With Donald Trump just 15 days away from becoming President, RBC Capital Markets sees his administration winding back the clock on economic expansion as the industrial macro environment looks markedly more optimistic than a year ago.
Given Trump's pro-business proposals, which include an infrastructure stimulus, corporate tax reform, protectionism and higher defense spending, a number of multi-industrial companies could benefit from such policies being implemented. However, RBC analyst Deane Dray notes that the pricey multi-industry valuations leave little margin for error, and the extended valuations support the firm's unchanged Neutral rating for the sector.
"Investors need to be in highly selective 'stock-picking' mode for now," Dray said in a research note. "We continue to recommend a Barbell Strategy of relative 'safe havens' of General Electric (GE) , Xylem (XYL) , Roper Technologies (ROP) , Honeywell (HON) , and Ametek (AME) with select cyclicals such as Pentair (PNR) , Atkore International Group (ATKR) and HD Supply Holdings (HDS) ." (The barbell strategy is when a trader invests in long- and short-term bonds and securities, but no intermediates.)
Dray endorses the barbell strategy with an increased emphasis on the cyclical end of the spectrum, as he believes these companies are more likely to be the outsized beneficiaries of the Trump's proposed policies. Of the cyclicals Dray recommends, RBC recently upgraded HD Supply Holdings to Outperform from Sector Perform based on the view that the company is one of the best positioned to benefit from the president-elect's proposals.
"We believe a confluence of net positives (Trump Bump, emergence from the industrial recession and stabilization of oil) has arguably reset the U.S. economic expansion clock from the 8th inning back to the 5th-6th," said Dray.
Examining these tailwinds more closely, RBC sees a 5% increase to infrastructure-related businesses in 2018 given Trump's campaign promise to finance up to $1 trillion of infrastructure projects. The president-elect also vowed to reduce the corporate tax rate from 35% to 15%, and eliminate the corporate alternative minimum tax. With this plan expected to be implemented, the firm sees the tax rate paid on U.S. pre-tax earnings reduced by approximately 25%. RBC expects inflation to return to 2% as well, "which would provide a boost to distributor pricing." Finally, defense sector spending is anticipated to jump up by 5%, the firm says.
"The earnings tailwinds from these actions are largely expected to manifest in late 2017, roughly concurrent with the projected termination of the 'industrial recession' and easing of oil & gas headwinds, the two major storylines of 2016," Dray said.