U.S. Industrials Looking Better To Morgan Stanley Analysts
February 09 2010 - 12:23PM
Dow Jones News
The caution that reigns this year for U.S. industrial companies
is under attack.
Tuesday, Morgan Stanley analysts and strategists said investors
had gotten too pessimistic on industrials and on makers of
electrical equipment as they upgraded the firm's investment ratings
on the sector. They predicted that strong orders and other
positives will push the stocks to outperform the S&P 500 this
year.
"We now see substantially more upside for industrial stocks than
the overall S&P, driven by sharply rising order books,
structural cost improvements, rational global pricing" and
government stimulus, wrote the analysts led by Scott R. Davis. They
upgraded individual investment ratings on Caterpillar Inc. (CAT)
and two other companies, and were joined by the firm's equity
strategists, who said earnings expectations have gotten too low,
"particularly in the U.S."
The analysts zeroed in on orders for industrial equipment.
"Sharply rising" orders are so outpacing earnings that stronger
results should arrive a few quarters ahead of schedule, they
argued. The comments put Morgan Stanley out ahead of most other
analysts and, notably, ahead of a good many industry leaders.
U.S. industrial executives have taken hard looks at the
shakiness of the U.S. recovery and sounded cautious notes on their
companies' 2010 prospects. This earnings season, they have noted
stronger earnings and other positives but also cited headwinds such
as lower capital spending and a lack of clarity about what,
precisely, is driving demand.
On the rosier side is General Electric Co. (GE) Chief Executive
Jeff Immelt, who said last month that the company's environment had
improved. But even a relatively upbeat GE doesn't expect to return
to growth until 2011.
Others are circumspect, at best. Take industrial-automation
product maker Rockwell Automation Inc. (ROK), whose CEO, Keith
Nosbusch, predicted late last month that "demand will trend flat to
up from here" in the sector. He noted signs of a recovery, but said
high unemployment and "very cautious" capital spending were going
to be headwinds.
Meanwhile, Wall Street has grown more optimistic, but most firms
haven't gotten fully bullish yet.
Perhaps the biggest worry about orders concerns re-stocking
after such a long downturn. Companies that spend to replenish their
depleted inventories could still face anemic demand themselves.
That would mean they have little need to keep buying a few months
hence--a "head-fake" scenario the Morgan Stanley analysts call the
biggest risk to their predictions.
Other risks of recent note are the threat of Chinese
rate-tightening, which could sap demand from a critical market, and
the growing concerns over sovereign debt on the periphery of
Europe, with worries mounting over the ability of Greece and others
to meet their obligations.
Either of those problems has the potential to send shudders
through global industrial production under less-than-positive
scenarios.
There is much to be learned from coming earnings reports. Among
major companies in the sector bearing relevance are Deere & Co.
(DE), set to report on Feb. 17 and a key indicator for farm and
crop-handling machinery, and Bucyrus International Inc. (BUCY), a
maker of mining equipment, which usually reports in
mid-February.
Industrial stocks were headed higher Tuesday, with Caterpillar
leading the Dow Jones Industrial Average upward as of
mid-morning.
The companies Morgan Stanley upgraded Tuesday in addition to
Caterpillar were Ingersoll-Rand PLC (IR) and Rockwell Automation
Inc. (ROK). Caterpillar was raised to "overweight" from
"underweight," and the others to "equal weight" from "underweight."
The firm's sector rating on industrials and electric-equipment
makers was upgraded to "attractive" from "in-line."
Caterpillar shares were up 5.2% in late morning trading, while
Ingersoll-Rand rose 3.1% and Rockwell Automation 2.5%.
-By Brendan Conway, Dow Jones Newswires; 212-416-2670;
brendan.conway@dowjones.com
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