Multi-Industry:US Beats Belgium This Quarter,2Q14 Preview

Our preview analyzes the key macro and market dynamics for the EE/MI group, together with detailed estimate tables and our recently published US industrial distributor and HVAC surveys.

    The World is Flat: We look for core growth of 3.7% - basically flat Q/Q. The key themes are: 1) acceleration in US industrial and non-residential construction – expect management teams to call out June strength; 2) modest but clear deterioration in Europe on EUR strength and political uncertainty, allied to toughening comps – we also note worrying signs of price deflation; 3) broad stability in China, although construction-facing verticals are likely to show signs of strain; 4) FX turns neutral on EUR strength and resource basket rally; and 5) Signs of raw material inflation that could pressure back-half margins.

    Investor positioning into the quarter is tough to call, but we sense a real lack of conviction in the group, borne out by underperformance YTD. We are biased towards discounted or reasonably priced names that tick the following boxes: 1) defensive with potential for positive EPS momentum (HON); 2) levered to US acceleration (GWW); 3) potential to meet or beat vs. low expectations (SWK, ETN). On the other hand, the game of “a miss is priced in” sounds like a risky trading strategy and we see higher than average risk of a miss and/or negative revisions for LII, EMR, ROK, HUBB and ADT. We highlight noisy quarters from both GE and UTX, on gains and restructuring – although we point to Farnboro’ Airshow catalyst (for both) and upside bias to FY14e for UTX.

    See pages 4-6 for tweaks to estimates and price targets. We hold station on ratings for now, but continue to highlight an expensive group (18.5x NTM EPS; +18% vs. S&P 500) with little real sales momentum and margins that generally look peakish. We highlight a particularly negative skew for DOV and ADT: we will need to see DOV beat and raise (we think they can) and ADT to show tangible signs of KPI acceleration (uncertain). On the other hand, we are biased towards buying SWK post-quarter if Security stabilizes, with conviction in 2H recovery.