Honeywell, Emerson, GE are among top industrial stock picks at BofA
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Honeywell International (NASDAQ:HON), Emerson Electric (NYSE:EMR) and General Electric (NYSE:GE) are among the top industrial stock picks for 2023 by analysts at Bank of America.
Fortive (NYSE:FTV) is BofAâs top pick overall in its multi-industry coverage. The industrial-technology firmâs âimproved portfolio and capital allocation history make it a compelling Buy in a volatile 2023 macro environment,â according to BofA.
The bank also listed Dover (NYSE:DOV), PTC (NASDAQ:PTC) and APi Group (NYSE:APG) as top picks for 2023.
Stock selection is important, as BofA downgraded Trane Technologies (NYSE:TT) to Underperform from Neutral. It also downgraded Rockwell Automation (NYSE:ROK), Johnson Controls International (NYSE:JCI) and Vontier (NYSE:VNT) to Neutral from Buy.
Conversely, it upgraded Montrose Environmental Group (NYSE:MEG) to Buy from Neutral on the expectation of accelerating earnings growth next year.
Amid signs of a looming recession in the United States and European Union, BofAâs analysts said theyâre âcautiously optimisticâ on the fundamentals for multi-industrial companies. That optimism is based on hopes for a recovery in the second half of next year that will drive capital expenditures, which include spending on equipment, technology and upgrades.
âA combination of pricing momentum, backlogs, reshoring, U.S. stimulus funds and international diversification should enable our sector to have modest revenue growth in 2023,â Andrew Obin, analyst at BofA, said in a Dec. 12 report.
The stimulus funding includes provisions in the Inflation Reduction Act signed by President Biden in August. The law offers tax credits to companies that make renewable energy equipment such as wind turbines and batteries for electric vehicles in the U.S., along with bonus tax credits for power-plant developers that use U.S.-made parts.
Bringing back manufacturing from foreign countries has become a bigger priority after the pandemic exposed weaknesses in the global supply chain. Growing tensions between China and Taiwan, a major supplier of computer chips, have added to concerns about shortages for key components. BofA pointed to the semiconductor industry as one thatâs investing billions of dollars to reshore fabrication plants in the U.S.
Aside from an economic slowdown, key risks include wage inflation and lower demand for industrial products as supply-chain bottlenecks ease, reducing the lead times between orders and deliveries. Distributors may feel less pressure to reorder products as they reduce existing inventories in warehouses.
âImproving lead times are likely to drive sharp declines in the U.S. manufacturing purchasing managersâ index (PMI),â according to BofA. âLead times are a key factor in distributorsâ targeted inventory levels. Faster lead times alone would tend to drive lower channel inventory.â