APD | Margin Story Playing Out, Decent Guide for FY20
We dropped APD as a Best Ideas long on a substantial upward repricing of the shares and an anticipation of decelerating volume growth. We expect the company to gradually re-lever the balance sheet, likely driving EPS upward. CEO Seifi Ghasemi and his team has (again) shown outstanding execution. Guidance for FY20 of $9.35 to $9.60 looks good relative to the $9.38 consensus, and the company has some levers it can continue to pull to hit numbers. Fiscal 1Q20 guidance of $2.05-$2.10 is a bit short of consensus $2.10. Capex guidance looks higher than we might have expected. With a chart like the one below, we doubt anyone will care too much. A great business well managed is a long to which we would like to return at the next valuation opportunity. Most of the Q&A will likely be on the Jazan transaction in Saudi Arabia…
2 Sigma Screen | Trucks A Problem
We have been bullish on the Truck OEMs for quite a while, only inflecting at the end of the second quarter. Since then, truck orders have fallen, competitive conditions have intensified, and build cuts have become likely amid surging inventory. Why then are PCAR, ETN, and CMI (93%) two of the most overbought names in the sector? We don’t know, but our job is to say when the market has it wrong, and we try to be a little early in making that determination. We think that is the case here. At least an ITW has an idiosyncratic margin story. For the most part, trucks have been trucks since deregulation.
Siemens | Auto & Machine Tool Capex, Rail Business Looks Better Than Alstom
In European trading, the market liked Siemens outlook, if somewhat back-end loaded. Seimens automation order rates below are negative across the board – auto appears a driver. While not new, order rates were only worse in China – a common source of weakness this quarter. Comps start to ease for order rates in 1H, likely supporting the back-end view.
The Siemens Mobility business looks better than Alstom did yesterday (Alstom oversold above). Will CRRC be able to buy the Vossloh locomotive business? Its doubtful, but a foothold for CRRC would be very problematic for the incumbent players dependent on Europe. Skoda didn’t play out, but CRRC might eventually buy (overpay) its way into this market, a day that would be very painful for Alstom.
JCI | Guide Maybe A Little Light, Same Resi Problems In Recovery
As a pure-play building company, we should have had JCI with our other building products as a long – maybe we’ll get another shot. Order rates looked healthy, with an 8% build in backlog. Private non-res construction looks lower, while resi is in recovery mode.
The composition leaves them some wiggle room.- we'd bet construction tailwinds and easy comps through FY20 help.
