Industrial Stocks Could Rebound on Trade News, Analysts Say
By Michael Wursthorn
Industrial stocks' strong performance this year has stalled. But
some analysts expect the sector to break from its rut if the U.S.
and China get around to signing an initial trade truce.
Industrial stocks in the S&P 500 are down 1.4% so far in
December, on pace for the sector's first monthly loss since August,
after data last week showed manufacturing activity across the U.S.
further contracted in November.
Industrial conglomerate Honeywell International Inc. has fallen
2.3% this month, sliding along with Caterpillar Inc., down 1.3%,
and United Technologies Corp., off 1.4%, among others.
That dented industrial stocks' recent rally, knocking the
sector's gain so far this year down to 25%. And an analyst at UBS
Financial Services Inc. says conditions for manufacturers show
signs of worsening, exposing companies in the sector to a deeper
pullback unless China and the U.S. can reach an accord.
"It appears that customers are still cautious on spending and
production and are reducing inventory further," UBS analyst Adam
Scheiner wrote in a note to investors Monday. "Trade continues to
be the major culprit for the negative business psychology and it is
crucial for the industrials and materials sectors that the U.S. and
China successfully reach the 'Phase 1' deal in the near term."
Inventory reductions have continued and can be seen in weak rail
and freight volumes, Mr. Scheiner added.
Corporate executives, including those at machinery maker
Caterpillar, also complained in the fourth quarter that customers
continue to curtail spending as trade tensions and economic worries
have pushed some companies to hoard cash.
That may mean corporate profit estimates for industrial stocks
need to come down further, making it harder for investors to
justify further gains in stock prices until earnings pick up again.
Analysts estimate a 5% contraction in fourth-quarter profits for
industrial manufacturers versus the 5% gain they had forecast in
September, according to FactSet.
Still, several investors, convinced the U.S. will eventually
resolve its trade issues with China, remain upbeat on industrial
stocks. Such an event would likely give an immediate boost to
industrial stocks, along with the broader stock market, and help
revive business spending, banks said.
The U.S. and China have yet to set a date for the signing of
their limited trade deal.
At the same time, valuations remain at appealing levels,
analysts say. S&P 500 industrial stocks trade at 16.7 times
estimated earnings over the next 12 months, near where they traded
before the 2008 financial crisis. And Bank of America adds that
industrial stocks trade at a 6% discount to the S&P 500, a
level not seen since the industrial earnings recession in 2015 and
Despite UBS's sour take, the bank expects manufacturers to hit a
trough in the next three to six months, then bounce back. And
analysts at Bank of America and Jefferies LLC both recommend
investors increase their exposure to the sector next year.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
December 09, 2019 17:14 ET (22:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.