Wall Street soured on industrial conglomerates Honeywell ( HON ) and Emerson Electric ( EMR ) on Wednesday. We disagree and see an opportunity to increase our positions as both club names should generate growth in a possible economic downturn. UBS has twice downgraded Honeywell to sell from buy, while cutting its share price target to $193 a share. stock from $220. The bank also downgraded the club’s newest holding, Emerson Electric, lowering its rating to neutral from buy, while cutting its price target on the stock to $100 a share. share from $118 previously. According to UBS, the two US industrial giants are facing a slowdown in order intake and a depletion of backlog, which could undermine growth in a possible recession. But Jim Cramer firmly rejected that argument Wednesday. “Those are the stocks you have to be in because they’re not as cyclical as people think,” Jim said of Honeywell and Emerson on “Morning Meeting.” “They worked forever to prepare for a recession,” he added. Honeywell’s product line includes automation technologies, industrial chemicals and aircraft engines. Emerson’s offerings range from software and automation to valves and electrical components. Shares of Honeywell closed nearly 2% lower Wednesday at $210.04 each. Emerson ended the day down 0.72% at $95.42 per share. In a research note, UBS analysts questioned whether Honeywell’s order growth, which they called a “key driver for industrial stocks,” would be robust enough to warrant a premium valuation on the stock, even if its strong order book protects near-term earnings. Similarly, UBS analysts said in a separate note that they expect order volume at Emerson to slow due to economic headwinds, as well as pressure from its planned acquisition of metals software company and mining company Micromine through a majority-owned subsidiary, Aspen Technology. Still, analysts pointed to the company’s automation solutions unit, whose backlog grew 26% between 2019 and 2022, as a revenue stream that could “insulate against a potential slowdown.” Bank of America, conversely, on Wednesday selected Honeywell as its 2023 industry sector pick based on quality, cash flow generation, potential for dividend growth and earnings expectations in a potential recessionary environment. On Tuesday, the bank also called Emerson a “best idea” for the first quarter, citing upside potential from the acquisition of Micromine, as well as tailwinds from a weaker US dollar from a year ago. Taking over the club Our industrial holdings, Honeywell and Emerson Electric, have performed positively of late, outperforming the market and demonstrating their strength in the face of a deepening downturn. We recently opened a position on Emerson in December thanks to the company’s ability to apply cash on the balance sheet and make acquisitions that should ultimately support earnings growth. The company has taken steps to revamp its portfolio by divesting non-core businesses and investing in strategic acquisitions, while prioritizing its higher-margin and faster-growing automation business. That came after a strong 2022 that generated robust free cash flow and sales that may continue into 2023. EMR stock is up over 18% in the past 3 months. And we are ready to buy but prefer to wait for a pullback. Honeywell, meanwhile, has a strong aerospace business that is well-positioned to benefit from the return of travel. China recently ended quarantines for international travelers, a catalyst for many airlines, of which Honeywell is a key supplier. We are keeping an eye on its warehouse automation business, which could show weakness as demand has been dragged out since the Covid-19 pandemic. But overall, 2023 should be a year with a focus on expanding margins. HON stock is up about 17% in the past 3 months and we would wait for a pullback to buy more. (Jim Cramer’s Charitable Trust is long HON, EMR. See here for a complete stock list.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
An aircraft engine is tested at Honeywell Aerospace in Phoenix.
Alwyn Scott | Reuters
Wall Street turned sour on industrial conglomerates on Wednesday Honeywell (HON) and Emerson Electric (EMR). We disagree and see an opportunity to increase our positions as both club names should generate growth in a possible economic downturn.