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Barclays downgraded the Industrials sector Monday and made ratings changes to several companies.
Analysts led by Scott R. Davis expected a "scenario in which stock returns are limited to mid-single-digit levels in 2015, and only slightly better in 2016, while rising cycle risks cap the upside to P/E multiples."
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The potential for a bear case would involve a continued decline in commodity prices, FX headwinds, elevated valuations, high inventories, slowing emerging market growth, poor capital allocation and limited EPS growth, according to the analysts.
A bull case included the continued availability of credit, reversal of non-commodity capex trends, high cash balances, positive impacts from lower oil prices, advances in technology, activist investor engagement and the feeling that the consensus was already negative.
With the understanding that either a bear or bull scenario could play out, below are the analyst's rating changes along with highlights from the research note:
W W Grainger Inc (NYSE: GWW) - Downgrade from Overweight to Equal-Weight, $237 price target
"Falling commodity prices and FX, coupled with negative mix from larger accounts and continued growth investments, will likely limit operating leverage and EPS growth in 2015 and 2016."
Dover Corp (NYSE: DOV) - Downgrade from Overweight to Equal-Weight, $72 price target
"DOV is guiding to Energy segment core revs down 11-14 percent in 2015, but with North American rig counts having already fallen 40 percent y/y we are surprised the guide isn't more negative."
Xylem Inc (NYSE: XYL) - Downgrade from Overweight to Equal-Weight, $35 price target
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"With XYL now trading at a premium to the group (~17.5x 2016E EPS vs. the group at ~16.5x), we see a far less favorable risk/reward dynamic and believe shares are now fully valued over the near-term."
WESCO International, Inc. (NYSE: WCC) - Downgrade from Overweight to Equal-Weight, $73 price target
"Wesco remains the cheapest stock in our coverage on a P/E and FCF basis, but even at these levels we find it difficult to articulate why the stock should outperform."
Tyco International plc (Ireland) Ordinary Share (NYSE: TYC) - Upgrade from Equal Weight to Overweight, $48 price target
"Remember, our downgrade of TYC on 10/14 from OW to EW (and simultaneous upgrade of ETN from EW to OW) was predicated on valuation. Valuation is more compelling now, EPS growth should be well above peers, and the stock is more defensive than peers."
Lennox International Inc. (NYSE: LII) - Upgrade from Underweight to Equal-Weight, $110 price target
"LII is exposed to end markets we favor (Resi HVAC and NA non-res) and the company arguably benefits from lower oil prices given consumer exposure."
The firm's "Best Ideas" based on its new macro assumptions included:
General Electric Company (NYSE: GE) - Overweight, $32 price target
"Simplification of General Electric's industrial holdings, a shrinking asset base in GE Capital, improving margins, best-in-class dividend yield (3.6 percent, 2x the group median), and potential for management change make GE one of the most compelling stories in our coverage."
Honeywell International Inc. (NYSE: HON) - Overweight, $36 price target
"Capital deployment has been disappointing for the past few years, but there appears to be a greater sense of urgency at HON; if management executes here, we think the discount to high-end peers (MMM and DHR most notably) should dissipate."
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.