Half the Q2 results of our industrial
stocks missed forecasts, and outlook
statements tended to negative
􀀗 But investor risk appetite for cyclicals
has revived, which seems to leave some
further upside even after the recent rally
􀀗 Short term the risk of a correction has
risen, but should be limited by
improving newsflow
Current fundamentals are not encouraging…: A review
of Q2 2009 results in our German Industrials universe
showed the fundamental situation is still pretty weak.
Incoming orders are down dramatically y-o-y (eg -45% for
VDMA sector average), and sales have started to follow.
Earnings are under heavy pressure from low capacity
utilisation. Low visibility and short-term decision-making by
customers mean few managers dare to give precise guidance
for this year. They are restricting themselves to vague, even
more cautious statements.
…but investors do not care: The strong rally in industrials
stocks from their year low (+59%) indicates investors are ready
to look well beyond the current trough and pay now for the next
upswing, which is likely to start in 2010. Positive sentiment
could prevail – with recovering order volume and earnings as
possible positive catalysts – in which case downside risk from
profit taking should be limited for the time being, while
valuation still leaves some upside.
Target prices up overall since Q2 results despite lower
forecasts: Despite broadly lower estimates (our EPS forecasts
2009-11e have gone down on average 33%) since the Q2
results, we have raised our target prices on average by 8%,
mainly driven by higher relative valuation versus peers.