FBR Capital Upgrades Sector View of Multi-Industry & Electrical Equipment Stocks

October 13, 2009 7:21 AM EDT

FBR analyst says, "Overall, we expect to see upside results across the Multi-Industry & Electrical Equipment (MI-EE) sector in 3Q09, driven by restructuring savings, "less bad" YOY revenue declines, a weaker dollar, emerging markets demand, and a boost from lower raw material costs. Upside in free cash flow is also likely to be a catalyst for some companies, such as Roper Industries, Inc. (NYSE: ROP) and Danaher Corporation (NYSE: DHR)."

"Much of the de-stocking pressure looks to have abated, finally bringing production back more in line with demand. Given the recent more positive macro indicators, company data points suggesting industrial demand may have stabilized, and attractive sector valuation, we are upgrading our sector view from Market Weight to Overweight."

"The keys to 3Q results should be a delineation according to which companies have attractive early-cycle exposures, such as 3M Company (NYSE: MMM) and Illinois Tool Works, Inc. (NYSE: ITW), versus those with late-cycle headwinds, such as Emerson Electric Co. (NYSE: EMR), SPX Corp (NYSE: SPW), Honeywell (NYSE: HON), and United Technologies Corp. (NYSE: UTX). Heading into 3Q results, we like
Outperform-rated MMM, W.W. Grainger, Inc. (NYSE: GWW), Tyco International (NYSE: TYC), and ITT Corp (NYSE: ITT). We remain Outperform rated on DHR, based on its defensive positioning and attractive valuation rather than on any 3Q earnings upside. We also expect that Market Perform-rated ROP could surprise to the upside in FCF, with a potential gap-up stock reaction. Upside in EMR, Thomas & Betts Corporation (NYSE: TNB), and WESCO International, Inc. (NYSE: WCC) looks capped over the near term."

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