Barclays analyst Scott Davis is bullish on big industrial conglomerates ahead of the release of first quarter earnings results. The stocks are still vulnerable to the recent risk-off sentiment, but “multi-industry stocks are looking increasingly attractive, particularly higher up in the market cap category.”
“We expect meaningful beats on both the top and bottom line, driven by continued strength in US industrial and price/cost shifting to a tailwind,” Davis writes.
Most large conglomerates will likely hold off on raising their guidance for the rest of the year, as demand in China and other factors remain uncertain. Still, it makes sense to consider getting into the stocks, Davis argues.
“Our 6 largest names, General Electric (GE), 3M (MMM), Honeywell (HON), Emerson Electric (EMR), Danaher (DHR), Tyco (TYC) are unusually cheap vs. smaller peers and it may make sense to rotate up the cap curve for best risk/return trade off. Given our recent investor conversations, the group still feels generally under-owned (especially vs. last two springs), potentially paving the way for shallower pullbacks than expected. If 2012 is truly mid-cycle, there is plenty of run-way left in our names. Europe/EM remains the biggest variable and clarity is not likely until summer at earliest.”