Congress and President Biden worked out a debt ceiling deal and the market yawned. That doesn’t mean there are no winners from the agreement.
Citi
industrial analyst Andrew Kaplowitz found a few, and wrote Tuesday that while it “could still be altered, the deal as it stands now we think is a favorable result for several industrials under our coverage.”
He called out six stocks in his report:
Quanta Services
(ticker: PWR),
MasTec
(MTZ),
KBR
(
KBR
),
Jacobs Solutions
(J),
General Electric
(
GE
) and
Honeywell International
(HON).
The first four are engineering and construction, or E&C, firms that benefit from, essentially, nothing much happening in the new deal. Kaplowitz sees no change in spending related to the Inflation Reduction Act, Infrastructure Investment and Jobs Act and CHIPS Act. The E&C firms will end up doing a lot of work around the country tied to some $2 trillion in total spending tied to those three laws.
As for GE and Honeywell, they benefit because a debt deal means defense spending can continue to grow.
Overall, the overall market took the debt deal in its stride. The
S&P 500
was flat is Tuesday trading. The
Dow Jones Industrial Average
dropped 0.2%. The four engineering and construction stocks gained an average of 2%, a sign that there was some concern that spending cuts could be part of a debt deal. Honeywell and GE shares didn’t move much and the
iShares U.S. Aerospace & Defense
ETF (ITA) dropped 0.2%. The defense sector didn’t get much of a bounce.
The lack or reaction in defense names and the modest move in E&C stock doesn’t mean there investors can ignore the debt deal. Wall Street sees things the same way as Kaplowitz.
The E&C firms are very popular among his peers. Overall, 88% of analysts covering the four stocks rate shares Buy. The least popular among the four is Quanta with 72% of analysts rating that stock Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 53%.
Quanta might be a little less popular because it’s relatively more expensive, trading at about 22 times estimated 2024 earnings. On average, the four E&C players trade for about 17 times 2024 earnings and the average analyst price targets imply gains of almost 20%, on average, from current levels.
Two-thirds, or 67%, of analysts rate GE shares Buy. The average analyst price target is about $108, about 5% higher than where shares are trading. And about 54% of analysts covering Honeywell rate its stock Buy. The average analyst price target is about $221 a share, roughly 14% higher than recent levels.
GE and Honeywell trade for 26 times and 19 times estimated 2024 earnings, respectively. In the case of GE, its PE ratio is high partly because earnings in its relatively large aerospace division are still recovering from pandemic-induced lows.
The worst outcomes from a debt ceiling stand off look like they will be avoided. Sometimes that is enough of a catalyst for Wall Street.
Write to Al Root at [email protected]
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