15.1X 2019 EBITDA and 9.9X post cost synergies.Additionally,PHs stock closed down after the company beat Q3 EPS estimates by 4%and reaffirmed FY adj.EPS.Despite the beat in the quarter,Q4 is implied weaker as in NA PH saw distributor destocking which had a 300bps negative impact on the top line and drove NA industrial orders down 6%.Finally,we attended CATs analyst day on Thursday,where CAT raised margin targets(as expected),raised the dividend and committed to substantially all cash back to shareholders,and targeted doubling service revenues.Bottom line,we believe the margin targets are very reasonable and reinforce our view CAT is structurally a financially better company.The commitment to return substantially all cash to shareholders via dividend increase and repo was needed and a positive.Engineering&Construction:The E&C group largely declined this week as well,led by steep drops in MDR and FLR following earnings.MDRs stock closed down after reporting adjusted EBITDA of$164M,which was light vs.the street estimate of$190M.However,more importantly in our view,MDR made significant progress on project execution,reporting no material cost estimate increases for Cameron LNG while reporting a$27M change in estimate for Freeport LNG.In conjunction with FLRs earnings release,FLR announced that David Seaton has stepped down as CEO,effective May 1st,and will also no longer serve as a member of the board of directors.FLR reported a GAAP net loss of($58M)or($0.42)per share,including a($39M)or($0.28)per share negative impact from restructuring($0.15),foreign exchange losses($0.13)and related tax impacts,implying an adjusted net loss of($19M)or($0.14)per share.Additionally,project charges impacted results by($0.65)per share in the quarter,and FLR lowered its 2019 adjusted EPS guide to$1.50-2.00,from$2.50-3.00,below consensus estimates of$2.75.On the macro front,LNG project activity remains supportive however,with Port Arthur LNG receiving non-FTA authorization for exports,and Energy Transfer and Shell issuing an invitation to tender for the EPC contract for the Lake Charles LNG project.5/3/2019MACHINERY/MULTI-INDUSTRYCAT Analyst Day First Blush:CAT Raises Margin Targets As Expected:CAT now targets adjusted operating margins throughout the cycle in the 10-21%range which implies a 3-6 target margin point improvement above CATs historic adjusted operating margins of 7-15%.Recall CATs targeted margins at its analyst day in September 2017 were 2-5pts of margin improvement relative to the prior margins of 12%at$55B in sales.The 3-6 margin improvement implies a one point margin increase versus the prior target,although a sales target is not provided.Raises Dividend;Commits to Substantially All Cash Back to Shareholders:CAT raises its dividend by 20%to$1.03 per share and targets at least high single digit%increase each of the next four years.While CAT did not provide a specific share repurchase target,the company did commit to returning substantially all FCF to shareholders.Targets Doubling Service Revenues:CATs ME&T services(excluding the finance sub)were$14B or 39%of ME&T sales in 2016 and$18B in 2018 or 35%of ME&T sales.CAT targets doubling ME&T services sales to$28B by 2026,which reinforces our view CAT can reduce EPS cyclicality over time,and in our view raise margins.Bottom Line:We believe the margin targets are very reasonable and reinforce our view CAT is structurally a financially better company.The commitment to return substantially all cash to shareholders via dividend increase and repo was needed and a positive.As highlighted in our preview note,we view the Analyst Day as a modest positive over the long term and reiterate CAT as OP.(Link to Note)Caterpillar Raises Dividend,Sets New Financial Targets and Provides Update on Enterprise Strategy at 2019 Investor Day:Caterpillar announced the following in a press release on Thursday:Caterpillar Inc.(NYSE:CAT)will host a meeting with investors and analysts today,detailing the progress made in executing the companys enterprise strategy,its plans for future profitable growth and its intention for more consistent and enhanced return of capital to shareholders.Our enterprise strategy for profitable growth is working.We achieved or exceeded the financial targets we communicated during our 2017 Investor Day,which resulted in record profit per share in 2018 and the first quarter of 2019,said Caterpillar Chairman and CEO Jim Umpleby.We will continue to execute our strategy while investing to double services sales by 2026,an area of significant opportunity for further profitable growth.Strategy Driving Improved Profitability,New Margin Targets Caterpillar has significantly improved its financial performance over the course of the last two years.On about$55 billion of sales in 2014,Caterpillars adjusted operating margin performance was 11%.At the 2017 Investor Day,Caterpillar targeted improving adjusted operating margin by 2%to 5%the next time sales returned to that level.In 2018,Caterpillar sales and revenues were again about$55 billion and its adjusted operating margin of 16%was at the top end of the targeted improvement range.The company is now targeting future adjusted operating margins through the cycles of three to six percentage points above historical performance from 2010 to 2016.Caterpillar attributes much of its improved profitability,as well as its confidence to achieve future targets,to the execution of its enterprise strategy for profitable growth through operational excellence and investing in expanded offerings and services.These investments are guided by the Operating and Execution Model,which helps the company allocate resources to the products and services that generate the greatest returns.With the success of the companys strategy execution,strong cash flow generation and its commitment to maintaining a competitive and flexible cost structure,Caterpillars balance sheet remains strong.The existing balance sheet capacity will also support inorganic growth opportunities.Returning Value to Shareholders Reflecting this improved performance and profitability,the companys board of directors authorized an increase to the quarterly cash dividend of 20%to$1.03 per share of common stock,payable August 20,2019,to shareholders of record at the close of business on July 22,2019.Caterpillar expects to increase the dividend in each of the following four years by at least a high single-digit percentage.With its remaining free cash flow,the company intends to repurchase shares on a more consistent basis,with the goal of at least offsetting dilution in market downturns.Through the execution of our strategy,Caterpillar is now a stronger and more profitable company that can produce higher free cash flow through the cycles,added Umpleby.We plan to return substantially all ME&T free cash flow to shareholders through dividend increases and more consistent share repurchases to create more long-term value for shareholders.Emphasis on Services Growth Caterpillars executive leadership team will describe its plans to grow services,which offer additional opportunity for profitable growth.Caterpillar intends to double ME&T services sales to about$28 billion by 2026,from a 2016 baseline of about$14 billion.Caterpillars services offerings encompass all the ways the company supports customer success after the equipment purchase,including aftermarket parts sales and digitally-enabled solutions.Services aim to maximize asset utilization and minimize downtime for customers,making them more efficient and lowering their owning and operating costs while providing a more consistent revenue stream for Caterpillar and improving profitability through the cycles.5/3/2019PH With LORD,Will PH Ever Be Royal?Thoughts Post Call:PH announced plans to acquire LORD Corporation,further improving Parkers market positioning and exposure to Engineering Materials.The deal is consistent with Parkers strategy to refocus the portfolio on higher growth,technology-driven offerings,and the timing makes sense with the CLC integration largely complete and given the strength of Parkers balance sheet.However PH paid a healthy multiple for LORD at 15.1X 2019 EBITDA and 9.9X post cost synergies.The cost synergies appear aggressive at first glance;however,we would note LORD was private implying greater opportunities vs.public companies.Also,cost synergies are driven largely by corporate G&A vs.facility rationalization and as a result should be less disruptive.Also LORDs sales CAGR and margins are accretive to Parkers overall portfolio,coupled with strong FCF conversion.Bottom line,we applaud Parker for putting its balance sheet to work versus sitting on the sideline and transitioning the portfolio to higher value add offerings,but the price seems rich leaving little room for error on integration.Details on LORD Deal:PH announced today that the company has entered into an agreement to acquire LORD Corporation for$3.675B in cash.LORD is 95-year-old privately held leader in materials science and vibration control technologies with$1.1B in sales across industrial(37%),aerospace&defense(33%),and auto(30%)end markets.The companys product mix is roughly 50%adhesives and coatings and 50%vibration technologies,LORDs CY2019 forecasted adjusted EBITDA is$244M,which implies a transaction multiple of 15.1x CY2019 adjusted EBITDA.Assuming full runrate cost synergies of$125M,the multiple is 9.9x CY2019 adjusted EBITDA.PH will finance the transaction with new debt.LORDs sales are roughly one-third through distribution and two-thirds direct;likewise,roughly one-third of sales are OE and two-thirds aftermarket.(Link to Note)PH Q319 Destock to Restock:Thoughts Post Call:PHs stock closed down 2%after the company beat Q3 EPS estimates by 4%and reaffirmed FY adj.EPS.Despite the beat in the quarter,Q4 is implied weaker as in NA PH saw distributor destocking which had a 300bps negative impact on the top line and drove NA industrial orders down 6%.While mgmt.did note that the destocking is expected to continue in Q4,trends in April improved and we would also note that is consistent with broader commentary from industrial companies while ex.destocking PHs NA distribution business would have grown 3%.End markets that experienced a slowdown in the quarter include in-plant automotive and land-based O&G.This mix shift towards less distribution also had a negative impact on NA margins which were also weighed down by a$5M one-time labor settlement.On the positive,Int.margins were strong,expanding 120bps on a modest 1%organic sales growth while Aerospace continues to surprise to the upside with margins that can structurally be in the low 20s over the next few years.We also think that PH can grow its earnings in FY20 even a flattish top line environment with more benefits from restructuring and synergies as well as contribution from LORD.We tweak our FY19-21 EPS to$11.60,$12.22 and$13.12 and TP to$196.Risks:macro,mat.costs,M&A integration.Details on FY2019 Guide:PH reaffirmed its adj.EPS guide of$11.45-11.75,or$11.60 at the midpoint,same as before and slightly below consensus of estimates of$11.63.This implies$3.08 in adj.EPS in Q4,vs.consensus estimates of$3.29.Total sales for FY19 on an organic basis are now expected up 2.0-3.0%,from up 2-4%previously,and expected down 0.4%to up 0.6%in total(prev.down 0.4%to up 2%).By segment,DI NA sales are expected up 0.9-1.9%(prev.1.4-3.9%),DI Intl are expected down(5.3)-(4.3)%(prev.down(4.9)-(2.5)%,and Aero sales are expected up 7-8%(prev.4.5-6.6%).Adj.operating margin is still expected at 17.0-17.4%.By segment,DI NA is expected at 16.6-17%(prev.17.0-17.5%),DI Intl is expected at 16.3-16.7%(prev.16.1-16.5%),and Aero at 19.3-19.7%(prev.18.1-18.5%).Corporate G&A,interest and other is seen at$492M(down from 497M)at the tax rate is still seen at 23%.(Link to Note)ETN Q119 A Tale of Two Cities:CS analyst John Walsh published the following in a note:Key Takeaways:The long cycle businesses(e.g.,Aerospace,ESS)continue to perform,partially offset by the short cycle businesses(e.g.,Hydraulics,Vehicle).ESS 12MT orders were+8%vs.our+10%but in line to modestly better than ETNs expectations.Data Center remains favorable with lumpiness attributed to hyper-scale timing.We remain focused on FCF generation and portfolio optionality