AAUC (AA UNION CAPITAL) - Our cyclical top picks

Under our interest rate normalization investment theme, we propose long cyclicals vs. defensives. Below we highlight four cyclical stocks from our Top Picks lists.

For the US industrial conglomerate Honeywell, we expect robust growth in its key end-markets such as commercial aerospace, warehouse automation and advanced materials. In addition, the company has made acquisitions and divestments over the last few years. A successful integration of acquisitions and significant restructuring opportunities can drive strong earnings growth for the company. Hence, we expect a consistent financial performance, particularly with regard to margin expansion and EPS growth, with improving free cash flow and smart capital allocation.

Infineon benefits from rising demand for power semiconductor content in the automotive end-market (in particular in electric vehicles, which will be produced increasingly in the coming years), where it leads with a market share of 20%. This structural growth and the fact that the semi power business is based on long-term contracts, competition plays a small role compared to in other semiconductor markets offer relatively high sales visibility. Infineon provides a solid sales CAGR 2018E-2021E of 10% with slightly improving margins at a reasonable price.

Schneider Electric reported strong growth of +7.3% in Q3 2018 and again revised FY 2018 guidance upward. The reason is short-cycle industries have continued to see good growth, while growth in mid- to long-cycle industries has been accelerating. We see Schneider as well placed in automation as well as in energy, gaining market share in businesses such as low voltage. We expect margin upside at Schneider as the company focuses on improving its business mix, pruning the portfolio of assets and stepping up the cost-out activity.

Global wealth growth is a key secular driver for the luxury goods sector, and the Chinese consumer has become a key growing consumer group. Swatch group, a market share gainer in the watch industry, supported by product launches, is well positioned to take advantage of these developments. Swatch is a cyclical business and its margins have started to rebuild from a very depressed level. Following concerns over China, Swatch’s valuation is back to the lower end of its trading range and earnings expectations remain modest going forward.

Find out more in https://www.aaunioncapital.com/