A Pair Of Manufacturing Downgrades At Baird: Illinois Tool Works And Rexnord

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While the end markets for the US Manufacturing Sector remain challenged, consumer-driven growth “appears poised to slow” and raw material prices are rising, Baird’s Mircea Dobre said in a report. He added that capital good stocks typically underperformed between May and October.

Analyst Mircea Dobre downgraded the ratings for Illinois Tool Works Inc. ITW and Rexnord Corp RXN from Outperform to Neutral, while maintaining their price targets at $108 and $22, respectively.

Illinois Tool Works

While saying that Illinois Tool Works was a best-in-class Industrial company, Dobre pointed out that the shares had recently outperformed the S&P500 by ~20 ppts, despite a number of the company’s key end markets appearing poised to decelerate or continue to face headwinds. While auto and food equipment are expected to slow, there is little rebound in Industrial.

The consensus expectations for net income and EPS growth for 2016 are at 4.1 percent and 7.8 percent, respectively, versus 0.5 percent and 9.8 percent in 2015.

The analyst lowered the EPS estimates for 2016 and 2017 by $0.10 to $5.45 and by $0.15 to $5.95, respectively, mainly due to end-market challenges.

Rexnord

“The shares are near our target price on a powerful YTD rally, Motion Control end markets remain pressured while Water Management upside could be limited by deterioration in non-res construction contracts,” Dobre wrote.

L12M nonresidential construction contracts peaked in May 2015 and have been declining on a year/year basis since November 2015, while contracts are significantly impacted by a massive decline in Manufacturing Plant construction. Thus, the company’s core nonresidential markets were seeing contract declines of 9-10 percent in terms of both value and square footage, the analyst noted.

The EPS estimates for FY17 and FY18 have been reduced by $0.03 to $1.50 and by $0.06 to $1.70, respectively.

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Posted In: Analyst ColorDowngradesAnalyst RatingsBairdMircea Dobre
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