--> Rating changes: We are upgrading Legrand, a quality play on European construction recovery, to Overweight and SKF, post significant underperformance, to Equal Weight.
--> We see close to 20% upside potential on average for : Siemens, Philips, Sandvik, Legrand, Atlas Copco and Prysmian.
On the downside we highlight Alstom, Kone, Metso, Alfa Laval and Osram.
Our preferred names in European Capital Goods are Siemens, Philips and Sandvik for restructuring, Legrand and Atlas Copco for mispriced quality and Prysmian for a bit of both. We think the sector in aggregate looks at best fairly valued on 2015E earnings and relative to the market. Following the reset in growth expectations last year (10% downgrades to FY14E EPS) current consensus growth estimates now look realistic. We are forecasting 11% EPS CAGR 2013-2015E reflecting a mild recovery in Europe, modest US growth and a mixed development in emerging markets.
See note attached