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Graco Inc. (GGG), Honeywell International Inc. (HON) & Dover Corp (DOV): 2 Multi-Industry Names to Buy, 1 to Hold

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Multi-industry companies are businesses that offer various products that are not limited to one industry. And for simplicity’s sake, we can call them conglomerates as well. With the earnings season on a go, many are impatiently waiting for the earnings calls so that they can gauge the health of the end markets of these companies. A weak Europe, slower-than-anticipated growth in China and a recovering US are all that we have been hearing in the last three months. Let’s see if we hear something new this earnings season.

In the next week, three multi-industry companies are set to announce their earnings. Let’s have a look at them.

Earnings preview and outlook

For Graco Inc. (NYSE:GGG) , the set-up into the quarter is not easy. I say that since Graco has been the best performer in the group since the last earnings season, having climbed almost 20% versus the S&P 500’s increase of only 5%. However, still Graco Inc. (NYSE:GGG) is one of the favored picks this quarter as comps should ease meaningfully in the 2Q and expectations are beatable. It is interesting to note that Goldman Sachs Group, Inc. (NYSE:GS) upgraded Graco on June 23 to Neutral from Sell as it believes that margins will remain resilient to macro pressures.

Into the quarter, the company is expected to post EPS of $0.85. However, this estimate can easily be beaten if management’s guidance for 2Q industrial margins of 34% and contractor margin expansion of +400 bp is realized. Beyond the quarter, 2H 2013 comps continue to ease, making Graco Inc. (NYSE:GGG) one of the few companies with earnings upside in the multi-industry group.

That said, the valuation remains expensive. The stock is trading at a forward multiple of 20x, which is far higher than the industry’s average of 14x. Moreover, the stock has rallied 35% year-to-date. This suggests that apart from some upside for investors in the short term, the stock may not have much to return to shareholders in the long run.

Attractive end markets for this company

Honeywell International Inc. (NYSE:HON)Honeywell International Inc. (NYSE:HON) is a company that has received favorable reviews by almost every analyst out there. It remains one of the top picks given its leverage to attractive end markets and its ability to deliver solid results in a slow- growth environment. Into the quarter, the 2Q 2013 EPS estimate of $1.21 is at the high end of the company’s guidance range.

However, there are three reasons why the company is poised to beat its earnings estimates: (1.) currency benefits: the dollar/euro averaged $1.31 in 2Q 2013 and should add $0.01 to EPS; (2.) recent bullish commentary on short-cycle strength in Europe, particularly in the transportation segment, which accounts for one-quarter of Honeywell International Inc. (NYSE:HON)’s revenue; and (3.) record backlog in performance, materials and technology (PMT)/process backlog converting at higher margins. The biggest concern for the 2Q is difficult margin comps in aerospace and the PMT segment.

Apart from that, the company is being aggressive on its M&A activity. Honeywell International Inc. (NYSE:HON) has stated that every division is considering deals and that the acquisition pipeline is “very strong.” Investors will be focused on potential deals. To this end, Honeywell International Inc. (NYSE:HON) recently noted that it may seek acquisitions in the aero aftermarket segment (according to Bloomberg). The stock pays an attractive dividend yield of 2.0%. Also, the stock is trading at a cheap forward multiple of 14x.

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