The Grand Poobahs of the global industrials are meeting this week in Florida. The Electrical Products Group Conference is an annual affair that offers a pretty general overview of the global industrial demand environment, capital allocation in the space, and other subsector themes that industrial dorks like myself live to follow.
While I am not there in person this year, I was able to listen to a few webcasts after my "Walk Around This Afternoon", published earlier.
First company of interest is Xylem (XYL). I own a very small amount of this stock in its dividend reinvestment plan and really like the uniqueness of the asset. Xylem was spun out of ITT Corporation in 2011. The company serves the global water infrastructure industry and is one of the few ways to play this theme in a high quality way. It has a portfolio of global brands, like Flygt, a world leader in the manufacture of water pumps.
The company also has a solid self-help story in the way of margin expansion. Since the spin, margin progress has been slowly moving northward. CEO Patrick Decker christened long-term margin guidance of 14%-15% and suggested that public water infrastructure spending is up 10% year over year. The stock has had a brisk move year to date on underlying strength within the U.S. and global infrastructure theme, so I'll start slow and wait for a pullback to increase my position.
Trifecta Stocks portfolio holding Danaher Corporation (DHR), another stock recently on steroids, discussed the pending Fortive spin (expected in July) and the integration of its pricey Pall Corporation purchase last year. The spin of the industrial assets leaves legacy DHR with a high-margin business skewed toward dental and healthcare equipment markets. I'm looking forward to see how Fortive will use its investment grade rating and intention to spend $3 billion in capital to grow through acquisitions.
Eaton Corporation (ETN) is also a name of interest at EPG. I reviewed the most recent quarter and listened to the presentation to learn that there is still a significant amount of margin left in the tank. While taking advantage of a low-tax jurisdiction in Ireland, the company's ESS segment has seen margin leakage in recent years, despite relatively recent stabilization. This has much to do with weakness in the industrial energy landscape, though. Overall, the power management theme should drive long-term share gains and cross-functional technology sharing.
We industrial dorks always speculated that Eaton would spin or sell the auto/truck supply business -- but after yesterday's presentation, it appears that nothing significant from a portfolio perspective is on the horizon. Finally, the recent change in CEO, following the beloved Sandy Cutler's pending retirement, has been reasonably well received.
Other snippets from Day 1 of this large-cap industrial dork fest include:
- Wesco International (WCC) said its electrical distribution business was "less bad" in April.
- Nonresidental construction spending remains quite strong in the United States.
- Pentair (PNR) has some larger operational headwinds in its Valves & Controls segment. There's some heavy lifting to do there.
- 3M Company (MMM) has an amazing R&D apparatus (Duh, I know) and an equally amazing balance sheet.
- The Johnson Controls (JCI) --Tyco International (TYC) tie up continues to be hashed out, with the combined entity targeting an additional $1 in EPS from productivity and synergies , and targeting the massive building efficiency and energy markets.
