Based on underinvestment post the credit crisis, Goldman Sachs
forecasts that a housing recovery should benefit companies in its
small-mid capitalization capital goods universe. In short, the
analyst recommends increasing exposure to the non-residential
Analyzing capital efficiency levels, the report finds that
companies which are expanding EBIT (Earnings Before Interest and
Taxes) margins and increasing levels of CROCI (Cash Return on
Capital Invested) have the most upside potential.
As a result, GS is initiating coverage of Apogee Enterprises (
) with a Buy rating and a $38 price target as well as adding the
company to its conviction list.
Given Apogee's non-residential exposure and strong operating
leverage, the analyst expects a recovery in its core end markets.
Moreover, accelerating cash return on capital investment (CROCI) in
excess of weighted average cost of capital (
) should enable out-performance.
Separately, the analyst is resuming coverage of Lennox
) with a neutral rating and a $79 price target and Watsco (
) at Neutral with a $98 price target.
Both LII and WSO have less visibility on end-market demand in
Residential HVAC (high-voltage alternating current). Furthermore,
valuation appears fair at these levels, according to the
Other capital goods companies mentioned in the report include
A.O. Smith (
), Kaydon Corp (KDN), Kennametal Inc (KMT), Regal Beloit
Corporation (RBC), RBC Bearings Inc (ROLL), Rexnord Corporation
(RXN), Stock Building Supply Holdings (STCK), AND SPX Corporation
APOG 30.87 0.00 0.00
LII 675.12 0.00 0.00
WSO 93.99 0.00 0.00
AOS 45.55 0.00 0.00
KDN 35.52 0.00 0.00
KMT 46.16 0.00 0.00
RBC 69.41 0.00 0.00
ROLL 65.68 0.00 0.00
STCK 12.65 0.00 0.00
SPW 85.22 0.00 0.00
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