Credit Suisse Offers Key 2016 Topics For Machinery Sector

Credit Suisse issued its Machinery Outlook for 2016 and highlighting names such as Allison Transmission Holdings Inc. ALSN, Deere & Company DE, Cummins Inc. CMI and Parker-Hannifin Corp PH. Credit Suisse analysts Jamie Cook, Jamie Anderson and Themis Davris gave four key 2016 topics which are highlighted below.

1. Outlook in the near term is challenging

Credit Suisse believes macro trends such as the decrease in oil prices and channel inventory will weigh on the industry for the next few months, which may be reflected in the industrial company's earnings.

2. US and European Construction

While U.S. Construction has been hurt by oil prices, analysts pointed to signs that Europe remains healthy for construction activities. Positive catalysts for the US include the highway bill which should drive investment and demand for machinery.

3. Orders

Credit Suisse expects weakness in truck orders and increased cancellations due to lack of demand, which should be a near-term challenge for truck producers.

4. Balance Sheet and Cash Flow

Credit Suisse believes that there will not be very much M&A in the machinery industry for 2016. They expect that cash will be redistributed to shareholders in the form of dividends as investors are demanding higher returns on their investment.

The analysts wrote, "We believe that we have a challenging Q4'15, however, post estimates should come down enough to capture the recent leg down in markets. We prefer DE and...names like ALSN as safer higher quality cyclicals. CMI should have valuation support at these levels...and PH is the first to benefit as short cycle play."