Thursday, 17 December 2015

Industrial stocks talk 2016: thoughts on the thoughts of GE and Honeywell

As I detail here I recently evolved from an overt buyer of General Electric (GE) shares to more of a holder as the shares pushed up above US$30/share.


Yesterday (Wednesday) when the world was musing about the Fed and related, GE was publishing some thoughts about 2016.  Given the 2015e EPS base is '$1.13-1.20' the 2016e 'operating framework' represents a good jump in no small way driven by the corporate base evolution aka cost simplification. 

As discussed in previous GE links however this was broadly expected.  Dig a little deeper and the still tricky backdrop can be deduced with - by my reckoning - three divisions showing an overt upgrade...and three showing a downgrade.  

  

GE is no mixed investment however.  It has strong market positions and an ongoing simplification plan as detailed in the presentation slide below.  Net net however did the company really say anything that new?  No - as shown by a share price still at US$30 and change.  


GE were not the only industrial company updating their 2016 thoughts however.  The other one was Honeywell who I have reviewed before on Financial Orbit most recently here with the observation:

The graphic which struck me however was this one which indicates some initial 2016 thoughts...which are predominately amazingly neutral across the range of Honeywell's businesses:

So what did their further updated 2016 thoughts indicate?  Well there was that neutral-ish tone to their underlying planning assumptions: 


I happened to listen to the thoughts of the Honeywell CEO on Bloomberg TV earlier today.  Essentially he noted a natural conservatism in their planning so as not to build up too many underlying costs.  A not unreasonable assumption.  He also noted it was not easy but via superior products, ongoing investments and controls of costs...he remained optimistic.  

And the forward quantitative guidance does remain reasonable on most of the key metrics.  


With a 6% free cash flow yield and x10.5 forward EV/ebit multiple the underlying metrics are reasonable attractive.  Of course there is the small issue of the uncertain 'neutralish' backdrop as I noted above but my instinct is to buy a starter position at a single digit EV/ebit forward multiple is justifiable.  Previously I cited this as a c. US$95 share price but now I would say in the US$97s.  As noted previously (see the link above) there is some technical support at/around this level: 

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