MT Insider: GS Recommends Increasing Exposure to Non-Residential Construction, Initiates APOG with Conviction Buy and $38 PT
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 construction market.
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 ( APOG ) 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 ( WACC ) should enable out-performance.
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 analyst.
Other capital goods companies mentioned in the report include A.O. Smith ( AOS ), 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 (SPW).
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