UBS gets it wrong on industrials Honeywell, Emerson. The Club holdings are prepared for a potential recession

Published Wed, Jan 4 20234:43 PM EST

Wall Street Wednesday turned sour on industrial conglomerates Honeywell (HON) and Emerson Electric (EMR) . We disagree and see an opportunity to grow our positions since both Club names are expected to deliver growth in a potential economic downturn. UBS double-downgraded Honeywell to sell from buy, while reducing the stock's price target to $193 a share from $220. The bank also downgraded the Club's newest holding, Emerson Electric, lowering its rating to neutral from buy, while reducing its price target on the stock to $100 a share, down from $118. Both American industrial giants are facing a slowdown in orders and backlog burn that could undermine growth in a potential recession, according to UBS. But Jim Cramer strongly refuted that argument Wednesday. "These are precisely the stocks you need to be in because they are not as cyclical as people think," Jim said of Honeywell and Emerson during the "Morning Meeting." "They have worked for ages to be ready for a recession," he added. Honeywell's product line includes automation technology, industrial chemicals and airplane engines. Emerson's offerings run the gamut from software and automation to valves and electrical components. Shares of Honeywell closed down nearly 2% Wednesday, at $210.04 apiece. Emerson finished the day down 0.72%, at $95.42 a share. In a research note, analysts at UBS questioned whether Honeywell's order growth, which they called a "key driver of industrial equities," would be robust enough to justify the company's premium valuation, even if its strong backlog protects earnings in the near term. Similarly, in a separate note, UBS analysts said they anticipated a deceleration in order volumes at Emerson due to gathering economic headwinds, along with pressures from its planned acquisition of metals and mining software firm Micromine through a majority-owned subsidiary, Aspen Technology. Still, the analysts highlighted 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, chose Honeywell on Wednesday as its industrial sector pick for 2023 on the basis of quality, cash-flow generation, dividend-growth potential and earnings expectations amid a potential recession. The bank on Tuesday also called out Emerson as a "top idea" for the first quarter, citing potential upside from the Micromine acquisition, as well as a tailwind from a weaker U.S. dollar compared with last year. The Club take Our industrial holdings, Honeywell and Emerson Electric, have seen a positive run lately, outperforming the market — a testament to their strength heading into a deepening slowdown. We recently started a position in Emerson in December on the back of the company's ability to deploy cash on its balance sheet and execute acquisitions that should ultimately support earnings growth. The company has taken steps to reorganize its portfolio by divesting non-core businesses and investing in strategic acquisitions, while prioritizing its higher margin, faster-growing automation business. It exited a strong 2022, delivering robust free cash flow and sales that can carry over into 2023. EMR stock is up more than 18% over the last 3 months. And we're prepared to buy, but prefer to wait for a pullback. Honeywell, meanwhile, has a strong aerospace business that is well positioned to benefit from the comeback in travel. China recently ended quarantine for international travelers, a catalyst for many airlines to which Honeywell is a key supplier. We're keeping an eye on its warehouse automation business, which may show weakness given demand was pulled forward from the Covid-19 pandemic. But, overall, 2023 should be a year focused on margin expansion. HON stock is up roughly 17% over 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 full list of the stocks.) 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 stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An aircraft engine is being tested at Honeywell Aerospace in Phoenix.

Alwyn Scott | Reuters