1、North America Equity Research10 July 2019Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateHubbell Inc.HUBB US7,010.73127.70OWn/c132.00Dec-19n/cn/cJohn Bean TechnologiesJBT US3,837.89120.31UWn/c90.00Dec-1989.00n/cRoper TechnologiesROP US
2、39,086.28374.30Nn/c295.00Dec-19n/cn/cFortive Corp.FTV US28,644.8580.27NRn/cn/cn/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 09 Jul 19.EE/MI2Q19 Earnings PregameElectrical Equipment&Multi-IndustryC.Stephen Tusa,Jr CFA AC(1-212)622-Bloomberg JPMA TUSA J.P.Morgan
3、Securities LLCPatrick M.Baumann,CFA(1-212)622-J.P.Morgan Securities LLCNicole Q Cai(1-212)622-J.P.Morgan Securities LLCAbhipsa Sahu(91-22)6157-J.P.Morgan India Private LimitedSee page 59 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seek
4、s 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.The s
5、etup into the 2H is clearer fundamentally given negative data points that are starting to trickle in,seemingly without the net of hope around trade resolution,though the quarterly trade as always will be more complex given expectations are now lowered,and there is little optimism.As we have been say
6、ing,the group indeed looks expensive,but this is influenced by the eye popping multiples for defensive growth stocks,without which the sector would look more like 16.5-17x,or 5%versus the S&P instead of the headline 20 x,or 25%premium to S&P(18x,and 10-15%,respectively,ex-GE).This is unchanged versu
7、s 1Q,a profile framed by three types of stocks:high multiple,defensive growth compounders,reasonably priced stories that investors nervously expect to“execute and deliver”,and cheaper cyclicals,the divergence between which has generally remained consistent over the past 3 months,but remains historic
8、ally wide.Unlike 1Q,however,the evidence is building around a more negative fundamental backdrop and any hope of acceleration that sustained sentiment out of 1Q likely runs into a wall of reality as the focus shifts to 2020 for which the ultimate base of 2019 will have an impact.We acknowledge that
9、our top picks are in the bucket of“nervous execution”,and we are avoiding these as a trade into the quarter(HON/IR),core holdings where we believe the future is mis-priced even without perfection on 2Q.On the contrary,our other OWs,UTX/EMR arein the overdone camp with UTX a relative cheap safety pla
10、y where we see relatively solid earnings visibility at a cheap price,and at EMR we play long as a“too cheap,everyone expects a miss”trade as$55-60 oil is supportive fundamentally.We are negative on ROK particularly in comparison to our preferred idea of EMR(auto/machine tools versus oil),and remain
11、negative on 3M,as the stock has stabilized despite what we expect to see as another dramatic reduction in consensus expectations,though admittedly this may be into the 3Q as the company has rarely followed a strategy of public resets and no,we do not count one-time gains as ways to offset fundamenta
12、l weakness.We are also hosting a pregame conference call today with our global cap goods colleagues at 10am ET1.1On January 3,2018,MiFID II came into effect.Therefore,you may only be eligible to participate in this event if you have the appropriate level of access to J.P.Morgan research.Please check
13、 your eligibility before participating/accessing.2North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622- Expecting negative 2Q fundamentals.While intra-quarter commentaryfrom sector management teams was stunningly boring,intel gleaned during China and Europe trips painted a more c
14、autious picture,reinforced by the data from the channel,with ISM prints showing an ongoing fade,China auto and electronics still trending lower,along with onshore rig counts.The pre-announcements have been a bit few and far between but arguably more pronounced in their magnitude(BASF,Hexagon)versus
15、1Q.This confirms investor expectations that without a trade agreement in place,there is nothing to stop the weakening trend,let alone support what some corporates had banked as a re-acceleration in 2H.We dont see a cliff event,though we also struggle to identify many markets that are actually gettin
16、g better.US construction/consumer related HVAC remains solid,as does Aerospace,though even here,air traffic slowed incrementally early in the quarter,especially freight which is now negative.Impacts on the companies should be on net negative,though particularly vulnerable are short cycle industrials
17、 who were still banking an acceleration,or even stability.Sector remains expensive on a headline,extreme valuation of safety vs cyclicals remains.The group multiple was sustained in 2Q(20 x),as investors waited for clarity on the macro,and a potential positive headline on trade.With the guts of the
18、sector trading at 17x,we dont see the optimism.The sector has typically traded in a range of parity vs the market,when investors are nervous about the economy,to as high as a 15%premium when things are picking up,and the 6%premium today shows investors are cautious,though far from downright“negative
19、”.With defensive growth compounders trading at wide premiums(60+%),the question remains:chase high priced safety,or buy cheap cyclicals.We dont want to do either until the dust settles from the quarter and the visibility improves on how management teams will the 2020 setups,on which the quarter will
20、 tell us some but September will tell us more.We maintain a GARP approach,with HON/IR our admittedly more consensus execution/earnings revisions stories at reasonable prices,UTX is cheap safety and EMR is too cheap for the ultimate cash and earnings power.Longs into the quarter:UTX,EMR.On UTX,we exp
21、ect 2Q slightly above consensus with 2019 guide brought up by a nickel at the low end,driven by strength on the aerospace side of the portfolio,highlighting better than average earnings visibility.The stock has underperformed over the past 3-6 months driven by concerns around the proposed RTN merger
22、,and though we understand the near term angst,we dont see how the risk/reward/cheap safety thesis does not play out favorably over time if the numbers come through as promised.For EMR,we expect a steady F3Q print in line with guidance/consensus,though with some pressure in upstream onshore,we think
23、2019 guidance could be tweaked down to the low end of the range.Orders and conversion on the funnel will be key.With the recent move up in oil to fundamentally supportive levels($55-60),this should help solidify the potential for acceleration,and we expect AS orders to remain solid,while C&RS should
24、 see softer trends but 3North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622-easier comps.NA upstream spending,discrete end markets and Asia Climate remain watch items,but we continue to view EMR as the better play vs ROK,and are long into the quarter on this stock as our too che
25、ap,everyone expects a miss trade.Avoids into the quarter:MMM,ROK.Rarely do we not change something like this in back to back quarters.However,for MMM,managements last comment suggested some“stability”,though given recent pre-announcements,the quarter seemingly ended weak,and in any event we believe
26、they needed acceleration which we dont see happening.There will be lots of noise with restructuring charges and savings,along with a few modest gains and moving parts around the recently announced deal,and its unclear how much of each is baked into consensus.We watch organic performance and profits
27、as our measure of the quarter and a miss and cut on the underlying will reinforce our well below consensus estimates($9.85 V$10.30 consensus)for 2020,on which the stock is not cheap,especially in the context of ongoing acceleration in the potential sizing of the PFAS liability.Additionally,managemen
28、ts 7-11%EPS growth long-term guidance is now clearly a stretch,and we dont think this will come down until late in the year,perhaps during the outlook in other words,this is not a management team that has shown a strategic appetite for public resets,the likes of which we think is necessary for any c
29、hance at a bottom in the stock.For ROK,its more simple.We see downside across the discrete automation chain with a watchful eye on the OEM business here,which has been highly supportive of growth in recent years,but exposed to cross border slowing.At a premium to Emerson,we take the under on ROK.GE:
30、Focus remains on FCF:bar for 2Q is low and beatable,but we agree with Bulls,20/21 matter more.Near term FCF headline expectations have only gone lower,framed by management guidance of negative$1-2 B(Street now at-$1.5 B from breakeven prior/JPM at-$700 mm unch).This dramatic of a negative print on 2
31、Q FCF makes little sense given most of the structural cash headwinds(restructuring,working capital solutions wind down,etc)are 2H weighted.In addition,2Q will have an unusually low amount of loss leading equipment deliveries as the LEAP is grounded with the MAX,with production shifting to highly pro
32、fitable spare engine sales,suggesting the opaque$300 mm drag management is talking about is tough to believe,and our,albeit crude,math suggests these dynamics could be net positive by materially more than that,while in Power,a quick check suggests H-frame deliveries look light so far,similar to 1Q(m
33、aybe 1 unit),which,combined could ADD half a billion in cash alone versus what would have been reported on a normal delivery cadence a strong book to bill is FCF positive,but if its because of unsustainably low shipments,it cannot be discounted into future years,the key point.In the end,we see a sim
34、ilar setup as 1Q,and would argue if it is“in line”at$1.5 B,that is a result with negative implications.Recall Bulls have cut 20/21 estimates despite the 1Q“beat”.Its this lack of lift from whatever this year may 4North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622-be to numbers
35、in 20/21 for which we are well below consensus that underpin a risk/reward that we see as the most negative in the group and we remain UW.5North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622-Table of ContentsEE/MI 2Q19 Earnings Pregame.6Summary 2Q and 2019 Estimates.6Macro Backd
36、rop.8Valuation Safety Still at a Premium.17Earnings Previews.22Dover(N).22Honeywell(OW).23Danaher(OW).25Lennox(UW).26United Tech(OW).273M(UW).28Watsco(UW).30Hubbell(OW).31Pentair(OW).33IR(OW).34General Electric(UW).35Fortive(NR).38Roper(N).39John Bean(UW).40Wesco(N).41Emerson(OW).42Rockwell(N).44Joh
37、nson Controls(N).45Atkore(N).46Evoqua(N).47NN,Inc.(OW).48Fortive Corp.49Hubbell Inc.51John Bean Technologies.53Roper Technologies.55Investment Thesis,Valuation and Risks.576North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622-EE/MI 2Q19 Earnings PregameSummary 2Q and 2019 Estimat
38、esTable 1:Calendar 2Q Guidance SummaryEPS Guidance($)JPMe($)Street($)ATKR 0.88-95$0.92$0.91DHR1.13-1.161.151.16DOV1.541.53FTV0.86-0.900.900.89GE0.050.12HON2.05-2.102.112.08HUBB2.172.17IR2.092.05JCI0.630.63MMM2.052.08ROK2.352.32EMR0.940.930.94ROP3.00-3.043.033.04PNR0.63-0.660.650.65LII4.314.17NNBR0.2
39、80.25AQUA(EBITDA)$57-61$59$60JBT1.05-1.101.101.07UTX2.082.05WSO2.652.54WCC1.451.43Source:Company reports,Bloomberg,and J.P.Morgan estimatesTable 2:Summary of FY19 EPS expectationsEPS Guidance($)JPMe($)Street($)ATKR 3.25-3.403.333.23DHR4.72-4.804.744.78DOV5.65-5.855.855.81FTV3.55-3.653.603.60GE0.50-0
40、.600.370.55HON7.90-8.158.158.11HUBB7.80-8.208.208.05IR6.356.456.36JCI1.85-1.951.901.92MMM9.25-9.759.009.43ROK8.85-9.158.908.87EMR3.60-3.70(GAAP)3.653.65ROP12.70-13.0013.1012.95PNR2.30-2.352.302.31LII12.00-12.6012.5012.32NNBR1.10-1.301.151.15AQUA(EBITDA)$220-240$225$228JBT4.35-4.554.604.49UTX7.80-8.0
41、08.007.97WSO6.806.71WCC5.10-5.705.355.40Source:Company reports,and J.P.Morgan estimates.7North America Equity Research10 July 2019C.Stephen Tusa,Jr CFA(1-212)622-Model UpdatesHUBB We are updating our 2020 numbers,with better understanding of the cadence in restructuring savings.Our 2020 EPS estimate
42、 is now$9.00(vs$9.25 prior)with margins of 15.0%,up 60bps y/y(vs 15.4%prior).By segment,we now forecast Electrical at 13.7%margin(vs 14.2%prior)and Power at 16.9%(vs 17.0%prior),while the rest of our estimates are unchanged.HON We are tweaking our model on FCF quarterly progression,while the rest of
43、 our estimates are unchanged.We now model 2Q/3Q/4Q at$1.62B/$1.58B/$1.78BFCF converting at 105%/109%/115%,while our FY19 FCF estimate remains at$5.88B(100%conversion)above the midpoint of guide($5.5-6.0B,95-100%conversion).MMM We update our model to reflect the new segmentation,as the company will s
44、tart reporting on this basis this quarter.The segments Industrial,S&G and E&E were redistributed into the two segments Safety&Industrial and Transportation&Electronics,while the Healthcare and Consumer segments remain relatively unchanged,with the exception of Healthcare now including Industrials se
45、paration and purification subsegment,and Consumers construction and home improvement subsegment now including Industrials retail auto care(previously in auto aftermarket).Our estimates remain unchanged,though on this new basis,we expect S&I down 3.4%with 19.5%margins,T&E down 2.6%with 23.0%margins,H
46、ealthcare up 0.3%with 25.1%margins,and Consumer down 1.0%with 20.3%margins.JBT We update our model to reflect the Prime Equipment acquisition,announced in early-June.Our 2019/2020 adj EPS estimates are now$4.60/$5.40(prior$4.55/$5.30).ROP We update our model to reflect the news that Gatan will remai
47、n part of the portfolio(the deal to sell it to TMO fell apart due to regulatory hurdles).As a result,our 2019/2020 EPS estimates move to$13.10/$13.35(prior$12.90/$12.90).FTV We update our model following 1Q results.Our 2019/2020 EPS estimates are now$3.60/$3.95(prior$3.75/$4.10),primarily reflecting
48、 lower margin assumptions at PI.Our 2Q estimate is$0.90 vs guidance of$0.86-0.90.Bias to positioning into the quarterIn terms of short-term positioning into this quarters print,our recommended longs are HON,UTX and EMR.Names we would avoid are MMM and ROK.8North America Equity Research10 July 2019C.
49、Stephen Tusa,Jr CFA(1-212)622-Macro BackdropTable 3:US Macro Dashboard Key Macro StatMetricRecentRolling 3MARolling 12MARolling 5YPMI(ISM)Absolute51.752.256.054.9Orders(ISM)Absolute50.051.557.057.7Inventories(ISM)Absolute49.151.052.350.3Core Cap Good ShipmentsY/Y 4%4%5%1%Core Cap Good OrdersY/Y1%2%4
50、%1%Industrial ProductionY/Y2.0%1.7%3.4%1.3%PPI spreads(cap goods price vs cost)actual spread2.1%1.9%0.7%0.6%Capacity utilizationAbsolute75.775.876.575.4M&T I/S ratioAbsolute1.41.41.41.4Auto salesY/Y SAAR0%-1%-1%1%Auto SAARAbsolute17.2917.0217.0717.19NA Class 8 truck ordersY/Y-70%-65%-8%4%Manheim Use
