Industrials

Time to Buy 3 Industrials After Serious Earnings Weakness?

Jon C. Ogg

Published: October 22, 2018 12:20 pm

Last Updated: January 11, 2020 4:03 pm

Investors have known for years that equities and entire sectors can be quite volatile around each quarter’s earnings reports. It turns out that the strength in the third-quarter earnings reporting season for 2018 has brought many big disappointments, and some of those disappointments have brought on big selling in the underlying shares of these companies.

According to the independent research firm Argus, three big industrial-related companies may have been oversold after earnings. The firm, which has no traditional broker and investment banking conflicts as do most Wall Street firms, has reaffirmed its Buy ratings, calling out recent weakness bringing attractive entry points for new investors.

Honeywell International Inc. (NYSE: HON) was reiterated as Buy at Argus after its recent weakness has taken off about 8% of its share price from recent highs amid the tariff concerns. Argus sees the recent weakness offering an attractive buying opportunity. After closing at $153.47 last Friday, a blend of valuation approaches took the Argus fair value estimate to $180 per share. This compares to a Thomson Reuters consensus analyst target price of $177.43.

Driving the Honeywell call for Argus is it being well-managed and highly profitable, with a track record of outperforming the market and the sector over time. The firm calls it a leading blue-chip industrial that should generate low double-digit earnings growth over the next five years. It also should continue to benefit from its diverse product lines with a strong presence in the commercial aerospace and commercial construction markets. And in China, Argus noted that Honeywell sells mid-market products that are growing despite that country’s infrastructure slowdown.

Honeywell shares were last seen trading down 0.3% at $152.95 on Monday, in a 52-week range of $137.99 to $167.72.

Argus reiterated Nucor Corp. (NYSE: NUE) as Buy, citing that the recent weakness offers a buying opportunity for new buyers.

Nucor managed to beat earnings expectations, and third-quarter consolidated net revenue rose 25% from the third quarter of 2017. Still, its shares tumbled on news that Nucor warned that fourth-quarter profit would be lower than in the third quarter.

While Argus maintained its rating, the firm did trim its target price to $65, noting that its shares have stumbled in the past weeks over lowered guidance and over tariff and oversupply concerns. And despite weaker guidance, Argus sees Nucor as a best-in-class steel manufacturer with a strong balance sheet.

Nucor shares were last seen trading up 0.7% at $58.79 on Monday. The 52-week range is $53.71 to $70.48.

United Rentals Inc. (NYSE: URI) was raised to Buy from Hold at Argus, after the post-earnings weakness was said to have knocked off too much value last week. The sharp decline in its share price was noted as largely overdone due to weaker-than-expected results in the Trench, Power and Fluid Solutions segment. Argus said this is offering investors a more attractive entry point.

On the plus-side, Argus noted that United Rentals continues to see healthy activity in its core U.S. markets. And it should also benefit over time from the recent acquisitions of NES Rentals, Neff and Baker.

Argus set a target price of $130, which implies a total return of 11% from last week’s price, and a forward price-to-earnings ratio of 8.03.

The shares closed down almost 1% at 117.12 on Friday after taking a larger post-earnings drop, and they are now down from a 52-week high of $190.74. Monday’s post-earnings reaction was lower, with a further 0.9% drop to $116.05, as well after trying to open higher. This company has lost over a third of its value from the peak.

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