Tax Reform Top of Mind for Wide-Moat U.S. Industrial Firms
Lower corporate taxes and higher infrastructure spending could cause our bull-case scenarios to play out.
Shares of diversified industrials have traded up in the aftermath of the U.S. presidential election, frothy with anticipation as a Republican-controlled Congress offers the possibility of business-friendly policymaking meant to revitalize a U.S. manufacturing landscape affected by globalization. This sentiment rang loud and clear at the 2017 annual outlook meetings of four U.S.-based wide-moat industrial titans representing over half a trillion dollars of market capitalization: 3M (MMM), General Electric (GE), United Technologies (UTX), and Honeywell (HON). While management teams enthusiastically highlighted corporate tax reform, capital mobility, and infrastructure spending as potential near-term earnings tailwinds, all stopped short of explicitly incorporating these favorable outcomes into 2017 expectations. We agree that it’s too early to include Trump’s America in the base-case assumptions that fuel our discounted cash flow analyses. However, if President Donald Trump’s target corporate tax rates and modest top-line growth materialize, our bull-case scenarios look realistic.
Election Jolts Market Sentiment From Low Global Growth to Overdrive
In our view, the positive reaction in diversified industrial stocks following the U.S. election Nov. 8 can be partially explained by some glimmers of hope following a particularly tough couple of years in the overall industrial economy. In late 2015, industrial management teams at their 2016 annual outlook meetings all sent the same cautious message: Low global growth is likely to persist, and it’s time to batten down the hatches. The late 2014 collapse in oil prices sent ripple effects throughout heavy industry, from the boomtowns surrounding U.S.-based shale plays to commodity-fueled emerging markets like the Middle East, Latin America, and China. As capital spending in these so-called high-growth regions slowed to a halt, diversified industrial companies saw organic revenue growth shrink from mid- to high single digits toward zero throughout 2015 and into 2016. For the past 24 months, we’ve observed industrial management teams brace even further for the realities of a low-global-growth environment, boosting earnings by cost-cutting as sales continued to dwindle amid weakened end markets.
Barbara Noverini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.