2/8/2019
MACHINERY / MULTI-INDUSTRY
MTW Q4¡¯18 ¨C Earnings First Blush:
Beat on Top Line and Margin:
MTW reported Q4'18
adjusted EPS of $0.16, which compares favorably to the street estimate of $0.01. The beat was on
the top line and margin. Revenues of $515.3M grew 7% year over year and 14.5% sequentially,
exceeding the consensus estimate of $488M. The increase in revenues reflects healthy demand in
the Americas, offset by weaker demand across the Benelux and Middle East regions. Also, FX was
unfavorable. Gross margins were 17.3%, up 40 bps year over year. Engineering, selling and
administrative expense in dollars held fairly constant at $67M, or 13.0% of sales. Adjusted
operating margins jumped to 4.3% of sales, compared to 2.7% in the prior year. Adjusted EBITDA
was $31.1M or 6.0% of sales, ahead of the street expectation of $26M. Orders were $486M, up 6%
q/q and down 21.7% y/y; however $29M was a pull forward in Q3 orders from Q4, implying a 20%
sequential increase more in line with typical seasonality. Total backlog was $671M, up 10.6% y/y
and down 4.2% q/q.
2019 EBITDA Guide Above Consensus:
For 2019, MTW expects revenue of
$1.85-1.95B ($1.90B at the midpoint, implying 2.9% growth y/y) vs. consensus of $1.928B. Further,
MTW's adj. EBITDA guide of $125-145M ($135M at the midpoint, or an implied margin of 7.1%)
exceeds consensus estimates of $132M. Together this implies a 35% incremental margin y/y for
2019. The guide also assumes depreciation of $37-39M, restructuring of $12-15M, interest of $28-
32M (excluding debt refinancing costs), income tax of $12-16M (excluding discrete items), and
capex of $35M. (Link to Note)
EMR Q4¡¯18 ¨C Still Several Innings Left to Play:
CS analyst John Walsh published the following in
a note:
Still Several Innings Left to Play:
Despite negative sentiment around upstream O&G
CapEx, Emerson continues to deliver underlying 3-month trailing orders growth in its targeted 5-
10% corridor. December underlying 3MT orders increased 7% with Automation up 12% and
Comm¡¯l & Resi up 3% excluding Asia (Orders Strong, Despite Automation Worries). Preliminary
January 3MT orders are pointing to another ~7% driven by AS remaining elevated and C&R
trending toward positive. EMR addressed the cycle and a mix shift away from upstream O&G
toward LNG, Chemical, and Refining verticals. They are assuming $45-$70/bbl for oil. The
company also has balance sheet optionality. EMR completed its targeted $1B share repurchase in
January and is place-holding $500mn of acquisitions for FY19. Larger deals in the funnel are sized
around $1-3B.
Moving Pieces in the Model:
FQ1 segment profit missed consensus by 3c with the
beat driven by corporate (incentive comp which is marked-to-market each quarter), tax, and shares.
The FY EPS range was revised up 5c despite 3c of new deal dilution from GE Intelligent Platforms
and A.E. Valves on unchanged organic sales growth assumptions. FQ1 report and orders suggest
Automation continues to track mid-point or better in terms of organic growth. FQ2 guided to 84c +/-
inclusive of 2c of deal accounting. Price/cost inclusive of tariffs is expected to flip positive in H2 as
price increases lagged material cost inflation. FCF benefits from A/P and accruals in FQ3.
Analyst
Day Preview:
We are looking for details around growth investments for next cycle, acquisition
integration, and the project funnel ($7.6B today).
Valuation and Risk:
We are raising our TP to $75
(from $70) based on 18X our 2020 EPS estimate of $4.15 (from $4.05). This equates to a FCF yield
of 5.4% on our 2019 estimate, in line with large cap peers. Risks to our rating and TP include a
decline in Energy capex, oil price volatility, a slowdown in HVAC markets and capital deployment.
(Link to Note)
CNHI Q4¡¯18:
CNH Industrial announced the following in a press release on Thursday:
Industrial
Activities net sales in 2018 were up 8% compared to 2017 (up 7% on a constant currency basis),
with solid growth in all segments. Adjusted EBIT of Industrial Activities increased almost 40% to
$1,585 million, with a 5.7% margin (up 1.3 percentage points). Adjusted EBITDA of Industrial
Activities was $2,671 million, with a 9.6% margin (up 1.1 percentage points). Adjusted net income
was $1,117 million (a $466 million increase compared to 2017), with adjusted diluted EPS of $0.80
(up 74% compared to 2017). Net industrial debt at December 31, 2018 was $0.6 billion, a one third
decrease compared to December 31, 2017. On December 3, Moody¡¯s Investors Service upgraded
the senior unsecured ratings of CNH Industrial N.V. and its subsidiaries CNH Industrial Capital LLC
and CNH Industrial Finance Europe S.A. from ¡°Ba1¡± to ¡°Baa3¡± with a ¡°stable¡± outlook. The Board of
Directors is recommending a dividend of €0.18 per common share, or approximately €244 million
(~$278 million), an increase of approximately 30%. For 2019, CNH Industrial expects net sales of
Industrial Activities at approximately $28 billion, and adjusted diluted EPS between $0.84 and
$0.88. Net industrial debt expected between $0.4 billion and $0.2 billion. As announced on January
14, 2019, the company has started a strategic assessment of its businesses, including the
determination of targets for each of them, which will culminate in the presentation of a new
2/8/2019
Strategic Business Plan in a Capital Markets Day to be scheduled in the course of 2019.
CS
Comment:
For AG, CNH talked to a solid order book in NAFTA row crop with coverage going well
into Q2 while conditions in Brazil also appear favorable with a book of business up 30% y/y. In
Construction, order books were flat for heavy equipment with declines in NA (though as a function
of realigning dealer inventory and CNH sees industry demand for heavy up 10% in NA for 2019)
and solid orders in the rest of the geographies.
AG EQUIPMENT
AGCO Q4¡¯18 ¨C Transition Imposition:
Thoughts Post Call:
AGCO's stock closed down 3% after
missing Q4'18 by 2% tied to slightly lower margins, although maintaining FY¡¯19 EPS of $4.60. The
quarter was largely as expected, with margins in SA and NA disappointing slightly relative to our
estimates. SA reflected more of the same with increased costs associated with technology
transition to tier 3 and in NA weaker product mix, as well as higher warranty and mat. costs. We
believe the stock performance was tied to weaker Q1'19 EPS guidance which is expected in the
$0.40 range, below the consensus estimate of $0.53 reflecting FX headwinds. Additionally, for
FY¡¯19 while SA margins are forecast to improve y/y 400bps, the ramp in margins is expected to be
more 2H'19 weighted with the 1H'19 losing money pressured by lower production and costs
associated with the impact of the transition to Tier 3 technology for low HP tractors. AGCO's order
books for the NA and Europe were noted as flat and South America higher compared to one year
ago. Recall AGCO's order book for Europe was down slightly y/y as of Q3'18. FCF continues to be
strong forecast $275-$300M and we expect AGCO to remain committed to dividends as well as
share repo relative to M&A in the near term. We maintain our FY2019 EPS of $4.60 and tweak our
FY¡¯20EPS higher to $5.10. Our TP of $65 assumes 14x our 2020 EPS discounted back. Risk: soft
commodity prices, material costs.
Details on Guide:
AGCO maintained its FY'19 outlook for net
sales and EPS, at $9.6B and $4.60, respectively. The underlying assumptions remain unchanged
as well, with relatively stable end-market demand, pricing of +2.0-2.5%, and negative FX of ~-2.5%.
By region, AGCO expects NA industry retail sales up 0-5%, SA up 0-5%, and W. Europe
approximately flat y/y (unchanged). AGCO sees engineering approximately flat y/y, operating
margin improvement, and an effective tax rate of 32-33%. The FCF outlook is also maintained at
$275-300M, while the capex guide was refined to ~$225M. Q1'19 EPS is seen at ~$0.40 with sales
down slightly tied to FX, although margins are forecast up y/y. (Link to Note)
TRUCKS / TRANSPORTS
CMI Q4¡¯18 ¨C Wardking Class Hero:
Thoughts Post Call:
CMI's stock closed down marginally
after missing Q4'18 EPS and providing a 2019 outlook largely in line with the street. Q4'18 GAAP
EPS was $3.63; however results included a $0.33 negative impact from a write off on an ELD
investment and an adjustment on mark to market losses in nonqualified benefit plans, offset in part
by a $0.15 tax benefit. Power Systems margins also disappointed but were one-time in nature,
expecting to ramp in 2019. As we look to 2019, CMI¡¯s outlook appears very reasonable in terms of
top line as well as margins considering easy comparisons in 2018 tied to product warranty costs.
For 2019, CMI assumes price is positive 80bps, variable compensation helps 40bps and warranty
is favorable by 140bps. This is offset in part by tariffs which are assumed a headwind by 50bps and
metal 40bps. In total, price / cost is assumed neutral, similar to guides from other industrials,
implying some upside potential. Also, CMI's guide on NA HD truck is conservative considering
backlogs are already through year end. The wild card is China, however CMI participates in the
over-the-road market which was down 10% in 2018 vs. vocational which was strong, providing less
downside risk. The ETN JV is expected to be flat on the top line and lose ~$10M for the year.
Similar to most other industrials, if China trade war gets resolved, there is likely upside on the top
line and margins, and to EPS. Finally, we believe CMI will continue to be opportunistic on share
repurchase will help support earnings with larger acquisitions on the back burner. We tweak our
FY19-20 EPS to $15.90 and $14.00, introduce FY21 EPS of $14.50, and lower our TP to $165.
Risks: NA truck downturn, pullback in the emerg. markets, and add¡¯l charges.
Details on Outlook:
CMI expects FY¡¯19 sales to be flat to up 4% and EBITDA margins are seen in the range of 15.75-
16.25%. Effective tax rate is seen at 21.5%. Earnings from JVs are seen down 5%. D&A is seen at
$625-645M, CapEx at $650-700M, global pension funding at $123M and interest expense of
$140M. By segment, Engine sales are seen flat to up 4% with margins of 14.5-15.5%, Distribution
is seen flat to up 4% with margins of 7-8%, Components up 1-5% with margins of 15-16%, Power
Systems up 3-7% with margins of 14-15% while electrification is seen at $30M of sales and a $120-
150M EBITDA loss. In terms of end markets, NAFTA HD is seen up 2%, MD NAFTA is seen up
2%, HD and MD in China is seen down 10%, HD and MD in India is seen down 5% while HD and
2/8/2019
MD in Brazil is seen at up 13%. CMI also expects to return 75% of OCF to shareholders in 2019 in
dividends and share repurchases. (Link to Note)
NA January Truck Orders ¨C In the Exit Lane:
Heavy Duty Orders Drop in January:
January
Class 8 preliminary orders came in at 15.8K units, below expectations that had been in the 20K
range. Orders were down 68% y/y and 26% relative to December. This was the first month of
particularly tough comps since the acceleration of orders started in January of 2018. The
moderation in orders is not coming as a big surprise given backlog levels that are near-record
levels and softening freight growth. Following January orders, HD backlog is expected to drop by
about 16K units to 281K units though that will still be 75% higher than last year implying still very
solid visibility in terms of production.
Medium Duty Orders Down As Well:
Class 5-7 orders came
in at 23.4K units (7.6K for Class 5 and 15.8K for Class 6-7). This represents a 24% decline y/y and
a 3% sequential increase. Medium duty has averaged 23.3K units in 2H¡¯18 so the order number is
roughly in line with the trend and the y/y drop is mostly a function of tough comps from last year
(one of the best months in history). (Link to Note)
WABCO Signs $230 Million Agreement to Equip Premium Passenger Car Manufacturer with
Innovative Air Suspension Technology:
Wabco announced the following in a press release on
Monday:
WABCO Holdings Inc., the leading global supplier of braking control systems and other
advanced technologies that improve the safety, efficiency and connectivity of commercial vehicles,
today announced that it has signed a long-term agreement to develop and supply innovative air
suspension technology for one of the world¡¯s largest manufacturers of premium passenger cars,
based in Europe. Under this latest 10-year agreement, WABCO will develop and deliver an
innovative air supply module along with control software to operate a range of air suspension
system configurations for one of the manufacturer¡¯s high-volume global premium passenger car
platforms. Air suspension is now a standard feature on most of the manufacturer¡¯s electric and
plug-in hybrid vehicles, so WABCO will support a 30% increase in air suspension production
volumes compared to the manufacturer¡¯s preceding car platform. Further enhancing driving comfort
and improved vehicle safety, air suspension systems automatically adjust the vehicle to the
optimum ride height, independent of the vehicle¡¯s load. This is particularly important for electric
vehicles to ensure sufficient ground clearance levels are maintained to protect their batteries.
WABCO¡¯s high performance air supply module includes its advanced compressors with an
integrated air dryer and air intake filter, acoustic and vibration isolation system, as well as an air-
flow distribution valve-block that controls air spring actuation. WABCO¡¯s air supply modules follow
the open system principle, enabling virtual silence during operation due to the substantially
improved acoustics of WABCO compressors and its optimized isolation within the vehicle structure.
¡°We are proud that this major European manufacturer has continued to put its faith in WABCO for
its latest premium passenger car platform,¡± said Nick Rens, WABCO President, EMEA. ¡°With
premium car customers increasingly valuing air suspension as standard equipment, we are
delighted that our leading air suspension technologies continue to support advanced driving
capabilities, enhancing driving comfort and vehicle safety.¡± With almost 40 years' experience in the
design and production of air supply modules and control technologies for vehicle manufacturers
world-wide, WABCO¡¯s innovative air suspension systems for passenger cars offer state-of-the-art
vehicle system integration.
Brazil Truck:
Brazil semi-heavy and heavy truck was up 71% in Jan. (vs. up 49% last month and
up 61% last Jan).
Our Take:
This is a modest positive for CMI and PCAR. Looking ahead,
comparisons remain easy for February.
Rush Enterprises and Tallman Group Announce Joint Venture:
Rush Enterprises announced
the following in a press release on Wednesday:
Rush Enterprises, Inc., which operates the largest
network of commercial vehicle dealerships in North America, announced today that one of its
subsidiaries has signed an agreement to enter into a new joint venture with Tallman Group, the
largest International Truck dealer in Canada. Rush Enterprises¡¯ subsidiary and Tallman Group will
each own 50 percent of the new joint venture entity, which will operate Tallman Group¡¯s network of
commercial vehicle dealerships in Canada. The formation of the joint venture is subject to
customary closing conditions, but the parties expect the transaction to close on February 25, 2019.
The joint venture will be named Rush Truck Centres of Canada Limited, and will be led by Kevin G.
Tallman as Chief Executive Officer, and Roger Poirier, CFA as President. Rush Enterprises does
not intend to consolidate the joint venture as part of its Truck Segment for financial reporting
purposes. Tallman Group owns and operates a network of 14 International Truck full-service
dealerships throughout the Province of Ontario including four locations in the Greater Toronto Area,
Canada¡¯s largest commercial vehicle market.Tallman Group achieved revenues of CAD $370¡£