Industrial stocks are in "bull mode," according to TheStreet's Jim Cramer, with several big industrial companies reporting solid quarterly results over the past few days.
While RBC Capital Markets is maintaining a cautious stance on big multi-industrial stocks, the firm says that a "not worsening" industrial demand is still "stoking the beta rally," in a report giving clients a "halftime update" on earnings results within the sector. RBC Capital is a subsidiary of Royal Bank of Canada.
"The early read on 1Q16 earnings points to some stabilization in industrial demand, evidenced by mostly inline 1Q16 organic revenues," RBC Capital analysts led by Deane Dray wrote.
Still, while some companies have boosted earnings guidance for 2016, stocks have mostly sold off following quarterly reports.
"Short-cycle industrial activity remains weak, with oil estimate cuts and negative stock reactions that imply these risks are still not fully calibrated," the analysts say. As a result, "we are maintaining our cautious stance on the sector as valuation is now more demanding and the end market backdrop remains challenging."
The RBC Capital analysts prefer a "barbell strategy" to owning stocks in the sector. One side of the barbell includes six "safe haven" plays: General Electric (GE - Get Report) , Roper Technologies (ROP - Get Report) , Honeywell (HON - Get Report) , Xylem (XYL - Get Report) , Danaher (DHR - Get Report) and Ametek (AME - Get Report) . The other side are companies with specific stock upsides, including Pentair (PNR - Get Report) , HD Supply (HDS - Get Report) , Actuant (ATU - Get Report) , Ingersoll-Rand (IR - Get Report) and Eaton (ETN - Get Report) .
For investors looking for exposure to the industrial sector, here's what RBC Capital had to say about its safe haven plays. We've paired the list with commentary from Jim Cramer if the stock is owned by his Action Alerts PLUS charitable trust portfolio.
General Electric (GE - Get Report) reported first-quarter earnings results of 21 cents a share on Friday, slightly higher than analysts were expecting. Revenue rose 6.4% from the previous year's quarter to $27.6 billion, just shy of expectations for $27.95 billion.
Still CEO Jeffrey Immelt's streamlining strategy is yielding results even when oil-equipment customers are reluctant to spend money, according to TheStreet.
"Our performance during the quarter demonstrates the strength of the GE operating model," Immelt said on a conference call with analysts. "Diversity is a key strength during this period of volatility. We are in the midst of a challenging oil and gas market, however, we are seeing sustained strength in aviation and power markets, and health care is rebounding."
RBC Capital Markets has an outperform rating on General Electric and a $35 price target on the stock (up from $33 previously).
"Outperform-rated GE is still a transformation story and normalized earnings power won't fully ramp until we get closer to 2018," Dray wrote in a separate April 24 note on General Electric. "Until then, quarterly earnings are important progress reports, but not the finish line. 1Q16 had plenty of indications of how the transformation is tracking well (margins, backlog, buybacks, de-SIFI, etc.). The cut in oil guidance is not shocking but poses an ongoing operating challenge."
General Electric is a holding in Jim Cramer's Action Alerts PLUS portfolio.
"I think GE has been penalized for its oil and gas exposure, but with oil going up and with the company about to be freed from the shackles of government financial regulation, this one could really fly," said Cramer recently.
Roper Technologies (ROP - Get Report) reported first-quarter profit of $151.4 million, or $1.48 a share, a 3% decline from last year's quarter, even though adjusted earnings of $1.50 a share beat expectations. Revenue rose 4% to $902 million for the quarter. The Sarasota, Fla.-based diversified technology manufacturer for the medical, water, energy and transportation industries, expects second-quarter EPS of $1.56 to $1.61 a share, which is lower than analysts' initial forecast of $1.74 a share.
RBC Capital Markets has an outperform rating on Roper Technologies and a $200 price target on the stock.
"This was not the bounce-back quarter that Outperform-rated Roper needed to reclaim its reputation as a defensive, high-quality industrial, but it was a good start," Dray wrote in an April 25 note to clients. "Feel-goods included upside 1Q EPS, reaffirmed 2016 and oil outlooks, and M&A optimism. New worries that cropped up included a light 2Q guidance and margin contraction in Medical. The stock's modest outperformance likely reflects low expectations heading into earnings."
As well, "Roper had lost some of its luster as a defensive "safe haven" due to its oil & gas woes in 2015, but 1Q16 earnings tentatively showed that its oil headwinds seem finally to be contained. We remain mindful that the +$1 billion M&A target in 2016 is a key upside catalyst," the note said.
Honeywell (HON - Get Report) reported first-quarter earnings results that were better than analysts expected, aided by a 13% jump in sales in its automation and climate control systems unit. Sales in its aerospace division rose by 3%, according to Reuters.
RBC Capital Markets has an outperform rating on Honeywell and a $122 price target on the stock.
"Given that Dave Cote chose this quarter to make his highly contentious run at United Technologies (UTX - Get Report) and signal his successor implied to us that he had a line of sight on a solid quarter. That scenario fell short," Dray wrote in an April 24 note following the company's earnings results. "Yes, Honeywell reported a headline 1Q16 beat, but under the hood, segment operating results were 2 cents below our estimates, with ACS (Automation and Control Systems) and Aero margins falling short."
As well, Honeywell's guidance for 2016 may have been boosted at the low-end of the range, but it was "mostly on below-the-line items, and 'core' guidance was essentially unchanged, Dray wrote.
"The two main guidance concerns are the 2H16 ramp in PMT (Performance Materials and Technologies) sales, part of the previous guide, and the expected ACS margin ramp after the 1Q16 shortfall, a new development. Even if these factors play out near the lower-end of expectations, we believe Honeywell has enough levers to pull to achieve the targeted EPS range," the note read. "The lackluster earnings quality raises eyebrows and lingering concerns could cap near-term upside, but we do not consider this toe-stub a game changer."
Xylem (XYL - Get Report) reports quarterly earnings on May 3. Analysts forecast the water engineering and technology company to report per-share earnings of 34 cents, up 4% from last year's quarter. Revenue is expected to be flat at $833 million.
RBC Capital Markets consider Xylem one of the best-positioned industrial stocks in front of earnings season and has an outperform rating on Xylem and a $42 price target on the stock.
Xylem's earnings setup is "solid," Dray wrote in the April 24 industry check-in note, however the stock's reaction to results "may be muted with the thought Xylem needs to grow into its multiple."
"Tailwinds from water utility markets and minimal direct oil exposure, cost-out progress, and M&A optionality suggest further momentum for this re-rating story," Dray wrote in an April 12 sector earnings preview note to clients.
Danaher (DHR - Get Report) reported better-than-expected profit and revenue for the first quarter, in what Bloomberg called its "biggest positive surprise since 2011," especially as industrial companies struggle with weak commodity prices and "sluggish" global economies. The industrial and medical device maker also upped its profit guidance for 2016.
Besides being less exposed to the energy markets, "Danaher has also done all the things an industrial conglomerate is supposed to do when growth is sputtering: Control costs, make acquisitions and when necessary, become less of a conglomerate, or even less of an industrial-focused company in Danaher's case. That's a playbook others should take note of," Bloomberg said.
RBC Capital Markets has a sector perform rating on Danaher and raised its price target on the stock to $96 from $87 last week.
"We have long been an advocate for a Danaher breakup scenario to unlock long-term shareholder value and remove the vexing Law of Large Numbers that had hampered its M&A growth engine," Dray wrote as part of the investment thesis attached to Danaher.
Danaher's pending spinoff of its industrial unit to be named Fortive Corp. "will effectively anoint a new 'Baby Danaher,' which will inherit all the DBS productivity tools and M&A discipline of its former parent. We remain positive on the split rationale to effectively double the scope of M&A and produce two high-quality, streamlined portfolios," Dray wrote.
As for quarterly earnings, "Danaher delivered a modest 1Q16 beat & raise, as upside in its Life Sciences platform offset ongoing softness in the industrial businesses. Fortive organic revenues declined -1.5%, but management noted signs in recent months of stabilization in select industrial markets. As for the 3Q16 spin, Danaher may need to prime the pump with an acquisition to create some earnings momentum for Fortive," Dray wrote in the April 21 note following earnings.
Ametek (AME - Get Report) will report quarterly earnings on April 28. Analysts, according to Thomson Reuters, expect the global electronic instruments and electromechanical device maker to post a profit of 57 cents a share, down 9% from last year's quarter. Revenue is expected to fall 2% to $965 million.
RBC Capital Markets has an outperform rating on Ametek and a target price of $58 on the stock.
"Over the past three years, AMETEK has driven further expansions to both gross and operating margins, reaching 24% by 2015, among the highest in our coverage," Dray wrote in an April 12 sector note. "But the real differentiator for AMETEK is its ROIC, which, at 13.7% over the past three years, is nicely ahead of the ~10% generated by other acquisitive Multi-Industry companies. We consider this premium ROIC to be an indicator of AMETEK's M&A price discipline and integration capabilities."