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By Basili Alukos, CFA, CPA | 06-06-2017 12:00 PM

Sturdy Economic Landscape for Diversified Industrials

The outlook for the credit worthiness for industrials looks solid after stellar first-quarter earnings.

Basili Alukos: Overall, many of the diversified industrials reported stellar first-quarter earnings last month. Aside from the stronger than expected revenue growth, impressive operating leverage boosted profitability and led to modest deleveraging in some instances.

We believe that the biggest driver of the improvement stems from many diversified industrials having outsize exposure to energy. If you recall, it was this reliance that devastated earnings when the energy complex started rolling over in 2014.

Looking ahead, we think that the economic landscape remains resolute for the diversified industrials. In May, the much-followed Institute for Supply Management's PMI registered 54.9, besting April's mark and remaining above the Maginot Line of 50. We still believe that energy will hold the tea leaves, as changes in oil prices have coincided with the growth in new orders during much of this expansion.

While tax reform is much debated, we think whole-scale changes may have a muted impact since effective tax rates for many multinational firms are already below statutory levels. Moreover, we suspect that any cash returned home from a potential repatriation tax holiday would probably bolster shareholder pockets, a move that is unlikely to enhance credit quality.

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