Barclays Downgrades Machinery Names; Sees Skewed Valuation Multiples Distorting Upside Potential

With Machinery end-markets delivering a disappointing performance since September 2015, much of the negativity has played out and investors have been buying the sector on expectations of a trough, Barclays’ Robert Wertheimer said in a report. He added, however, that the shares now reflect more than a healthy 2018, while underestimating the risks.

Analyst Wertheimer downgraded the Machinery sector from Neutral to Negative, saying that valuation reflected “a relatively sharp rebound back to midcycle and trades even with multi industry in 2018…But cycle overhangs are larger than normal in every way.”

Terex

Wertheimer downgraded the rating on Terex Corporation TEX from Equal-weight to Underweight, while maintaining the price target at $20.

The new management team has been several positive changes in less than a year. The company’s balance sheet is now stronger, backed by asset sales. “What remains is a strategically well positioned Aerial Work Platform business, a cranes business that is struggling but which to be fair is now deeply cyclically depressed, and a very steady materials processing business of middling attractiveness.”

The analyst noted, however, that the replacement cycle would likely be stepper and harder than is currently being anticipated.

Actuant

Wertheimer downgraded the rating on Actuant Corporation ATU from Equal-weight to Underweight, while maintaining the price target at $19.

Actuant has a dynamic new CEO, some high quality businesses and a few “straightforward paths to value creation.” Despite these positives, the challenges ahead for the company would likely be greater than the market is currently estimating, the analyst commented.

WABCO

Wertheimer upgraded the rating on WABCO Holdings Inc. WBC from Equal-weight to Overweight, while maintaining the price target at $107.

While the US downturn does not seem to have bottomed out, Europe would likely move downward for the next three to five years. The analyst added, “Wabco is, however, a high quality company with a clear and successful strategy, a path to outgrow tepid market growth across industrials, has a no-debt balance sheet, and trades under 16x our 2018 estimate.”

Wertheimer believes that even in the absence of a supportive end market, Wabco’s growth would result in the stock being among the cheaper names in the group in a couple of years. Estimates already reflect weakness in the US and an EU downturn.

While saying that there is potential for upside to growth, the analyst pointed out that Wabco’s balance sheet supports the possibility of acquisition, while other machinery companies have been repurchasing shares in recent years.

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