00:00 Josh Lipton
Industrials, the top performing sector in the S&P 500 so far this year, up more than 16% now year to date, and as markets rally around Fed chair Jerome Powell’s comments on the path forward for interest rates, there could be some interesting opportunities for investors within Industrials. We’re now going to had a play this space with the Yahoo Finance playbook. Joining us Christian Owen, senior analyst and managing director at Oppenheimer. Kristen, it is good to see you. So let’s start with the news today, Kristen, that would be J Powell. Jackson Hole seems to be suggesting there, Kristen, a policy pivot is on the way. Let’s say that happens. What could that broadly mean for the Industrials you cover, Kristen?
01:09 Kristen Owen
Yeah, thanks Josh for having me on. Um it is an interesting day and one where we’re seeing a little bit of exuberance come back into the market. And I think the expectation here is um one both a little bit of clarity, and this has been a market that has been missing uh clarity thus far this year. So a little bit better uncertain better certainty uh with respect to the September rate cuts. Uh but also a little bit better on the affordability front. When you think about industrials, I mean we’re talking about capital equipment, capital goods. These are these are tend to be large uh in some cases multi-million dollar investments uh that really make our economy run. And so if um if we are at a point where we’re now starting to see rates come down, or the expectation that rates are going to come down, that affordability piece gets a little less challenged. Um and the decision to make some of those larger investments becomes a little bit easier here. So the way that I look at it, um we’ve got some some certain pockets of the market where there are some clear opportunities. Uh when you look at who’s responding well today and you see a name like caterpillar up 4%, um certainly getting some benefit from the opportunity for resi improvement. And that’s something where, you know, we think that there is a real opportunity now in anticipation of rate cuts that that could revive uh this resi sector that’s been bumping along the bottom. Uh a few other names in that in that space that we like. Uh Trimble would would be one that we’d put in that bucket. A little bit less capital intensive, but but certainly tied to that affordability and and improving uh resi and housing outlook. Um, so leave it there. I mean we we have a lot of opportunities here for for the affordability to get a bit better.
03:51 Josh Lipton
And Kristen, you know, for investors, the Fed, one critical theme. Trade is another, Kristen. I think about trade tensions. I think about some of those industrials being front and center. I’m just curious how how the names you cover, Kristen, how they’ve been sort of just navigating that that tariff dynamic, mitigation strategies, levers they’ve been pulling.
04:25 Kristen Owen
Yeah, Josh, I started with this idea of clarity or certainty and that’s something that has really been a challenge for a lot of uh of the companies in this space. And and that’s primarily related to the tariff backdrop. How we’ve seen most of our companies respond thus far is take a a slow and steady approach. It is how can we control the controllables? Let’s try to make um our any move that we take more palatable for our customers. Meaning it’s not necessarily a knee-jerk reaction to increase price. Let’s see what we can do within our own supply chain. And let’s not make any non uh or any regrettable decisions at this point, given that we haven’t had a lot of clarity on what that tariff backdrop is going to look like. So some of the other uh developments this week, a little bit more codification on what EU tariffs are going to look like. That’s going to create a little bit more certainty for how do I address my supply base that may be coming from Europe? How do I think about the section 232 or the steel and aluminum tariffs when I’m starting to think about how I build this piece of equipment or this piece of machinery? And first and foremost starting with the supply chain before thinking about, do I need to reshore? Do I need to bring more of that manufacturing back either to the United States or under USMCA compliance?
06:13 Josh Lipton
Kristen, I want to end here with some picks, some names. Caterpillar is one name I know you mentioned. I know you like that. You also like deer. Why is that one to buy here, Kristen?
06:28 Kristen Owen
I mean, deer is one that can also benefit from the construction side of the business. We don’t often talk about deer’s construction business. Certainly more well-known for its ag business. But that’s one that that can benefit from this affordability backdrop. Um on the ag cycle, I mean ag tends to move to the beat of its own drum. And from that respect, deer is the best-in-class name that you can own in the ag machinery space. Um and what we would really benefit from uh in addition to the rate cut is really understanding what trade policy is going to look like from an agricultural market perspective. That’s going to be more meaningful for the commodities backdrop. That’s really going to be the kicker to deer shares here. Right now what we like about deer is with a little bit of help from the macro, you can still get earnings growth next year. And that’s what’s currently being priced into the stock. On top of that, you get a nice dividend, you get a high-quality management team, strong free cash flow conversion. These are all things that for a multi-year investor really screen quite well here.
07:59 Josh Lipton
And how about CNH, Kristen?
08:04 Kristen Owen
CNH is much more of a self-help story here and hasn’t had as much of a run as deer has had. So you don’t have that premium multiple applied for CNH. We think that actually creates a multiple opportunity for them. They’ve called out 350 to 450 basis points of operating margin opportunity just within their control, just by executing better, better quality equipment, integrating more of their own technology into their machines. So when I think about deer versus CNH, you know, deer is probably already well priced for a lot of the um the premium execution that they get. CNH has a little bit more of a catch-up opportunity and is trading at a slightly lower multiple. So a little bit more attractive valuation relative to deer.
09:10 Josh Lipton
Kristen, appreciate your time and those picks. Have a great weekend.
09:15 Kristen Owen
Thanks Josh.