RBC says 'Trump-onomics' has Reset Industrial Expansion Clock - (HDS) (WCC) (GWW) (MMM)

As the potential policies of a Trump administration begin to take shape, RBC Capital Markets feels that the economic consequences surrounding the future President's views could create a "second wind" to an already ongoing expansion.

RBC Capital Markets Industrial analyst Deane Dray commented, "Trump-onomics policy proposals have arguably reset the clock on the economic expansion from the 8th inning to the 5th or 6th. Given the prevailing view that President-elect Trump’s policy proposals could inject a second wind to the ongoing economic expansion (already entering its eighth year), we are increasing the cyclical weighting of our mix of stock recommendations. We also highlight how this fiscal stimulus tailwind would likely be concurrent with the projected end of the “industrial recession”, potentially sparking a “slingshot” effect to accelerate growth in 2H17. Against this backdrop, we are executing three stock ratings changes on Dec-6: (1) upgrading HDS (NYSE: HDS) from Sector Perform to Outperform as we add to our cyclical exposures; (2) upgrading MMM (NYSE: MMM) from Underperform to Sector Perform with relative P/E valuation back down to the midpoint of its range; and (3) trimming our higher-quality recommendations by downgrading IEX (NYSE: IEX) from Outperform to Sector Perform."

RBC believes that it is still too early to revise forward EPS estimates for most projected Trump lifts in 2017. However, a sensitivity analysis of the potential upside to 2018 EPS that could emerge from President Trump’s business-supportive policies could produce a nearly 8% lift to sector earnings, on average.

The three distributors in RBC's coverage, HD Supply (NASDAQ: HDS), WESCO (NYSE: WCC), and Grainger (NYSE: GWW), screen as being among the prime beneficiaries of the proposed Trump policies. The key changes include increasing inflation which should aid sales and margins through pricing increases, tax reform given the high relative US footprints, and infrastructure spending exposures.

According to RBC's analysis, HD Supply is best positioned for earnings lift. Given the company's exposures to tax reform, reflation, and infrastructure spending, HD Supply is in prime position to benefit from Trump's projected changes.

Grainger is primarily MRO-based, and the market could be slightly overestimating the potential lift from infrastructure spending for Grainger. RBC pointed out that GWW has lagged both WCC and HDS since the US election. However, analysts expect Grainger to also benefit in the near-term, and would not be surprised to see some stronger monthly sales results at some point in 2017, mostly as a result of pricing increases and inflation.

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