Scoreboard: Hollywood seeks to profit from football’s multibillion transfer market
German Industrial Giant ThyssenKrupp Is Restructuring. That Could Reboot the Stock.
Shares in the Frankfurt-listed firm (ticker: TKA.Germany), which has about 400 subsidiaries and is one of the world’s largest steel producers, have plunged 75.6% over the past five years.
Coronavirus has slowed its turnaround, and in April ThyssenKrupp—the maker of everything from submarines to car parts—sought 1 billion euros ($1.2 billion) in state grants, which it hasn’t used yet. Last week it announced the latest in a series of job cuts, with the loss of 800 workers at its automotive business.
These events have weighed on the stock, which has fallen to €4.53 and is down about 62% this year. This could be a nadir if the restructurings succeed. In September, ThyssenKrupp raised €17 billion selling its elevator division. While the company hasn’t confirmed how it will spend the proceeds, there is the potential to reduce debt and secure a firmer financial footing.
ThyssenKrupp is also seeking consolidation in its steel business and shipbuilding arm, and looking to attract buyers or partners for its plant-engineering unit. The company is also examining the sale of noncontrolling stakes in other areas.
Marc Gabriel, an analyst at independent private bank Bankhaus Lampe, thinks the shares can gain momentum as Chief Executive Officer Martina Merz reshuffles the company’s portfolio.
Gabriel forecasts that ThyssenKrupp could rise to €10, saying the restructurings are a “catalyst for the financial market to regain trust in the stock along with the scheduled transformation phase of two to three years.”
Analysts at Société Générale have a price target of €10.20.
The business, based in Essen, employs 106,000 workers and is one of Germany’s largest 20 companies, valued at €2.6 billion. The stock trades at a significant discount to its healthier peers.
ThyssenKrupp had a €83 million loss for the 12 months to Sept. 30, 2019, from income before tax of €561 million recorded the previous year. Net sales in 2019 were €41.9 billion.
At the third-quarter trading update on Aug. 13, the company posted a deeper net loss.
Merz said in a statement: “While we are now seeing signs of stabilization, the forthcoming restructurings and cleaning up of the balance sheet will continue to weigh on earnings in the current quarter.
“With the proceeds from the elevator transaction, we can now at last systematically address these overdue measures.”
The business dates back to 1811, when Friedrich Krupp established a factory with two partners to make English cast steel.
By 1833, with the first steam engine lowering production costs, the company expanded into producing railroad equipment and gun-barrel ingots and artillery, and later added shipping and ore mining.
In 1871, August Thyssen created Thyssen & Co. to produce iron hoops. In 1997, the two companies agreed to merge their flat carbon steel activities and examine other areas of cooperation. A full merger was proposed, and Thyssenkrupp was born in 1999.
Christian Obst, an analyst at investment bank Baader wrote in a recent note that “the journey is far from over, and the CEO always pointed to the fact that it will take up to three years.”
This is a stock for brave long-term investors. The sale of its most profitable elevator unit will shore up finances, but reaching the next level depends on successfully slimming down and maximizing profits.
Industrial Stocks Are Getting Ready for 10 Years of Outperformance. Here’s How to Play It.
Visit a mine these days and there’s a good chance you’ll find Caterpillar’s 797F. The truck stands 25 feet high, weighs nearly 290 tons, and comes with a feature that would make Tesla co-founder Elon Musk proud: It can operate itself.
Watching Caterpillar’s enormous trucks, without drivers, as they slowly navigate open-pit mines resembles an alien landscape from science fiction.
The future, however, is now, and it’s a profitable one. Caterpillar can bill up to $5 million for one of these automated trucks and can charge more for software and data collection from the vehicles.
Technology is no longer just about tech stocks—and industrial companies stand to benefit. Caterpillar (ticker: CAT) and Rockwell Automation (ROK) are among the companies harnessing the powers of data and automation in ways that should make their sales more consistent and their bottom lines more profitable in the years to come.
At the same time, a shift toward renewable energy and electric vehicles provides the catalyst for companies with electrification technologies, like Quanta Services (PWR) and Eaton (ETN). In some cases, renewable energy will replace the business that industrials have lost with the decline of fossil fuels. Combined, these trends suggest that after 10 years of limping along, it’s time for the industrial sector to outperform.
“This should be the decade when the software boom starts to accrue to the consumers of the technology from the producers of the technology,” says Ironsides Macro strategist Barry Knapp.
For the past 10 years, the industrial sector hasn’t been the place to be if an investor wanted to outperform the market. The S&P 500 Industrial Sector index rose just 12% during the past 10 years, lagging behind the S&P 500 index’s 14% return over the same period, hurt by the collapse of oil and coal, slowing growth in China, and the decline of once-mighty General Electric (GE). Tech returned 20% over the past 10 years, thanks to the dominance of Apple (AAPL), the rejuvenation of once-tired titans like Microsoft (MSFT), and the arrival of new players like Zoom Video Communications (ZM).
Yet historically, markets have moved in cycles, with tech outperforming for a decade before giving way to industrials, and then reversing again. The tech-rich Nasdaq Composite index returned less than 12% a year on average during the 1980s, while the S&P 500, our proxy for industrials, managed average annual gains of 18%, spurred by a commercial-construction boom.
The 1990s followed with the dot-com boom. In that decade, tech gained 30% annually, while industrial stocks managed 16% average annual gains. Tech lost 7% a year on average in the 2000s, while industrial investors gained about 1% a year, as China joined the World Trade Organization and sparked a spike in infrastructure spending that helped boost industrial company sales. Then, tech returned to the ascendancy. Compared with the 20% average annual gain for tech stocks over the past decade, industrial stocks have returned less than 12%.
Now, there are signs that the cycle is about to turn again. Tech stocks trade at 31 times 12-month forward earnings estimates, their highest since the dot-com era. Industrials, on the other hand, trade at 24 times earnings. That seven-point gap is the largest since the early 2000s and a sign that tech could be peaking.
“The future is uncertain, but it is probably a worthwhile conjecture to think industrials will trounce technology in the next decade,” Fundstrat’s Tom Lee writes.
The benefits of technology have already started to bolster some industrial companies, particularly those engaged in automating the industrial process. Spending on automation should continue to accelerate over the next decade, says Baird industrial analyst Rick Eastman. He estimates that spending in recent years has tracked global gross-domestic-product growth, but that the combination of tech trends and a return of manufacturing capacity to the U.S. should lift that growth rate by one to two percentage points a year. That may not seem like a lot, but compounded over a decade, it is a huge opportunity.
Automation also means more chances to collect and process data—and charge for it, too. The decreasing costs of computing combined with the explosion of cloud-based technology makes it possible to collect data, store it, and analyze it to improve processes. “Edge computing,” which involves analyzing the processes away from the center of activity at a manufacturing plant, is becoming a big business for industrial companies, providing them with recurring revenue similar to Microsoft’s model.
Rockwell Automation, which controls processes at the “edge,” has been growing sales and earnings at about 5% and 18% a year, respectively, for the past 10 years. That compares with sales growth of 5% and annual earnings growth of less than 8% for industrial companies on average. Rockwell’s profit margins have averaged about 19% in recent years, up from about 7% at the time of its split from Rockwell International in 2001.
Companies are betting the growth will continue by buying software companies to leverage the explosion in computing power and the falling cost of data storage and analysis. Siemens (SIE.Germany), for instance, bought Mentor Graphics in 2017 for $4 billion, while Rockwell Automation this past week announced a partnership with Microsoft, marrying more software applications with its industry expertise. Those efforts should lead to more profits and better margins. “By 2030, you are going to shift how you create customer value,” explains William Blair analyst Nicholas Heymann. “You don’t want to be on the wrong side of the information divide.”
While the trend toward automation and data will create new revenue streams and higher profit margins, industrial companies also need new business, especially to replace lost revenue from the decline of fossil fuels. That business could come from the rise of renewable energy.
Make no mistake: Servicing oil companies was a huge business for industrial companies, but as oil prices have dropped, so have those sales.
Enter renewable energy. The cost of generating electricity from solar and onshore wind is now just about as cost effective as natural-gas-based power generation. Global spending on renewable power totaled $313 billion in 2016, according to the International Energy Agency. Combined with the amount spent on energy storage and transmission, the figure rises to $619 billion. Upstream oil-and-gas exploration spending in 2016 was $452 billion, down from $614 billion in 2015. The tipping point arrived.
It has created an enormous opportunity for industrial companies building and servicing the renewable infrastructure. There is no marginal cost for wind and sunlight, but a majority-renewable grid requires more technology and storage to manage electricity generated from, say, Vestas Wind Systems (VWS.Denmark) turbines turning in the North Sea or a giant NextEra Energy (NEE) solar installation soaking up the rays in Nevada. U.S. transmission investment is expected to top $22 billion a year for the next few years, up from about $10 billion a year a decade ago, according to the Edison Electric Institute.
“It’s clear that electrical power systems are changing dramatically both for utilities and for their customers, driven by decarbonization and the decentralization of power generation,” Uday Yadav, president of the electrical sector at Eaton, tells Barron’s. “There is a need for additional electrical equipment as well as software and services to optimally manage the expanded grid in terms of safety, resilience, and economics.”
And the push for renewable energy cuts across all businesses. Gordon Haskett analyst John Inch looked at more than 35 companies that generate more than $3.3 trillion in annual sales combined. Those companies are trying to reduce emissions and are asking their suppliers to do the same. “The train has left the station,” Inch says. “Now it is a function of how fast that train runs.”
Here are five stocks poised to prosper on the trends of electrification, automation, and data:
Schneider Electric
Some companies benefit from all three: Take Schneider Electric (SU.France), a $71 billion maker of electrical and automation products based just outside of Paris. The company, like many of its peers, has been pushing into software to enhance sales growth and expand profit margins. In 2018, the company acquired a 60% stake in engineering software firm Aveva Group (AVV.UK).
Schneider’s automation business generates more than $7 billion in annual sales, but electrification is larger—generating about $24 billion in annual revenue from the sale of products ranging from residential circuit breakers to low-voltage transformers to power inverters, which turn direct current from solar generation into alternating current used by modern electrical equipment.
“We’re not in the business of building solar arrays, but we are in the business of managing that power,” says Mark Feasel, vice president of Schneider Smart Grid. One of his jobs is to help commercial customers manage power demands from a diverse source of renewable and traditional electricity-generation technologies.
Schneider’s sales have grown less than 2% a year on average for the past five years, but growth is expected to accelerate to about 5.3% a year on average for the next three years. At 21 times estimated 2021 earnings of roughly $6 a share, Schneider, which traded at a recent 107.45 euros ($127), isn’t all that cheap. Indeed, the multiple is higher than its historical average of about 15 times. But the outlook for both automation and electrification is improving.
Schneider’s stock can trade like other high quality industrials—at about 25 times earnings—and hit €125 over the coming months.
Eaton
Eaton, like Schneider, makes circuit breakers and transformers. It also benefits from the rise of electrification and automation. Eaton’s sales have fallen about 1% a year for the past five years because, well, it is an industrial in the midst of recession and sells equipment for heavy-duty machinery.
But, as with Schneider, Wall Street believes that Eaton’s sales growth will accelerate, to about 3.7% a year for the next three years. The growth acceleration will be driven by electrification spending. Haskett’s Inch thinks that growth in its electrical divisions can reach 4% to 5% over the next few years, a step up from the previous five years. Eaton trades at 22 times 2021 earnings estimates of $4.88, a premium to its historical average.
But Inch thinks that is reasonable. “Eaton is still covered heavily by machinery analysts who count tractors and heavy trucks,” he says. With more than 60% of sales in its electric business, Eaton shouldn’t be viewed against other commercial vehicle stocks. The stock, says Inch, is a “stealth opportunity that definitely hasn’t been completely recognized or been priced in.” He has a Buy rating on the shares and a $120 price target, up about 12% from a recent price of $107.
Caterpillar
Caterpillar will benefit just as it has in previous industrial cycles: by supplying the industry with the machines necessary to build whatever needs to be built. Caterpillar’s sales growth accelerated in the 1980s and again in the 2000s. Sales are likely to accelerate in the coming decade, and this time around the company can also improve profit margins and make sales a little less cyclical by adding services related to connecting and monitoring machines.
By 2019, Caterpillar had one million connected machines around the globe. Its stock is trading for about 21 times estimated 2021 earnings of $7.26 a share—but that may not be as expensive as it appears. Cyclical companies like Caterpillar typically trade at high price/earnings ratios when earnings have sagged. Caterpillar’s earnings are well off its previous peak earnings of about $11 a share in 2018, when its P/E ratio was about 13 times.
The time to buy Caterpillar is when things are starting to get better. And things are getting better. Wall Street expects sales to rise about 8% a year for the next four years, hitting $56 billion by 2024, after growing at a 2% clip from 2016 and 2020.
In the expected industrial upturn, shares can trade up 50% from Caterpillar’s average price of $144 during 2017-18, when Caterpillar last produced peak earnings. That is roughly $210 to $220 a share—about 20% higher than CAT stock’s all-time high, set at the start of 2018.
Quanta Services
Quanta Services, an engineering and construction company that builds electrical infrastructure and other projects, has been helped by the shift to renewable energy. Revenue from electric-power construction totaled $7.1 billion in 2019, or 59% of its total revenue, up from $5.3 billion in 2014. Those sales could grow to $10.3 billion by 2024.
“Look at business and investor sentiment around carbon-free and technology; we are enabling those things,” Quanta CEO Duke Austin tells Barron’s.
Profit margins, meanwhile, are expected to improve from about 5.1% in 2020 to 6.7% in 2024. It also has a strong backlog of projects to buttress growth. At a recent price of $59, the stock trades at about 14 times 2021 earnings, a little higher than its five-year average of 12 times. Still, that isn’t expensive relative to the market, and some premium is warranted.
“There is a slightly more recurring nature to their earning stream,” Baird analyst Andrew Wittmann tells Barron’s. He says that Quanta is adding smaller contracts to what is normally a boom/bust construction cycle, effectively serving as an extension of a utility customer’s labor force.
“We are craft-skilled labor, that’s what we are about,” Quanta’s Austin says. He doesn’t like to subcontract business, and believes it gives Quanta a competitive advantage.
Wittmann rates the shares the equivalent of a Buy and has a $60 price target.
Rockwell Automation
Rockwell Automation isn’t cheap—it trades at just over 30 times fiscal 2021 earnings-per-share estimates of $7.96—but it doesn’t need to be.
Rockwell is the largest pure-play industrial automation company in the world. It specializes in both “discrete” automation—controlling a robot on an assembly line, for example—and process automation products, which manage continuous operations such as food production.
“There are only a handful of global automation suppliers,” says Haskett’s Inch. He expects Rockwell stock to hit $250 from a recent $241, which would work out to 31 times the Street’s earnings forecast. Inch, however, sees earnings reaching $8.85 a share in fiscal-year 2022. If he’s correct, the stock would trade at 28.2 times. The Wall Street consensus for 2022 earnings is $9.21 a share, an increase of 16% over the prior fiscal year.
Barron’s Weekend Summary: Industrials increasingly resemble tech companies because of their use of data and automation—and they are set for a rebound.
* Cover Story: Industrial companies such as CAT and ROK are increasingly becoming technology companies, harnessing the powers of data, analytics, and automation in ways that should make their sales more consistent and their bottom lines more profitable in the years to come, while a shift toward renewable energy and electric vehicles provides the catalyst for companies with electrification technologies, like PWR, ETN, and Schneider Electric; The industrial sector, which has lagged behind the S&P 500’s 14 percent return over the past 10 years, is set to outperform again.
* Tech Trader: It has become easy for investors to dismiss the threat of tech regulation, but the upcoming vote on California’s Proposition 22—a referendum that would overturn Assembly Bill 5, a state law passed in 2019 that forces gig-economy companies to classify drivers as employees, rather than contractors—could have a material impact on LYFT, UBER, and other important tech stocks.
* Trader: JPM’s results mark the unofficial start of earnings season, but investors should keep an eye on GS, whose stock has fallen less than peers because of its strong investment banking and trading businesses and less exposure to possible credit losses.
* Interview: Jack Wild, founder of JW Asset Management, one of the first US institutional investors in legal cannabis companies, assembled a specialty pharmaceutical business that his JW Partners fund sold for a huge profit, and is now building the Canada-listed cannabis company TerrAscend—and investing in healthcare companies such as ESTA and HZNP.
* Profile: Jeff Kripke, manager of the $6B Pioneer Fund, updated the fund’s investment approach when he took over, reducing the number of holdings by more than half and making ESG factors a focal point of the strategy; The fund is prohibited from owning stocks that rank in the bottom 15% of their industries and bottom 30% of the S&P 500 index based on ESG research (top 10 holdings: AAPL, AMZN, MSFT, UPS, MA, V, GOOGL, VZ, UNP, FB).
* Features: 1) MS’ bid for EV, which followed its acquisition of E*Trade, “marks another step in its retreat from its somewhat swashbuckling pre-financial-crisis persona, when it made much of its money from risky trading—and it fits in with a wave of consolidation reshaping the money-management industry”; 2) Positive on AB: Asset managers are hot these days, as a recent deals suggest, but AllianceBernstein generates little attention because of its partnership structure and thin public float—the public portion of the company owns 35 percent stake, while life insurer EQH holds the other 65 percent, though it could at some point decide to acquire the entire firm; 3) Cautious on AMC, CNK, MCS, Cineworld Group: Slow to reopen amid the coronavirus pandemic, theater chains are reeling from low attendance and a lack of new films to lure moviegoers, and locations are essentially shuttered in New York City, Los Angeles, and San Francisco, which represent about a quarter of domestic box-office sales and the key markets that studios need to debut their big offerings; 4) Though US companies gladly shifted manufacturing overseas to reduce cost and boost profit margins, doing so came at the expense of diversification and resiliency; With an increasingly hostile China a key hub, there are national security implications to overseas manufacturing, but fostering a revival of US factories would be a difficult task; 5) PFE’s lawsuit against the federal government seeking a judgment in favor of proposed patient-assistance programs that would allow the company to help cover copays for Medicare beneficiaries using tafamidis—which costs $225K per year—could reverberate far beyond Pfizer, since such programs hamper efforts to bring down drug prices.
- European Trader: Positive on ThyssenKrupp: The Frankfurt-listed industry conglomerate has been restructuring its various businesses in an attempt to reboot performance and address debt issues; it is also trying to consolidate its steel and shipbuilding arms, and looking to attract buyers or partners for its plant-engineering unit, all of which should boost shares.
- Emerging Markets: “A raging pandemic and five percent economic contraction might seem like a poor backdrop for initial public offerings, but Brazil’s IPO market is defying macro gravity with its hottest year since 2007”—seventeen companies have gone public as of late September.
- Commodities: “Gold was up by close to 40 percent for the year when it hit a record high in August, but it has since nearly halved that gain, and some analysts say a move to fresh all-time highs in the final quarter may be out of reach for the precious metal.”
- Streetwise: REGN’s past success developing an antibody cocktail for Ebola bodes well for its Covid-19 effort—“Whatever suspicion the president’s Regeneron endorsement has raised among the embellishment-weary, we should take it more seriously than his past Covid-19 pitch work,” says columnist Jack Hough.
Closing Stock Market SummaryThe S&P 500 rose 0.9% on Friday and ended the week with a 3.8% gain, as investors remained enthused by reported progress in stimulus talks and positive corporate commentary. The Nasdaq Composite outperformed with a 1.4% gain, followed by 0.6% gains in the Dow Jones Industrial Average (+0.6%) and Russell 2000 (+0.6%).
The White House was reportedly drafting a $1.8 trillion stimulus bill, up from a prior $1.6 trillion and representing an about-face from the previous stance aimed at standalone relief bills. President Trump advocated in a radio interview for a bigger stimulus package than what both sides are offering.
Truthfully, the reaction in the market wasn't that impressive considering the news contributed to only a small bump in the S&P 500, which was already trading higher before the headlines. That might have been because Senate Majority Leader McConnell said beforehand that a deal might not happen before the election or perhaps the market was gassed out after a strong week.
Sector leaders today included consumer discretionary (+1.5%) and information technology (+1.5%) amid solid gains in the mega-caps and semiconductor stocks. The Philadelphia Semiconductor Index rose 1.8%. The energy (-1.6%), real estate (-0.3%), and utilities (-0.04%) sectors closed lower.
Within the semiconductor space, Xilinx (XLNX 120.94, +14.95, +14.1%) was reported to be in talks to be acquired by AMD (AMD 83.10, -3.41, -3.9%) for $30 billion, NXP Semi (NXPI 141.53, +6.70, +5.0%) raised Q3 revenue guidance above consensus, and Teradyne (TER 86.10, +3.62, +4.4%) was upgraded to Buy from Hold at Stifel.
Separately, Gilead Sciences (GILD 63.84, +0.52, +0.8%) said trial data for its remdesivir drug shortened the recovery time of COVID-19 patients by five days and significantly reduced death rates. The news strengthened the market's optimism surrounding coronavirus treatments and their potential impact on consumer sentiment.
U.S. Treasured ended the session on a lower note. The 2-yr yield increased three basis points to 0.16%, and the 10-yr yield increased one basis points to 0.78%. The U.S. Dollar Index fell 0.6% to 93.06. WTI crude futures fell 1.3%, or $0.54, to $40.64/bbl.
Friday's economic data was limited to wholesale inventories for August, which increased 0.4% (consensus 1.0%) following a revised 0.2% decline in July (from -0.3%). Investors will not receive any notable data on Monday.
- Nasdaq Composite +29.1% YTD
- S&P 500 +7.6% YTD
- Dow Jones Industrial Average +0.2% YTD
- Russell 2000 -1.9% YTD