President Trump's plans to readdress the trade deficit got a boost from his trade mission to China, with Secretary of Commerce Wilbur Ross announcing around $250 billion in trade deals for U.S companies. The majority of the deals were signed as part of the recent CEO delegation to China, and there's little doubt about Trump's determination to defend U.S. interests.
Let's examine the details and pick out the highlights for the industrial sector. Which companies were the big winners?
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Deals and more deals
While Ross announced "a quarter-trillion dollars in deals," many of those deals were memorandums of understanding (MOU), and there was little detail on others, which is understandable from a commercial perspective. But we do know of some significant deals for the industrial sector:
On the Caterpillar and Boeing deals
Readers already know how important China's been to Caterpillar's growth in 2017, but the interesting thing is that it's come largely from the construction sector in China, whereas this deal is for mining equipment -- suggesting Caterpillar can improve its growth from the resources sector.
The Boeing deals are obviously good news, although to be fair it's difficult to move the needle on Boeing's backlog. For example, the company has 4,431 Boeing 737 airplanes in backlog, 326 Boeing 777X models, and 683 Boeing 787s.
Moreover, in the next 20 years, Boeing expects to deliver 7,240 aircraft to China , so it's hard to argue that the order for 300 is a game-changer as it relates to the case for buying the stock.
How General Electric fared
Here's where the deals get interesting. GE and Honeywell announced deals across two different industries. The aviation deals aren't really big news for GE because the company claims to have 14,000 LEAP and 1,900 GEnx engines already on order. In addition, the $2.5 billion in orders -- to be delivered starting in 2018 -- represent only 1.6% of GE aviation current backlog of $161 billion.
However, the power deal is arguably more significant. China Datang Group is one of China's big five state power generators, and the agreement may presage a pickup in the usage of gas as an energy source. For example, the International Energy Agency calculates that natural gas provided just 5.4% of China's total primary energy supply in 2015.
The deal is also very useful to GE Power. The gas turbine market is suffering from overcapacity, and every deal is fiercely fought over. Moreover, the power segment generated only $26.7 billion worth of orders in the first nine months and is at the epicenter of GE's woes. In other words, any deal, even as small as $1 billion, is good news for GE investors.
While there's no figure attached to either of Honeywell's deals, they're definitely important in terms of the company's progressing on its strategic objectives. It's been a good year so far for Honeywell International -- management has raised full-year EPS guidance to $7.05-$7.10, having started the year guiding toward $6.85-$7.10.
However, things weren't as smooth in 2016, when management had cut sales and earnings guidance on the back of weaker-than-expected aerospace sales and weakness in its UOP subsidiary. Honeywell's UOP describes itself as "the leading international supplier and technology licensor for the petroleum refining, gas processing, petrochemical production, and major manufacturing."
Clearly, the pressure is on Honeywell to win aerospace contracts and expand UOP's sales reach, and the China deals are a sign of progress. In particular, the kind of deal UOP agreed to will help reduce the subsidiary's dependency on energy prices -- low oil and gas prices hurt UOP in 2016 because of a slump in capital spending in the processing industry.
The trade delegation was obviously a big success, but it didn't change the investment thesis a lot for the stocks discussed. GE still needs more power deals, and Boeing needs to continue receiving aircraft orders, but these deals are steps in the right direction. Honeywell's deals are arguably more important and signal the company's success in trying to accelerate its growth rate, particularly in two areas that proved difficult for the company in 2016. All told, if I had to pick a winner from the industrial segment from Trump's mission, it would be Honeywell.
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