Company Name Rating (New) Rating (Old) FLSmidth & Co. A/S Neutral Buy Geberit Holding AG Sell Neutral Metso OYJ Sell Neutral Outotec Sell Neutral Philips Electronics Buy Neutral Wartsila (B) CL-Sell Sell
A tough up-cycle for Capital Goods - The last cycle saw many booming end-markets: mining, power generation, shipping, O&G and Chinese construction among many growing 3x+. We expect this up-cycle to be absent of booms, and see several preceding end-markets continuing (or entering) multi-year declines. We expect a mild recovery, but do not see the sector returning to prior peak growth/margins. While we still see material upside to certain names, we expect dispersion to widen and reiterate our Neutral coverage view. Avoiding certain end-markets will be key - A rising tide lifts all boats, but when the tide ebbs many are stranded. We would avoid two groups: (1) stocks with large exposure to declining markets. We expect KONE (CL-Sell), Wärtsilä (onto CL-Sell), Alstom (Sell), Metso and Outotec (both down to Sell) to struggle to grow meaningfully. And (2) weak cash managers exposed to EM competition: Alstom, Nexans and Husqvarna (all Sell). Other downgrades include FLSmidth (to Neutral) and Geberit (to Sell). What we’d own: Philips up to Buy, reiterate CL-Buy on Atlas and Prysmian - We prefer: (1) Companies which can outgrow their end-markets due to competitive advantage: we expect Atlas (CL-Buy) and Legrand (Buy) to continue to their track record of doing so. We also see Prysmian (CL-Buy) and Schneider (Buy) outgrowing their end markets. (2) Turnaround stories. We believe the constant cash leakage from GEA (Buy) and Philips (up to Buy) is drawing to a close while, at the same time, they should benefit from a general recovery. €130 bn: cash management key - We introduce 2016/17 estimates and make changes to our long-term growth forecasts. Meanwhile our new forward-looking Cash Manager framework details where we expect €130 bn of cash to be allocated and which companies we think will spend it most productively. All this changes our GS SUSTAIN rankings, in line with what is turning into a very different sector landscape this time around.