Is The Electrical Equipment Sector Flickering? Credit Suisse Illuminates '16 Outlook

Julian Mitchell of Credit Suisse maintained a view that the electrical equipment sector will continue to see challenging trends heading into 2016.

According to Mitchell, conversations with investors revealed a "reasonably widely-held view" that companies' capex have been "abnormally subdued" so far this cycle. However, the analyst suggested that this may not necessarily be the case, as capex/sales and capex/depreciation ratios appear to be in-line with their historical averages.

Related Link: Credit Suisse Still Likes General Electric, But Removes Stock From Focus List

On the other hand, Mitchell acknowledged that industrial production has "clearly lagged" GDP growth throughout 2015 due to elevated inventory levels and the fourth quarter represents the third quarter of the current short-cycle downtown. The analyst added that typical downturns could last approximately six quarters and that stocks could "reflect the cessation of this current slump" at some point in 2016. As such, near-term sector moves are "likely to remain choppy/weak," while a "more muted" pricing and "rising" balance sheet leverage represent an incremental headwind relative to a year ago.

Mitchell stated that his cautious stance forces him to have a more bearish view of the sector compared to his analyst peers. The analyst noted that as a whole, his earnings per share estimates for 2016 are on average 3 percent below the Street and his fourth quarter 2015/first quarter 2016 estimates are 5 percent the Street.

Tyco Downgraded To Neutral

Mitchell downgraded shares of Tyco International plc (Ireland) Ordinary Share TYC to Neutral from Outperform, with a price target lowered to $36 from a previous 40.

According to Mitchell, Tyco could face "structural problems" in its IS&S businesses while it also faces increasing competition within the products segment. As such, the company's margins are likely to expand at the low end of management's guided range and may "continue to disappoint" on earnings.

Preferred Stocks

Mitchell also offered his preferred stock picks among the larger-cap group. General Electric Company GE was listed, given the company's "ongoing portfolio change" and the "scope" for balance sheet deployment. In addition, 3M Co MMM was also named a top pick given its strong balance sheet with the ability to either buy back up to $6 billion worth of stock or initiate M&A activity to "shore up" earnings per share growth.

Textron Inc. TXT was named as the analyst's third top large-cap pick, given the company's "significant" margin expansion at aviation.

Finally, Mitchell named Allegion PLC ALLE and Cubic Corporation CUB as his top two small- and mid-cap picks.