Scott Davis, together with the team of Barclays' analysts, shared his view of the future of the American Multi-Industry sector and why investors should not miss out on it.
Honeywell International (NYSE: Honeywell International [HON]), General Electric (Milan Stock Exchange: Gefran [GE]) and 3M (NYSE: 3M Company [MMM]) are the stars of Barclays (LSE: Barclays [BARC]) analysts' upgrade list of the companies in the U.S. multi-industry sector, reports Barron's. The analysts say that despite this year's sluggish performance of the sector, investors should definitely look into the industrials, as the upcoming round of earnings reports, such as that of Danaher (NYSE: Danaher Corporation [DHR]), is likely to bring some positive news.
Davis and his team have upgraded the entire group from Neutral to Positive, paying particular attention to one of the group's main players, 3M. According to the analysts, together with other industrials such as General Electric, Emerson Electric (NYSE: Emerson Electric Company [EMR]) and Honeywell, 3M has been losing investors' favor. However, 3M was the only company in the group that got a special upgrade from "Overweight" to "Equal Weight" from the analysts.
"The investment case is based on our view that the negative earnings revision cycle is nearing an end, greater visibility on key end-markets – notably non-res construction and general capital spending, and a recovery in Emerging Markets. Oil over $50 helps… M&A may help too. Valuation plus mean reversion are statistically the most powerful quant factors in industrials and our upgrade has support from that perspective as well," they wrote, as reported by Barron's.
The price target for the company was substantially upgraded to $194 from $171. The experts say that the reason behind such a generous prediction is the fact that 3M is a large Equity Multiplier, with 35% of sales. And, according to Davis, there is an upward trend in EM development at the moment that will positively affect 3M's future performance. The Motley Fool adds that if Barclays' prognosis is correct, MMM stock will be worth 14.5% more than its current price. This is a quite ambitious estimate, considering that 3M is already up 17% this year.
"Our target multiple may scare folks, but it’s comparable to levels seen for similarly quality of assets both inside our coverage and outside of our coverage. 3M is tough to comp with precision. It’s a hybrid medical/dental/chemical/industrial/consumer product company, but with a common base of technology, distribution, and global brand. Biggest risk to our upgrade is either an outsized rally in the US$ or a rise in raw material prices hurting margins. Both are legitimate risks, but we do like 3M’s history of pricing power in offsetting."
Additionally, they bet on the expertise of 3M's "best-in-class" management to facilitate the rapid development of the company.
Along with 3M, the analysts upgraded Rockwell Automation (NYSE: Rockwell Automation [ROK]), ITT (NYSE: ITT) and Rexnord (NYSE: RXN).