2/1/2019
MACHINERY / MULTI-INDUSTRY
CAT Q4’18 – Look What the CAT Dragged Down:
Thoughts Post Call:
CAT's stock closed
down nearly 9% after missing Q4'18 EPS and guiding 4% below the street for FY2019. The Q4'18
miss was related to higher costs in construction (freight, mat, production inefficiencies and the
absence of incentives in Brazil) and one time write offs in the FinCo. We believe investor concerns
are centered on the lack of execution in Q4'18 in Construction and the fact that price/cost in total is
expected to be neutral when it was expected as a tailwind. In particular, this is with price increases
announced in 2H'18 and January 1st coupled with material costs down considerably. We believe
the midpoint of the guide is prudent given uncertain macro, with potential upside with resolution of
US / China trade relations, and reflects some level of conservatism with the new CFO. Executing in
Q1'19 will be key given Q4'18 hiccup reminds investors of legacy CAT. Additionally, the analyst day
in May should provide another catalyst as it addresses long term capital allocation plan and return
targets, as well as a potential update on the macro environment and what that implies for 2019
guidance. We tweak our FY’19 EPS to $12.25, maintain 2020, and introduce 2021 EPS of $14.55.
Risks: macro, commodity prices.
Details on Guide:
For FY2019, CAT expects EPS of $11.75-
$12.75 or $12.25 at the midpoint which assumes modest sales increases across all segments.
Tailwinds include incentive comp (+$600M), the absence of one-time write offs in FinCo (+$150M)
and share repo (not quantified except $750M expected in Q1'19 and benefit from y/y S/O decline).
Price/cost in total is expected neutral which appears conservative in our view and includes $240M
in tariff. Higher tax rate is a headwind of $0.30. Restructuring cost is a headwind now that its
included in GAAP albeit modest and the absence of dealer inventory build a negative estimated at
~$0.75 per share. Volume growth is expected to be the biggest driver of EPS growth which the
market is skeptical on given modest backlog decline in Q4'18 and uncertain macro. Implied FCF is
robust with cap ex forecast flat, CAT inventory flat and lack of pension contribution a tailwind by
$1B. (Link to Note)
OSK Q1’19 – Too Hot to (Tele)handle:
Thoughts Post Print:
OSK's stock closed up nearly 3%
after beating Q1'19 and raising FY’19 revenues and EPS on a better AE outlook which now implies
14% y/y EPS growth. Orders in AE reached near record levels at $1.56B with backlog sitting at
$1.7B up 8% y/y. Furthermore, the AE guide appears conservative, with revenues in the remaining
9 months assumed flattish and margins down modestly tied to more negative mix from telehandlers
and the assumption of neutral price/cost. Strength was noted as broad based across North America
and overseas. Lead times on telehandlers are now 5-6 months out whereas booms are 30-45 days.
Visibility in total for OSK is above average with total backlog of $6.26B up 30.6% y/y. F&E, Defense
and Commercial outlooks are unchanged, although operational execution in the quarter was
impressive. FCF is forecast unchanged at $450M and share repo is still forecast at $350M. We
increase our FY2019-21 estimates to $7.50, $7.15 and $6.05 and our TP to $81 reflecting better
than average visibility and the assumption OSK continues to use excess cash to buy back stock.
Key risks include an Access downturn, material cost headwinds and the loss of defense contracts.
Details on Guide:
OSK raised its FY’19 adjusted EPS guide to $7.00-7.50, tied to the improved
outlook in AE. Sales are now expected at $8.05-8.25B. Adjusted operating income is expected at
$685-735M. By segment, FY’19 expectations are for AE sales of $3.8-4.0B with margins of ~10.75-
11.25% , Defense sales and margins are maintained at ~$2B and 9.5-9.75% respectively, along
with F&E sales of ~$1.2B and margins of 13.25-13.5% and Commercial sales of $1.05B and
margins of 7-7.25%. Capex is guided to ~$165M, adjusted tax rate at 20-21% and FCF at $450M
while OSK assumes a share count of 71.5M (assumes $350M of repurchases in FY’19). For Q2,
OSK expects modestly higher sales y/y and EPS flat to slightly higher y/y, given favorable items
last year and chassis availability in Commercial. (Link to Note)
PH Q2’19 – Hope Springs Eventually:
Thoughts Post Call:
PH stock traded off marginally after
beating its Q2'19 EPS guidance by ~6% and raising FY’19 adjusted EPS by 2%, reflecting
improved margins and help from the $500M in share repurchase. For FY’19, Parker raised its
adjusted margin forecast across all three segments with total adjusted margins up 30bps from the
prior guide to 17.2% at the MP. Despite top line challenges, margin performance is forecasted
better vs. expectations as PH is benefiting from savings associated with prior restructurings, phase
two of the Win Strategy (simplification efforts and lower SG&A) as well as productivity and supply
chain improvements. Still, PH's top line forecast remains more muted compared to several
forecasts from multi-industrial peers, which have averaged in the mid-single digit range. For the full
year, organic growth is now forecast up 2-4% or up 3% at the MP, down from up 3.9% in the prior
guide which implies organic growth in 2H'19 of less than 1%. Also, looking to the next two quarters,
2/1/2019
PH expects Industrial orders to mirror organic revenue growth which is forecast slightly higher than
1% in NA and off about 0.5% overseas. With regards to the macro, PH sees recent trends as more
of a pause in demand tied to uncertainty associated with Trade War, Brexit, etc.; organic growth
could re-accelerate once resolved but this is more likely in PH’s FY’20. Additionally as we look to
FY’20, PH has several levers it can use to support EPS including additional benefits from
restructuring and the CLC integration as well as repo and M&A given strong balance sheet. We
tweak our FY2019-2021 EPS to $11.50, $12.00, and $12.60 and TP to $190 and reiterate our OP.
Risks: macro, mat costs, M&A integration.
Details on FY2019 Guide:
PH raised its adj. EPS guide
to $11.35-11.85, or $11.60 at the MP. The $0.20 raise is driven by higher overall adj. op. margins
and a lower expected share count , with $0.11 from segment op. income, $0.03 from tax, and $0.20
from share count, offset by $(0.11) in G&A/other and $(0.03) in interest. Total sales for FY'19 are
expected up 2-4% organically (prev. up 2.5-5.3%) and (0.4)%-2.0% in total. Sales growth
expectations by segment are DI NA 1.4-3.9%, DI Int'l (4.9)-(2.5)%, and Aero 4.5-6.6%. Adj. op.
margin is now expected at 17.0-17.4%. By segment, expectations are DI NA at 17.0-17.5%, DI Int'l
at 16.1-16.5%, and Aero at 19.0-19.3%. Q1'19 adjusted EPS is forecast $2.99 which excludes
$0.05 in realignment costs and $0.01 in CLC costs to achieve. (Link to Note)
ITW Q4’18 – Earnings First Blush:
ITW Beat Marginally:
ITW reported Q4'18 GAAP EPS of
$1.83, which compares favorably to the consensus estimate of $1.82 and at the midpoint of ITW's
guidance of $1.78-$1.88. Results included a $0.02 headwind associated with higher tax rate offset
by $0.02 benefit from other income. Total sales were $3.58B, vs. the street at $3.61B. Q4'18
organic sales increased 1% which was at the low end of ITW's guide of 1-2% tied to weakness in
overseas markets. Specifically, NA grew 4% however overseas declined 2%. PLS was also a
headwind of 90bps. By segment, organic growth declined in Auto off 4%, Specialty down 2% and
Construction decreased 1%. ITW saw positive organic growth in Welding up 8