UPDATE: Goldman Sachs Cuts 3M (MMM) to 'Sell' and Illinois Tool Works (ITW) to 'Neutral'
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(Updated - November 21, 2016 10:31 AM EST)
Analyst Joe Ritchie said he was pivoting from "non-industrial" industrials.
The analyst explained, "The Multis have outperformed YTD (+12% vs. the S&P) with cyclical stocks outperforming defensive industrials by 1,300 bps. In our view, this trend is likely to continue in the medium term as industrial demand appears to be stabilizing and oil becomes less of a headwind. In fact, we expect organic revenue growth for the group to turn positive in 1Q17 – the first time since 2Q15 (Exhibit 11). As a result, we are pivoting from “non-industrial” industrials, like MMM (down to Sell from Neutral) and ITW (down to Neutral from Buy), which derive > 50% of profit from consumer end markets. While our view on the quality of the franchises is unchanged, we believe that in this backdrop, it is unlikely that the shares will outperform in the medium term."
Discussing 3m, the analyst said, "While MMM remains a solid franchise with top quartile margins/returns through a cycle, we see downside risk to Street EPS (GS: -3%/-3% for 2017/18) owing to growth challenges in Electronics as smartphone sales taper and the shift to OLED continues. We also think margins will be pressured from rising raw material costs. Lastly, we believe the multiple (~20x 2017E EPS) could derate if investors rotate to more cyclically exposed industrials."
On Illinois Tool Works, Ritchie said, "We acknowledge ITW’s best-inclass execution/self-help opportunities but after 14 months of strong outperformance (+50% vs. S&P/group: +12%/+17%), we see risk/reward as more balanced with limited upside to the multiple (~ 20x 2017E EPS). At the December 2 analyst day, the pivot to growth and margin runway will be key. Separately, we adjust select estimates and price targets across our coverage."
Shares of 3M closed at $172.96 yesterday.
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