Goldman On Industrials: Continues To Prefer Construction Products Over E&C, Machinery

Goldman Sachs raised its coverage view on Engineering & Construction (E&C) to Neutral from Cautious as non-OPEC supply reductions provide visibility on an oil price recovery through 2017 and risk of E&C multiple expansion. Moreover, Goldman continues to prefer Construction Products (Attractive) to E&C (now Neutral) and Machinery (Cautious). "Our Cautious view on E&C was based on an extended capital allocation shift for commodity producing companies and countries from infrastructure investment to balance sheet repair," analysts, including Jerry Revich, wrote in a note to clients. Goldman said since lowering its E&C view in late 2014, energy capex estimates have been reduced by 46%, mining capex by 38%, and consensus EPS by 26%. Now, based on non-OPEC supply reductions, the brokerage estimates an oil price recovery to $57 in 2017 that could drive multiple expansion for the group. The analysts expect the capex recovery to be concentrated in US shale – where E&Cs have limited exposure ex-LNG. On Machinery, Goldman sees an emerging construction recovery in Europe, China, and US (public). According to the note: "Our Buys are focused on product cycle opportunities (Trimble Navigation Limited TRMB, WABCO Holdings Inc. WBC), rising cash returns (Allison Transmission Holdings Inc ALSN, PACCAR Inc PCAR), and European truck exposure (Paccar, Wabco)." However, for mining & construction machinery, the analysts believe excess global mine and US pipeline supply will make earnings growth in 2017 challenging, underpinning their Cautious view and Sell ratings on Joy Global Inc. JOY and Caterpillar Inc. CAT. Meanwhile, Goldman reiterated its Attractive coverage view on Construction Products, and expects first quarter earnings to reveal accelerating aggregates pricing momentum due to the carryover effect of mid to late 2015 pricing actions, and rising visibility on the public construction cycle. In addition, a structurally repriced markets following a sustained M&A cycle will also benefit the sector. "Our top picks remain Vulcan Materials Company VMC, Martin Marietta Materials, Inc. MLM, Summit Materials Inc SUM," analysts added.