美股投资策略-CS工业路演的主要议题-2022.3.18-23正式版.pdf

U.S. IndustrialsKey Topics from the CS Industrials Roadshow DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSUREAND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in makingtheir investment decision.March 18, 2022Equity Research Americas2Source: Company data, Credit Suisse researchThis deck highlights emerging themes that are topical with investors based on recent marketing including implications of Russia/Ukraine and stocks mostimpacted across the EE/MI and Machinery/E&C sectors.1. Increased Oil and Gas Cap ExRussia is the worlds third largest oil producer and one of the largest natural gas exporters. Russia supplies 10% of the global oil and gas demand.We see the need to further increase oil and gas production in the United States in the near term; with the global oil market likely well undersupplied forthe foreseeable future, there is a need for increased energy investment in the medium to long term. Stock Picks: GTLS, FLS, FLR, MTZ, EMR, CAT2. Strengthening Global Industrials MetalRussia produces 4% of the worlds copper, 5% of aluminum, 9% of nickel and 43% of palladium. Nickel has surged 84% and steel 11% sinceUkraine invasion tied to supply concerns. We prefer names with high exposure to mining cap ex (benefit to the mining business should offset the costheadwinds). Stock Picks: CAT, FLR, CMI3. A Stronger For Longer AG CycleRussia and Ukraine together account for 29% of global wheat and 14% of global corn exports and the war puts global AG markets/supply chain underpressure. Russia also accounts for 20% of global potash supply and major exporter of natural gas, both important fertilizer components. We prefernames that should benefit from continued elevated AG commodity prices and cost efficient Precision Ag technologies. Stock Picks: DE, AGCO4. Increased Defense SpendingSince the Russia/Ukraine conflict, countries have announced increases in defense spending including Germany and Ukraine. In the US, there is alsoincreased bipartisan support to increase defense budget. We prefer names with higher exposure to international defense with capabilities in intelligencesolutions and base infrastructure. Stock Picks: KBR, J, HON, ETN, GE5. Prolonged InflationS&P GSCI Commodity index has increased 25% YTD. Tight labor market continued to persist in Jan 2022. We prefer names with likely high ability topass through cost including those with majority of sales to dealers (=ability to reprice backlog), industry leaders in price, technology adoption,substantial distribution capabilities, and supply integral but not a significant part of bill of material (=insensitive to price increases). See opportunity:HVAC names (JCI, TT, CARR, LII), CAT, DE, PH, ROK; see risk: GTLS, FLS, MTW, TEX, OSK, XYL6. Flight to QualityAs concerns for a European recession continue, quality names could be back in favor as investors look for safe haven stocks amid prolongedgeopolitical tension. Quality names currently trade at a 94% premium to deep cyclicals, compared to 5 year average of 64% premium. Stock Picks:HON, PCAR, DE, ITW, FTV, OTIS7. European/China Exposed NamesWe also summarized our coverages exposure to broader Europe which could decelerate due to high energy price/geopolitical tensions as well as toChina given recent increase in COVID cases/lockdowns. However, the Chinese govt has announced some easing actions. Stocks with high exposureto Europe include AGCO, FLS, OTIS, GTLS, PCAR, ITW, IR and China CMI, OTIS, DD, EMR, FTV, GTES, CATKey Topics from the CS Industrials Roadshow3Source: FactSet, Company data, EIA, Credit Suisse research Russia is the worlds third largest oil producer and one of the largest natural gas exporters. Russiasupplies 10% of the global oil and gas demand.On March 8th, Biden announced that the US will ban imports of Russian oil, natural gas and coaland oil prices surged 33% since the Russian invasion of Ukraine.CS US E&P team raised 2022-2023 and LT Brent/WTI oil price forecast ($/Bbl) to $100/$96,$85/$82 and $65/$62, respectively.Increased Global Oil & Gas Cap Ex - MarketUnited States20%Saudi Arabia12%Russia11%Canada6%China5%Iraq4%United Arab Emirates4%Brazil4%Iran3%Kuwait3%Other28%Share of Total World Oil Production (2020)O&G Sales ExposureMachinery/E&C in light blue; EEMI in dark blueEEMI EEMI E&CE&CE&CEEMI EEMI E&CMCMCMCEEMI EEMI MCEEMI EEMI EEMI MCMCEEMI 0%10%20%30%40%50%60%4Source: Company data, Credit Suisse researchGTLS (55-57% of Sales): Charts sells natural gas processing and handling equipment and solutions into natural gasand LNG infrastructure markets. Big LNG was back in focus on the Q421 call driven by discussions around Europesenergy dependency which could result in more re-gas terminals. We see potential for $3+ of GLTS content Big LNGprojects to FID in 2022.FLS (45% of sales): Flowserve sells engineered pumps, valves, and seals. Their sales OE/AM split is 48%/52%.While FY21 O&G bookings grew 13% y/y, they still remained 25% below pre-pandemic 2019 levels. Expectedmarket growth in 2022 should be driven by demand, elevated commodity prices, and underinvestment during thepandemic. The company expects orders to grow high-single digits in FY22, primarily driven by a return in projectspending.FLR (40% of Sales): With the global oil market likely well undersupplied for the foreseeable future, the need forincreased energy investment in the medium to long term should benefit FLR as an oil and gas E&C powerhouse.Furthermore most of FLRs peers have exited oil and gas, suggesting above average win rate and more favorableT&Cs potentially.MTZ (32% of Sales): MTZ is one of the largest contractors in gas pipeline in NA. Peers have deemphasized thisbusiness, suggesting to us an above average win rate for MTZ as well.EMR (23% of Sales): Emerson sells field devices and automation controls into process industries. New infrastructureprojects (KOB1) account for 20% of the Automation Solutions business. The company sized their KOB1 funnel at$6.5B, which has remained stable over the last 12-18 months. EMR expects to benefit from North America and QatarLNG, primarily in instrumentation, valve, and actuation businesses.CAT (10% of Sales): We see the need to further increase oil and gas production in the United States in the nearterm benefitting Machinery names with higher exposure to oil and gas. CAT is the dominant player in this space.Furthermore, we believe CATs oil and gas business carries above average margins.Increased Global Oil & Gas Cap Ex - Stocks5Source: FactSet, Company data, Nikkei, Bloomberg, Credit Suisse researchStrengthening Global Industrials Metal - MarketRussia produces 3.5% of the worlds copper, 5.4% of its aluminum, 9.3% of its nickel and 42.8%of its palladium, according to Nikkei.Aluminum is used to make aircrafts, fire trucks and tactical wheeled vehicles, nickel to makebatteries for EVs and palladium for automotive vehicles.Nickel has surged 84% and steel 11% since Ukraine invasion, tied to supply concerns.CS Metals and Mining team notes that the surge higher in bulk material and metallic markets isdramatically reshaping the medium-term outlook for the global steel cost curve.Russia Raw Material Exports (2019)CAT and FLR Sales vs S&P GSCI Commodity Index12366.226.326.317.817.6020406080100120140 - 200 400 600 800 1,000 (200) 300 800 1,300 1,800CAT SalesS&P GSCI Commodity IndexCAT sales positively correlated (0.79) - 200 400 600 800 1,000 - 2,000 4,000 6,000 8,000FLR SalesS&P GSCI Commodity IndexFLR sales positively correlated (0.75)6Source: Company data, Credit Suisse estimatesStrengthening Global Industrials Metal - StocksCAT (20% of Sales): CAT is one of two major equipment players in mining and benefits from improving commodityprices including metals as mining represents 20% of CAT sales. CAT sales correlation with S&P GSCI CommodityIndex is 0.79. Mining customers have continued to take a cautious approach in their investment decisions given thecontinued uncertainty around inflation, supply chain, logistics and labor availability. Prolonged inflation may drivecustomers to make investments. Also, mining customers should be less sensitive to price increases given they wouldlikely benefit on the revenue side from commodity price increases.FLR (20% of Sales): We estimate nearly 20% of FLRs revenues are tied to mining. FLR sales correlation with S&PGSCI Index is also high at 0.75. Pre-FEED/FEED work FLR has done represents $50B in TIC. FLR is further goingafter $42B of front end work over the next 18 months where it expects to take a fair share.CMI ( $1 invested in new energy).CAT: As the dominant player in all key markets, CAT tends to have above average pricing power, especially ininflationary markets. We prefer CAT in terms of their ability to pass through cost as the majority of their sales are todealers and they have the ability to reprice backlog. Higher commodity prices should benefit CATs customers.DE: We also prefer DE in terms of their ability to pass through cost helped by sales to dealers and ability to repricebacklog. DE tends to be the industry leader in price. DE demonstrated strong pricing power above significant costheadwinds in both 2021 and 2022E, helped by Precision AG benefits.PH: We prefer companies with substantial distribution capabilities such as PH, which have the ability to pass throughcost and/or supply products that are integral but not a significant part of bill of material (= insensitive to priceincreases). PH continues to maintain price cost margin neutrality despite significant cost headwinds.ROK: We think ROK will benefit from an increasing demand for automation as companies make supply chain andfactory floor investments amid continued freight, labor wage, materials, etc. inflation.Prolonged Inflation - Stock13Source: Company data, Credit Suisse researchSee Risks:GTLS: Chart Industries also expects significant margin ramp in H222 as the company executes on projects currentlyin the backlog for which materials are already accounted. The company has identified $29mn of annualized cost-outactions to mitigate continued inflation.FLS: Flowserve has noted inflation in motors, electronics, etc., along with tight labor market in early FY22. FLSguided to Q1 EPS of less than 15% of full year EPS, versus consensus estimate of 18% into the Q421 print.MTW: Crane market is depressed, lack of new technology innovation, market has not been disciplined in the past.TEX: On the AWP side, large rental companies have negotiating power and more limited ability to reprice backlog.OSK: On the AWP side, large rental companies have negotiating power and more limited ability to reprice backlog.XYL: We see risk to XYL profitability, as historically, the company has needed both pricing and productivity savings tooffset inflation, amid chip shortages. XYL saw 80% of supply chain difficulties in microcontrollers.Prolonged Inflation Stock (contd)14Source: FactSet, Company data, Credit Suisse researchAs the Ukraine conflict continues, quality names could be back in favor as investors look for safe haven stocksamid prolonged geopolitical tension. While most companies have minimal direct exposure to Russia, it is too earlyto decipher second- or third- derivative impact from further deterioration in relations.Quality names currently trade at a 94% premium to deep cyclicals, compared to 5 year average of 64% premium.Flight to Quality - Market02040608010012012/31/2101/14/2201/31/2202/14/2203/01/2203/15/22iShares Core S&P Total U.S. Stock Market ETFiShares MSCI World ETFiShares MSCI Russia ETFiShares MSCI Emerging Markets ETFYTD Geo-based ETF Performance (Indexed)Quality vs. Deep Cyclical P/E Valuation Data as of:3/16/2022Quality: HON, DHR, ITW, ROP, SHWDeep Cyclical: CAT, KMT, TEX (from 01/12), TKR (from 01/12)0.00.51.01.52.02.53.01/31/200111/30/20019/30/20027/31/20035/28/20043/31/20051/31/200611/30/20069/28/20077/31/20085/29/20093/31/20101/31/201111/30/20119/28/20127/31/20135/30/20143/31/20151/29/201611/30/20169/29/20177/31/20185/31/20193/31/20201/29/202111/30/202115Source: Company data, Credit Suisse researchHON: We view HON as a quality industrial company in our EEMI coverage as the company has ample deployablecapacity of $25B+ over next three years. The company has consistently pulled self-help levers such as lowering theircost base with their 2019-2021 repositioning yielding $2B of cumulative cost savings.PCAR: PCAR is one of the highest quality cyclical truck OEs globally with best in class margins, returns and balancesheet with no manufacturing debt. Parts (50% of gross profit) and Finance Sub typically support earnings resiliencythrough the cycles.DE: DE is a best in class industrial cyclical with dominant market share focused on technology as a means todifferentiate. Necessity of food staples supports farm equipment demand and Precision AG provides potential oppty todampen cyclicality of the business. DEs strong balance sheet should allow the company to invest in future growththroughout the cycle, consistently grow the dividend and repurchase stock.ITW: ITW is one of the premier diversified industrials and go-to defensive names, with an impressive managementteam and execution record. Its success is built upon its business model, which is highly decentralized and consists of80 core business units that in total generate $15B in annual revenues.FTV: Fortive provides workflow solutions, instrumentation, and sensing technologies to industrial and healthcare endmarkets with 40% of their sales from recurring sources and 16% of total sales from software. The company also has$5B in deployable capital post recent acquisitions (ServiceChannel, Provation). The company targets FY22 FCFconversion and margin of 105% and 20%, respectively.OTIS: We view Otis as a stable FCF generative company as they benefit from largest service portfolio in the industry.Digital offerings should not only act as a growth vector but also allow the company to realize higher serviceproductivity. Otis has a leverage target of 2x.Flight to Quality - Stock16Source: Company data, Credit Suisse researchWe think investors will focus on US-centric companies in an effort to isolate any negative impact from geopoliticaluncertainty in Europe. The iShares MSCI Russia ETF has declined 80% YTD, compared to US and EmergingMarket comps declining 10%.Further, recent rise in COVID cases in China could exacerbate supply chain concerns if it leads to lockdownmeasures.European/China Exposed Names - MarketEurope Sales ExposureChina Sales Exposure Machinery/E&C in light blue; EEMI in dark blueMC/E&CMC/E&CEEMIEEMIEEMIEEMIEEMIEEMIEEMIMC/E&CMC/E&CMC/E&CEEMIMC/E&CMC/E&CMC/E&CMC/E&CEEMIEEMIMC/E&CEEMIMC/E&