Kone Already Getting Ample Reward For Its Quality

Quality deserves a premium, but the market seems to be going overboard with Kone (OTCPK:KNYJY) (KNEBV.HE) (also spelled “KONE”), as this Finnish elevator and escalator company is indeed a high-quality company, but one that seems unlikely to grow enough to justify the valuation. Future service growth in China is a valid driver, as is equipment growth in India and other markets, and I don’t dismiss the possibility of a value-building mega-merger, but the share price already seems to contemplate nearly double-digit free cash flow growth from a company serving a market likely to grow in the low-to-mid single digits.

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Kone Already Getting Ample Reward For Its Quality

Healthy Markets And Price Leverage Bode Well For Ingersoll-Rand

Ingersoll-Rand (IR) has had a so-so run of late. Although the company has been reporting some good core revenue and order growth numbers and a general upward trend in margins, the shares have lagged peers/comps like Lennox (LII), Gardner Denver (GDI), and only just matched the industrials sector as whole (and Atlas Copco (OTCPK:ATLKY) had also been outperforming Ingersoll-Rand until a recent dip tied to its semiconductor-exposed vacuum business).

I find that performance interesting given that the company continues to benefit from healthy cycles in the non-residential and residential building markets, has little meaningful exposure to sectors of concern like autos or electronics, and still has leverage to price/cost improvement and growing aftermarket/service sales. Although Ingersoll-Rand isn't cheap enough to call it a clear bargain (those are few and far between in the industrial sector), I wouldn't ignore the significant boost to guidance and the potential for IR to be one of the relatively few beat-and-raise stories in the second half.

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Healthy Markets And Price Leverage Bode Well For Ingersoll-Rand

Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane (CR) has always been a bit of an odd duck. While there are plenty of multi-industrials out there, Crane’s $3 billion revenue base and $5 billion market cap makes it a small player among the conglomerates and one with a fairly unusual (albeit very diverse) mix of end-markets. It’s also not especially widely-followed, with only about a half-dozen sell-side analysts covering it and less than 75% institutional ownership. Now add in some odd trends and market signals, and this is a somewhat challenging story to evaluate.

I didn’t like Crane’s valuation back in February of this year, and the shares have underperformed the broader industrial group since then (as well as the S&P 500) with a roughly 10% decline. Now, though, there seems to be growing momentum in the Fluid Handling and Aero businesses, and margins seem to be coming along a little better than expected. If Crane’s late-cycle exposure bears it out as a late bloomer, this could now be a time to consider the shares.

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Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Excellent Results Supporting A Steep Valuation At Halma

I really like the businesses at Halma (OTCPK:HLMAF) (HLMA.L), but when I last wrote on the company in January, I thought there wasn't much room for the already-steep multiples (on both an absolute and relative) to expand much further. For a little while that call worked, with the shares losing about 10% of their value between late January and late March, but a positive late March update and renewed enthusiasm for companies exposed to the oil/gas recovery and commercial buildings sparked a big rally that has left the shares about 10% higher than they were back in late January.

I am still a big fan of Halma's business mix and management's strategy to augment its core strengths with selective M&A and greater internal investments in digital capabilities (including IoT and analytics). It's also very easy to like a company that is logging double-digit organic revenue growth and even stronger order growth. The "but" remains valuation; the shares are trading at multiples more than 50% above the company's long-term averages and close to 33% above a peer group of quality growth companies. Given the level of expectations built into the price, I'd rather err on the side of missing more of the run than risk jumping in ahead of even a partial reversion to the mean.

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Excellent Results Supporting A Steep Valuation At Halma

The Tide Is Turning For Ingersoll-Rand

A year and a half ago, I thought that Ingersoll-Rand (NYSE:IR) looked undervalued, and the shares are up more than 70% since then. Now, to be fair, I thought Atlas Copco (OTCPK:ATLKY) was the better pick at that time, and Atlas's almost 80% rise since then isn't that much ahead of Ingersoll-Rand, so I think this had more to do with being generally right that the market was too worried about the long-term future of these industrial businesses.

In any case, Ingersoll-Rand's management has made progress in both improving the business and shifting the sentiment. I frankly think there's been more progress on the former than the latter, and so there could still be some upside as investors take a more "normalized" view of the company and its prospects (rather than always seemingly expecting something to go wrong). The May 10 Investor Day likely isn't going to be revolutionary for sentiment, but a clear discussion of the company's innovation and productivity initiatives as well as its plans for capital deployment could further strengthen that improving trend in sentiment.

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The Tide Is Turning For Ingersoll-Rand

Honeywell Has Several Options To Go From Very Good To Great

To hear some talk about Honeywell (NYSE:HON), you'd think this is a lousy business, never mind the solid margins and returns on capital. There are nits to pick with respect to organic revenue growth and free cash flow generation, I'll grant, but it's interesting to me to see what companies get a "pass" and what companies don't. Now with a new CEO in place, one who hasn't earned the benefit of the doubt from investors and analysts, there could be more pressure on Honeywell to remake the business in a more dramatic fashion.

I don't know whether or not Honeywell will restructure itself in a major way, up to and including separating from the aerospace business, but management has at least validated it as a talking point in response to a letter from an activist investor. Relative to my cash flow expectations, Honeywell shares are trading at an implied return in that space between "mid" and "high" single digits, which isn't bad, and could still offer some upside as comps get easier and the company considers its strategic options.

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Honeywell Has Several Options To Go From Very Good To Great

Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

Commercial aviation engine suppliers make up a relatively small world, as there are really only a half-dozen companies in North America and Europe that offer competitive solutions, and most of those don't compete across the board. Rolls Royce (OTCPK:RYCEY) is a name that is probably best known for a business it's not even in (the luxury car business is owned by BMW (OTCPK:BMWYY)), but this is the third-largest aircraft engine maker and a significant player in the markets for widebody and business/regional engines.

This is an interesting time for Rolls Royce, as the company is about to see new widebody programs ramp up (which isn't actually that good for margins), older programs wind down (which is bad for margins), and likely not much progress in non-aviation areas like marine. What's more, there are well-publicized challenges with widebody aircraft these days, as many operators are turning to more efficient, more capable next-gen narrowbody planes instead.

Although the next couple of years are likely to remain challenging, and an accounting change will hammer reported earnings (but not cash flow), I believe there's an argument to be made that Rolls Royce shares are priced to generate double-digit total returns from here.

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Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

With Watsco, It's About Quality Versus Value

If somebody offered you a brand new Ferrari for $1,000, you'd probably be extremely suspicious of the offer and/or the car. Quality products don't typically come at a bargain price, and that's something investors largely have to make their peace with in the industrial distribution/MRO sector, as quality names like Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and WESCO (NYSE:WCC) often look pricey. So it is with leading HVAC distributor Watsco (NYSE:WSO), and especially now that stocks in this sector have shot up 15% to 30% in just the last month.

If you're happy with a lower total return, or you believe that Watsco can grow free cash flow in excess of a 10% compounded annual rate over the next decade, maybe there's some appeal here. I don't find either of those clauses acceptable, though, and so I will watch this distributor from the sidelines as it continues to benefit from a healthy residential HVAC market and invests in IT and supply/logistical improvements that should pay rewards in the coming years.

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With Watsco, It's About Quality Versus Value

Safran Building Toward Better Days

It hasn't been the smoothest ride for aerospace companies, but France's Safran (OTCPK:SAFRY) is nevertheless worth a closer look. Safran is a tier one supplier in the aerospace market, and through its alliance with General Electric (NYSE:GE), a leading player in narrowbody aircraft engines. While the launch of a new engine program will pressure margins in the short term, aftermarket sales should start improving and management seems focused on removing the company from underperforming business lines.

The sale of the security business is going to bring a lot of cash to Safran and there are still concerns about what management will do with that money. Although management hasn't sounded particularly eager for M&A, and there aren't many deals out there that would seem to really improve the company, the Street is still batting around various names as potential targets. While this potential M&A is a significant swing factor, mid single-digit revenue growth and improving margins can drive a fair value more than 10% better than today's price, making these shares worth a closer look.

Investors/readers should note that Safran's ADRs are rather liquid, and while the home exchange shares are even more liquid, there should be adequate liquidity with the ADRs for most investors' needs.

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Safran Building Toward Better Days

Meggitt Going Through A Transition, But The Valuation Seems To Anticipate The Recovery

Aerospace cycles are tricky, as investors in stocks like Honeywell (NYSE:HON), Rockwell Collins (NYSE:COL), and Safran (OTCPK:SAFRY) can attest, but Meggitt (OTCPK:MEGGY) has had more challenges than most. Margins are on a four-year slide, and investors are rightly concerned as to whether a wave of fleet retirements will sap demand for lucrative spare parts and whether recent M&A transactions will generate acceptable returns on the capital invested.

I think Meggitt is growing through a transitional period, as new original equipment programs ramp up, but I believe the business can return to a more normal margin/FCF footing in the coming years. That said, the shares already seem to anticipate such a recovery and M&A is really the only driver I can see that would drive significantly better results in the near term.

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Meggitt Going Through A Transition, But The Valuation Seems To Anticipate The Recovery

Amid A Lot Of Uncertainty, Honeywell Is Still Honeywell

There is plenty to worry about these days, not only in a general economic/market sense but also more specifically to Honeywell (NYSE:HON). Can Darius Adamczyk fill the very large shoes that CEO David Cote will leave behind? How much turnover will occur at the senior leadership levels, and just how deep is Honeywell's management bench? Oh, and while we're at it, what's going to spur meaningful improvements in global productivity and capex investment such that growth can break out of the low-single-digits?

If we're in a lower-for-longer scenario, I think Honeywell is a good companion for the journey. The shares are up about 13% from my last article and no longer trade at a discount to my fair value, but I still think the price works out to high single-digit total returns. What's more, if and when that lower-for-longer scenario does become the consensus, I think stocks like Honeywell, 3M (NYSE:MMM), Illinois Tool Works (NYSE:ITW), Danaher (NYSE:DHR), Rockwell (NYSE:ROK) and a few others will become darlings for their ability to drive relatively better performance.

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Amid A Lot Of Uncertainty, Honeywell Is Still Honeywell

Seeking Alpha: Ingersoll-Rand Better Valued, But Not Better

It has been a while since I've liked Ingersoll-Rand (NYSE:IR), as I believe the shares have been buoyed by quite a bit of faith around the Street in the company's restructuring efforts. This skepticism has kept me on the sidelines, and with the shares down around 20% from the time of my last article, I can't say as though I've missed out on much.

The startling weakness in global equity markets since the start of the year and in industrial stocks, really, since the middle of 2015 has created some bargains provided that 2016 isn't the start of another deep or prolonged recession. I still have a lot of quality-based issues with Ingersoll-Rand - the company is a strong player in HVAC, but I don't believe the company is doing much to shrink the gap with Atlas Copco (OTCPK:ATLKY) in industrial and there's still a lot of work to be done on margins. At this price, though, I don't think so much benefit of the doubt is baked into the price and patient investors could see some upside from here.

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Ingersoll-Rand Better Valued, But Not Better

Seeking Alpha: Ingersoll-Rand: Good Exposures, But Not So Much Value

It has been a while since I've written on Ingersoll-Rand (NYSE:IR), in no small part because I haven't had a lot to say beyond reiterating that the company is following a more or less cogent restructuring plan and that its end-market exposures (non-residential construction and commercial vehicles) are broadly attractive. Now, though, the prospect of a sharper downturn in the industrial sector is threatening to undermine some of the progress.

Two years ago, I thought Ingersoll-Rand didn't look like a particular bargain, and the shares have risen about 16% since then - less than half the rise in the S&P 500 and well below the likes of Honeywell (NYSE:HON), Lennox (NYSE:LII), and Johnson Controls (NYSE:JCI). Dover (NYSE:DOV), too, had been an outperformer over much of that time until it was laid low by energy while Atlas Copco (OTCPK:ATLKY) shares have lagged in no small part because of its large mining exposure. Looking at Ingersoll-Rand today, I still don't see enough undervaluation to be truly interested in the shares.

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Ingersoll-Rand: Good Exposures, But Not So Much Value

Seeking Alpha: Can Tyco Break Out Of A Persistent Lagging Trend?

For a company that is supposed to be in one of the more attractive industrial markets, fire and security, Tyco (NYSE:TYC) hasn't lived up to investor expectations. With weaker than average growth and margins, Tyco has been lagging other fire/security players like Honeywell (NYSE:HON), United Technologies (NYSE:UTX), Stanley Black & Decker (NYSE:SWK), and Allegion (NYSE:ALLE) for some time, not to mention the market as a whole (as measured by the S&P 500).

Can the company reverse this unimpressive trend? I can't immediately think of another company in this size range with as much exposure to the non-residential construction market (though Ingersoll-Rand (NYSE:IR) is close), both here and abroad, and perhaps the protracted lull in that market explains some of Tyco's underpeformance. That said, management needs to address what seems to be an elevated level of corporate expenses and a relatively bad track record of meeting projections.

I don't see a large amount of undervaluation here, but this is a significant "self help" story where outperformance on margins can have a disproportionate benefit on the valuation. It's also arguably still at a size where a larger conglomerate could consider it an acquisition target, particularly with the prospect of rooting out the company's elevated cost structure.

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Can Tyco Break Out Of A Persistent Lagging Trend?

Seeking Alpha: Honeywell Appears To Have A Lot To Offer

Having recently written that I'd be willing to sell 3M (NYSE:MMM) in the face of its take-no-prisoners valuation if I could find a good enough replacement idea, Honeywell (NYSE:HON) seemed like a logical place to look. I'm happy with what I found, as Honeywell offers broad multi-industry exposure but has built itself with a "be the best or be gone" mentality. Honeywell is also pursuing some fairly ambitious (but reasonable) margin and ROIC improvement targets that could have it near the top of the list of its peers in three to five years' time.

Now for the catch - investors aren't exactly getting a fallen angel or hidden gem here. Honeywell's quality and self-improvement plans are not secrets and even with some concerns about the company's exposure to falling oil prices, the shares aren't dirt cheap. Management could add value by a faster/better margin acceleration and/or by leveraging the balance sheet and acquiring more businesses. I haven't decided if I'm going to swap 3M for Honeywell, but Honeywell isn't a bad stock to consider in the industrials/conglomerate space.

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Honeywell Appears To Have A Lot To Offer

Seeking Alpha: With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

Like the roads around most major cities, the construction of a large industrial conglomerate is never finished. United Technologies (NYSE:UTX) is now strongly leveraged to the expected growth in commercial aerospace over the next decade, but the Building and Industrial Systems segment has suffered in comparison. Like most industrial conglomerates, United Technologies doesn't look like a tremendous bargain at today's levels, but I wouldn't underestimate the potential of a value-bidding deal in the next 12 to 18 months.

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With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

Seeking Alpha: Parker Hannifin Can Take Another Run At $130-Plus

It's not too hyperbolic to say that Parker Hannifin (PH) makes the global economy go. A leader in fluid power systems with double-digit share, Parker Hannifin is a force in hydraulics, fluid connectors, seals, automation, fluid control, filtration, and aerospace, boasting a diverse mix of industry end-markets like manufacturing, all manner of vehicles and attachments ("mobile"), and so on. In fact, Parker Hannifin's order flow generally tracks global industrial production pretty closely. If you believe that manufacturing growth is turning back up and that second quarter U.S. GDP will rebound from inventory drawdowns in the second quarter, this is a good stock to investigate for its early-cycle exposure.

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Parker Hannifin Can Take Another Run At $130-Plus

Seeking Alpha: Investors Seem Surprisingly Willing To Buy ThyssenKrupp's Weird Brew

Imaging putting together bits and pieces of United Technologies (UTX), U.S. Steel (X), Technip (OTCQX:TKPPY), TRW Automotive (TRW), and Allegheny Technologies (ATI) and you might end up with something that resembles German conglomerate ThyssenKrupp (OTCPK:TYEKF) (TKAG.DE). ThyssenKrupp is the third-largest steelmaker in Europe, but also a large player in metal marketing/logistics, elevators, large-scale plant construction, and vehicle components.

It has been a while since ThyssenKrupp has reported good earnings or margins, a byproduct of the same steel down-cycle that has hit ArcelorMittal (MT) and Salzgitter, but management has made some curious moves with respect to asset sales and take-backs. Investors seem confident in this name as a rebound and restructuring play, but it seems like a lot of improvement is already factored into the share price.

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Investors Seem Surprisingly Willing To Buy ThyssenKrupp's Weird Brew

Investopedia: United Technologies Still Has Plenty of Runway

Not unlike Honeywell (NYSE:HON) and General Electric (NYSE:GE), United Technologies (NYSE:UTX) has built its business to take advantage of emerging growth cycles in commercial aviation, urbanization, and energy efficiency. Weak construction activity and share losses have limited the growth at Otis, Carrier, and Fire & Security, but the company's aviation business seems to doing relatively well and I believe there's further upside in all of these businesses. My question with UTX, though, is how much margin and cash flow leverage is waiting to emerge, as these shares seem fairly rich without some significant improvements along those lines.

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Investopedia: Ingersoll-Rand Outperforming As Management Hits Its Marks

Credit were credit is due – Ingersoll-Rand (NYSE:IR) has been in a seemingly never-ending state of restructuring since 2008, but management seems to be hitting its marks recently. Leaner manufacturing, smarter sourcing, a refreshed product line up and solid pricing all seem to be leading to the improved results that have been expected for some time now. Although these shares still don't look particularly cheap, Ingersoll-Rand is heavily leveraged to a recovery in residential housing and commercial construction and continued outperformance on margin targets could very well push the shares higher.

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