Adam Scheiner, CFA, Industrial and Materials Analyst ...

UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision.

US IndustrialsEquity preferences

Chief Investment Office GWM | 12 March 2021 2:07 pm EST

Adam Scheiner, CFA, Industrial and Materials Analyst Americas, [email protected]

Sector view: Moderately preferred

In this report• Global manufacturing should continue to improve as we

move through 2021. Additional stimulus and effective vac-cines are critical factors in our outlook.

• We favor the aerospace and railroad industries along withspecial situations within capital goods.

• Railroads should see powerful earnings leverage from areturn to growth.

• Valuations for defense companies are attractive again, butawait direction from Washington.

• Aerospace seeing a rebound that should accelerate withmore vaccines available.

• Raw materials prices are a concern, but are being offset sofar.

Strategy: Optimism surrounding the rollout of coronavirus (COV-ID-19) vaccines and a potential global economic rebound havecaused the industrials sector index to outperform the market yearto date in 2021. The industrials index has posted a total return of7.8% versus 5.2% for the S&P 500 for the year to date through11 March 2021.

Our equity strategy team currently has a moderately preferred viewon industrials. As economic activity begins to improve, we expectto see a pickup in the manufacturing sentiment, which tends tobe a positive driver for the sector. Overall we expect the industrialrecovery to continue into 2021, but it should take some time beforewe get activity back to pre-COVID 19 levels. Areas of potential con-cern are any delay in COVID-19 vaccines, higher raw materials, andglobal economic weakness.

Our positioning within the sectorOur most preferred stocks reflect companies with a combination ofexposure to improving end markets as well as favorable company-specific catalysts such as restructurings, acquisitions and newproducts.

Name Ticker PriceMost PreferredBoeing Co. BA 252.00CSX Corp. CSX 93.82Delta Air Lines Inc. DAL 48.32Emerson Electric Co. EMR 91.31Fortive Corp FTV 68.18Honeywell International Inc. HON 212.50Kansas City Southern KSU 214.86Lockheed Martin Corp. LMT 339.73Parker-Hannifin PH 308.27Raytheon Technologies RTX 77.05Stanley Black & Decker SWK 191.98Union Pacific UNP 214.52United Airlines UAL 54.06United Parcel Service Inc. UPS 167.24

Bellwether List3M Co. MMM 184.57Caterpillar Inc. CAT 219.76Crane Co. CR 91.78Cummins CMI 269.80Deere & Co. DE 364.46FedEx Corp. FDX 268.49General Dynamics Corp. GD 172.67General Electric Co. GE 12.27Huntington Ingalls HII 189.91Johnson Controls JCI 61.09Lennox International LII 292.62Norfolk Southern NSC 260.75Republic Services Inc. RSG 95.20Rockwell Automation, Inc ROK 264.25Southwest Airlines LUV 58.47Trane Technologies TT 162.94

Source: Bloomberg, UBS as of 11 March 2021

Sector Benchmark: S&P Industrials

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosuresbegin on page 46.

Our subsector preferences are currently Transportation at Most Pre-ferred with Capital Goods and Commercial & Professional Services atNeutral. Our main industrial themes are e-commerce, energy efficien-cy, automation and restructuring/M&A.

Capital Goods: NeutralWithin capital goods, we favor select companies with favorable endmarkets and specific catalysts. We are more selective in the mul-ti-industry and machinery groups due to valuation, but see someattractive company-specific stories that should benefit from restruc-turing, M&A and superior product portfolio. We believe the aerospaceindustry still has positive long-term drivers, but will first have to dealwith the overhang of demand destruction in the wake of COVID-19.

Transportation: Most PreferredImproving economic growth combined with renewed cost and profitdiscipline make this subsector attractive. Both the railroads and air-lines are focusing on price versus market share, which should enhanceunderlying profitability. Precision railroading is having a major posi-tive impact on margins and service efficiencies for the railroad group.Airlines should see a move towards normalization, but only after asuccessful COVID-19 vaccine is rollout globally. Freight transportationis likely to benefit from economic growth, but will have to managethe disruption in their business caused by the surge in e-commerceactivity.

Commercial and Professional Services: NeutralThis small subsector includes a diverse set of mostly US-centric com-panies such as waste management, employment and data services.As a large number of companies in the sector are US focused theyreceived a large benefit from corporate tax reform. The environmen-tal waste companies are attractive stories longer term, in our view,that should benefit from increased industrial activity as well as higherinflation. However, being still relatively early in the economic recoverymay cause these stocks to be more market performers in the nearterm. The group would be more defensive in any economic pullback.

Industrials environment should continue to

improve with stimulus and successful vaccine

Industrial stocks have begun to outperform the market again as weare getting closer to our two main catalysts of vaccines and stimulus.The recent approval of the Johnson and Johnson vaccine should con-tinue to boost industrial stocks as investors begin to see the end of thepandemic and a return to more normal activity. While it could still takeyears for activity and travel fully return to pre-COVID levels, stockstend to discount a recovery from the bottom much faster than funda-mentals. For this reason, we believe airlines and the aerospace groupare an attractive way to play this recovery at this time. Vaccines shouldalso help drive rotation to the industrial group that has not kept upwith new orders and fundamentals recently (Fig. 1). This catchup tofundamentals should also lead to moderate outperformance over thenext six to nine months.

Fig 1: Industrial stocks have not followed therebound in new orders

Source: Bloomberg, UBS as of 1 March 2021

US Industrials | Equity preferences

CIO GWM 12 March 2021 2

The new order reading of the PMI has remained strong at 64.8 andshould lead to increased revenues in the months to come and is agood indicator of industrial stock performance in the near term. Anymovement on an infrastructure stimulus bill would also be a boostfor sector performance. Business inventories also now seem belownormal relative to sales (Fig 2). This could set up a restocking impactto benefit industrial revenues if demand continues to improve in themonths ahead.

Further stimulus should help keep US PMIs in expansion terri-tory. PMIs in the major economies still remain in healthy expansionterritory after their rebound last year from the COVID-19 pandem-ic. The US in particular remains at strong levels of over 60 on theISM Index (Fig. 3). The high level of the US PMI is causing some peakfears of a near term pullback possible from high levels, but we believereopening and stimulus should keep the economy firmly in expan-sion We remain optimistic on moderate outperformance for industri-als given the stocks have lagged and already did not reflect the recentPMI surge as being sustainable. The Biden administration is makingfurther stimulus a high priority with a USD 1.9 trillion dollar packagejust passing the House and Senate. Stimulus is vital as a bridge to awide rollout of vaccines.

As the economic conditions get back to more normal during 2021we would expect price to earnings multiples to compress some-what as is usually the case when moving later into a recovery. Thisshould be offset though by continued strong earnings growth thatwe believe is likely to exceed expectations given accelerating revenuesand increased leverage from cost containment is an offset that shouldallow the group to moderately outperform in 2021. With sales andorders still having not yet turned to positive growth, we believe it isstill early to call for a peak in the sector.

We expect sales growth to turn positive for most of the sector in 1Qand accelerate thereafter on easy comps with last year's pandem-ic (Fig 4). Most companies noted that December was the strongestmonth of the year for orders with continued momentum into Janu-ary. We continue to prefer the transports and aerospace industriesthat have pulled back recently and select machinery companies thatshould rebound once we get better visibility on stimulus and vaccineroll-out in the months to come.

In the capital goods area we remain focused on companies with moreself help to aid growth. In this vein we like Fortive (M&A), Stan-ley Black and Decker (margins and M&A) and Emerson Electric(restructuring and energy rebound).

Fig 2: Low inventories could trigger a restocking

Source: UBS, Bloomberg and ISM

Fig 3: Global Activity remains at growth levels

Source: Federal Reserve Board, Caixin Global, Factset and UBS

Fig 4: Sales growth should turn positive in 4Q

Source: UBS and company reports

This In the capital goods area we remainfocused on companies with more self helpto aid growth. In this vein we like ParkerHannif in (margin growth), Fort ive(M&A), Stanley Black and Decker(margins and M&A) and Emerson Elect ric(restructuring and energy rebound).



But interest rates and raw material costs are watch items. Aninflationary environment can be good for the industrials sector as itdenotes very strong end demand. However, a rapid rise in raw mate-rials and interest rates can potentially short-circuit a rally in the sec-tor. The recent PMI reading has shown a material spike in prices paidintentions from managements (Fig 5). Feedback so far from compa-nies exposed to rising metal and petrochemical prices is that it is beingoffset through price increases and productivity improvements. Thisis good news and is a function of the strong demand environmentallowing the pass through of higher prices versus a price shock likehigher tariffs.

Raw materials prices increases have been a function of the rapidincrease in demand, but also supply led issues which were compound-ed by the recent freeze in the southern US. We have recently seena very strong rise in base metals of copper, steel and aluminum thathave now surpassed pre-COVID levels. Steel prices are now the high-est since the last peak in 2018 and could begin to crimp margins formachinery companies. Higher metal prices are an increasing concernfor auto, HVAC and tools exposed areas. Rising petrochemical pricesare also a headwind for plastic packager and paint companies.

Interest rates are also a watch item, in our opinion, given the recentmove in commodity prices and faster economic growth. The initial risein interest rates is usually a positive for cyclical sectors such as indus-trials as it is also a signal of faster growth (Fig 6). We have recentlyseen industrials outperform the market as higher interest rates andfaster growth have caused a rotation away from growth to more valueoriented sectors. With the pandemic winding down and more stimu-lus on the way, it is hard to see the recent move upward in interestrates choking off near term economic growth. However, a continuedrapid material move up in interest rates could turn into a negative asit would could begin to pressure overall stock valuation multiples.

COVID-19 vaccines should drive material improvement inAerospace activity. The rollout of the JNJ vaccine, expected immi-nently, means we now have three effective vaccines in the US to fightthe COVID-19 pandemic. As the JNJ shot is also one dose, it shouldmaterially improve the daily vaccine rate, where everyone who wantsa shot can possibly get one by midyear; this is also a goal of theBiden administration. We expect travel demand to further improveand accelerate from current levels once vaccines are more broadlyrolled out.

Within the aerospace industry, we prefer the airlines and aftermarketas the best ways to play the recovery, as these industries should beon the front line of the benefit from a recovery. New plane demandshould also benefit, but that will likely come with a lag after we getmore of an established travel recovery. We have already seen a pick-up in bookings from the airlines as infection rates and hospitaliza-tions have receded from their winter spike (Fig. 7). Although it couldtake years for flying activity to return to normal, stocks usual discountimprovement well ahead of time.

Fig 5. Raw material prices have increased mate-rially

30

40

50

60

70

80

90

2011 2013 2015 2017 2019 2021ISM Manufacturing Business Prices Index

Source: Bloomberg, UBS

Fig 6. Higher rates are typically a tailwind forcyclicalsCorrelation between relative sector performance and

changes in 10 year Treasury yields

-50% -30% -10% 10% 30%

Real Estate

Utilities

Cons. Staples

Health Care

Comm Services

Cons. Disc.

Info. Tech.

Materials

Industrials

Energy

Financials

Source: Factset and UBS



Fig 7. Airline travel has begun to bounce off of its recent lowsTrailing 7-day TSA airline pax trend

Source: TSA

We believe further progress in the rollout of a vaccine could makeaerospace stocks some of the best performers in 2021 given how theyhave still markedly underperformed the market. In this area, we favorthe aftermarket and airline stocks with strong balance sheets thatshould benefit from improved activity more directly. We remain MostPreferred view on Raytheon Technology and Honeywell on after-market exposure, and United Airlines and Delta within the airlines.Boeing's stock should also respond positively to any improvementsin air travel; likely well ahead of a material turn in demand for newplanes. Original equipment should normally take much longer to fullyrebound as airlines, but the recent increase in oil prices could spurincreased replacement demand for new and more fuel efficient planes

We still expect near-term volatility in aerospace stocks as the pandem-ic recovery is still likely to be choppy as we could get a surge with newCOVID variants spreading around the world. However, we believe amore widely available vaccine rollout will allow investors to see a lightat the end of the pandemic tunnel that should enable the travel stocksto continue to outperform over the balance of the year.

Rough weather should negatively impact rails in 1Q, but costcontrol is more important. Severe winter weather has hamperedactivities in the southern portion of the US recently which will likelytake a toll on 1Q earnings; albeit temporarily. This is most pronouncedin the railroad industry as the polar vortex in the Midwest and Southhas materially disrupted volumes. 1Q rail earnings estimates will like-ly have to reduced, but structural costs continue to come down aswell which believe is more longer lasting and should be the focus forinvestors going forward. The good news is that with the economyexpanding we do not see the weak volumes in 1Q as indicative of ademand issue. We expect the recent volume shortfall to be made upin future quarters as the backlog of volume is delivered.

The rail stocks have pulled back recently on high expectations, butwe believe there is a lot of leverage left as the economy improvesand valuations remains below the sector average. We expect marginsto continue to expand in 2021 as volumes bounce back faster thancosts which should lead to double digit earnings growth this year



from the rail industry. We continue to prefer Union Pacific that ison our top picks list along with CSX and Kansas City Southern.Potential higher corporate tax rates under a Biden administration area near-term negative for the industry given that they derive most oftheir revenue in the US, but this drag should be somewhat offset byincreased stimulus.

Supply chains are under some near term stress. The large swingin activity after the global lockdown last spring and summer hascaused some delays and bottlenecks in the supply chain. The pan-demic has also limited the availability of dock workers and truck dri-vers. Ports in LA and Long Beach, California are very congested dueto the surge of imports in the second half of last year. Ships are wait-ing at anchor for over 8 days in February to be unloaded versus 2.5last November. While this could temporarily impact areas of industri-als and the general economy due to shortages and higher logisticscosts, as we have seen with the semiconductor shortage impactingauto production, it should be a positive for freight companies as ithighlights very strong demand for their services.

The shipping surge has also been heightened by the pandemic-ledshift in consumer spending from services to goods as many consumershave been stuck at home. As all parts of the loading and warehousechains are stretched, it could take several months for conditions toget back to fully normal. Another main issue for the supply chainis an overall lack of empty shipping containers with which to shipitems. This may cause companies to increasingly use air freight, whichis much more expensive.

Defense stocks are in search of a catalyst. The defense group con-tinued to put up strong growth in the recent quarter, but more inline with expectations which gave investors no real reason to buy thestocks. With the continued overhang of an uncertain defense spend-ing outlook, the group has continued to underperform. While we donot expect much of a change to the expected low-single-digit growthgoing forward for the industry, we unfortunately will likely not getclarity until sometime in 2021.

A Blue Wave sweep of total Democrat control in Washington is seenas the more negative outcome for the defense group given the party'spreference for social spending over defense. However, this is notborne out by history, and the Democrats and President Joe Biden havealready expressed their support for higher defense spending. Howev-er, we suspect investors are not likely to re-rate the group until theyhave further clarity from the new administration. This could cause thegroup to have a difficult time outperforming in the near term. Lock-heed Martin remains our top pick in defense with its strong growthin aerospace, missiles and space segments. The group could becomemore interesting as we move through next year as we will get clarityon Washington’s spending priorities and cyclical tailwinds could beshifting more to defense later in the year.



Key themes

• Automation/Digitalization: Companies that can harness theintegrated opportunity between these two areas of transforma-tional technologies should over time realize superior companyperformance and earnings growth. Automation is frequently cit-ed as the next industrial revolution and has been evolving fromimproving production cost and efficiencies to the collecting ofdata and connectivity. Digitalization is the collecting and analyz-ing of this data which is then used as a tool to develop solutionsthat optimize system performance. This data collection is aid-ed by the increased connectivity between devices which is oftenreferred to as the "Internet of Things" (IOT). While most firmsare working hard on developing digital technology and solutionsfor their customers, it is still unclear how these companies willspecifically monetize this investment. We would expect success-ful industrial firms in this area to likely partner with key technol-ogy providers to further assist in developing data solutions.

• e-Commerce: The significant growth in sales from this chan-nel is presenting both opportunities and challenges within thesector. Online sales are expected to accelerate further as adop-tion of mobile devices and overall shopping convenience increas-es. Industrial companies that can use technology to offer superi-or solutions to increased fulfillment and delivery speeds requiredby e-commerce players will see a benefit to company growth.Increasing distribution will also impact the shipping industry inproviding increased business flow, but presents an overall chal-lenge to effectively handle the rapidly increasing velocity and vol-umes of packages. Companies that are more pure competitors toe-commerce will have to adapt their model to this new reality orlikely permanently suffer lower levels of profitability.

• Restructuring/M&A: In the slow global growth environmentwe have encountered since the Great Recession companieshave increasingly looked towards restructuring and transforma-tive M&A to help boost growth and returns. Restructuring canoften help profitability by exiting underperforming businesses ormaking current operations run more profitably and effectively.M&A can add a business or technology that is missing and canbe instrumental towards future growth. Activist investors havebeen playing an increasing role in this theme by placing pres-sure on company managements to deliver results. In this envi-ronment there is little tolerance for continued underperformanceand managements must adapt or will likely find change put uponthem.

• Emerging North American energy independence: Industri-al companies should benefit from this theme by providing prod-ucts which increase the efficiency and conservation of energy.Stricter regulations towards protecting the environment havebeen a powerful driver in boosting efficiency demands in industri-al applications. In recent years, however, the demand for efficien-cy has moved past environmental solutions to focusing on overall



cost improvement and productivity. Thus, we do not expect anychange in this trend due to potential environmental regulatorychanges from the Trump Administration. As companies and con-sumers demand more efficient and less costly alternatives it willdrive growth opportunities for many industrial applications suchas truck and power engines, building automation, and heating,ventilation and air conditioning systems.



Boeing Co.: Most PreferredThe Boeing Company operates as an aerospace and defense company that offers a broad portfolio of products andservices in commercial airlines, military aircraft, as well as space and missile systems. The company operates through threebusiness groups: Commercial Airplanes, Boeing Defense Space & Security, and Boeing Capital Corporation, which acts asa financing arm. The company was founded in 1916 and is headquartered in Chicago, IL.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 169,545 152,136.0 133,250

Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E

Revenues ($M) 58,158.00 81,400.32 87,589.27

Net Income ($M) (11,873.0) 609.4 3,960.0

EV/EBITDA (x) 455.6 30.5 18.0

EPS ($) (23.25) 0.04 5.37

P/E (x) NM NM 42.5

Consensus Rating Distribution Buy Hold Sell

10 11 3

Source: Factset, UBS as of 11 March 2021

What drives our opinionWe have Boeing shares on our Most Preferred list as we believe currentvaluation is attractive considering the rollout of vaccines to addressCOVID-19 over the next 12 months. A vaccine and the resulting low-er infection rates should lead to improved flying activity and betterdemand for Boeing airplanes over time. The certification of the 737Max is a positive that will allow Boeing to resume deliveries, gainorders and improve cash flow, in our view. The backlog of Boeingplanes is still sizable and stands at over 4,500 planes. The downsiderisks to our view are continued depressed air traffic, no improvementin the pandemic and future issues with the 737 Max.

Boeing has endured unprecedented negatives in the last two yearswith the grounding of its popular 737-Max narrowbody and then theCOVID-19 pandemic grounding 95% of air travel this past spring.We believe the stock's valuation is more reflective of the currentdepressed environment, but does not fully discount the potential pos-itives of a COVID-19 vaccine and gradual return to normal air travel.The road back to normal could take years, but stocks tend to discountimprovements well ahead of time. Thus, we think current valuationis attractive here with the positive potential catalysts of a return topositive cash flow later this year, new orders and improvement in airtravel. Longer-term, we still see air travel in a secular upturn whichshould benefit Boeing once the macro environment normalizes. High-er oil prices could also start another cycle of replacement demand fornew planes.

Boeing leverage has been increased materially during the pandemic,but their US 35 billion debt raise over the last year greatly improvedliquidity and an equity raise we believe would be a derisking event.The company's strong position in the industry has so far limited can-cellations during the downturn to about 15% of backlog. This shouldhelp cash flow rebound with the resumption of deliveries.



CSX Corp.: Most PreferredCSX provides rail, intermodal, barging, and contract logistics services across America and around the world. The companyoffers traditional rail service, and the transport of intermodal containers and trailers. CSX transports crushed stone, sand,gravel, metal, phosphate, fertilizer, food, consumer, agricultural, paper, and chemical products. The company was foundedin 1978 and is headquartered in Jacksonville, FL.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.18 81,519 39,793.0 67,660


Revenues ($M) 10,536.40 11,459.25 12,001.04

Net Income ($M) 2,765.0 3,224.2 3,478.7

EV/EBITDA (x) 13.7 12.4 11.8

EPS ($) 3.65 4.37 4.90

P/E (x) 24.2 20.3 18.1


13 8 1


What drives our opinionWe view CSX as Most Preferred as we see continued operatingimprovements through 2021. The company has seen a substantialchange in operations since adopting precision scheduled railroading(PSR) that is materially lowering the cost structure of the company. Thelower costs should provide significant earnings leverage as volumesrebound this year. The current management team is targeting furtherimprovement in operating margins through PSR that should lead tosuperior earnings and cash flow growth. Downside risks to our viewinclude lack of operating performance improvement, weaker volumesand pricing, and any disruption of its management team.

CSX has greatly improved operations over the past several yearsthrough cost-cutting and instituting precision railroading that waspioneered by former CEO Hunter Harrison. This led to over 500 basispoints in margin improvement as its operating cost ratio fell to under60% in 2019. CSX had one of the worst operating ratios among itspeers a few years ago at above 65%. 2020 was more of a transitionyear as the company cycles through lower coal pricing and profitabil-ity, but their focus on costs should lead to material earnings leverageas volumes rebound into 2021.

The company should be aggressive at returning cash to sharehold-ers after the COVID-19 impacts dissipate and has further room onits balance sheet to increase buybacks over time. Service metrics forCSX have also improved dramatically over the past year, which shouldenable the company to begin winning back customers lost duringtheir restructuring. Recent evidence shows improvement with cus-tomers as volumes are outperforming their peers.

Pricing for the truck market has also improved materially this year,which should help support pricing for the railroads. New truck pro-duction has also dramatically declined, which should tighten truckpricing as we move through 2021.



Delta Air Lines Inc.: Most PreferredDelta is one of the largest airlines in the world involved in providing air transportation for passengers and cargo. Its majorhubs include Atlanta, Detroit, New York, Salt Lake City, and Seattle in the US and Amsterdam, Paris, and Tokyo abroad.The company is a member of the SkyTeam Alliance and partners with many airlines around the world. Delta operates over15,000 daily flights with a mainline fleet of over 800 airplanes.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 51,546 71,996.0 30,389


Revenues ($M) 17,095.00 25,698.82 37,609.23

Net Income ($M) (8,996.0) (1,570.6) 2,385.0

EV/EBITDA (x) 3.9 25.8 7.4

EPS ($) (10.76) (2.62) 3.80

P/E (x) NM NM 12.5


10 10 1


What drives our opinionWe view Delta as Most Preferred as we believe its current valuation isattractive considering the increased probability of a vaccine to addressCOVID-19 over the near term. A vaccine and the resulting lower infec-tion rates should lead to improved flying activity over time and mate-rially improve DAL's cash flow. The company's recent capital raisesgives them liquidity and should carry for several years without havingto raise additional capital. This puts them in a good position to emergestronger than peers once the current crisis passes. The downside risksto our view are continued depressed air traffic, no improvement inthe pandemic and further economic weakness.

We believe DAL's valuation is more reflective of the current depressedenvironment, but does not fully discount the potential positives ofa COVID-19 vaccine and faster than expected return to normal ofair travel in the US and internationally. Despite the recent rally,DAL's stock has materially underperformed the market this past year.The road back to normal could take years, but stocks tend to dis-count improvements well ahead of time. While we could see con-tinued near-term volatility with infections surging, continued vaccineprogress is a positive offset over the next year.

We see Delta as one of the strongest players in the airline industry withbest in class margins and liquidity. The company expects to reduce itscash burn to USD 12 mn a day by the end of 1Q, which was betterthan expected and ranks at the top of peers. Given their lower coststructure, we expect their current liquidity of over USD 18bn to lastthe company several years without improvement in air travel fromcurrent depressed levels. They also were one of the few airlines toavoid issuing equity during the crisis.

The lower cost base means that air travel at only 50% of normalwould likely get Delta close to break even cash flow, faster than peers.The company also operates in less competitive markets.



Emerson Electric Co.: Most PreferredEmerson is a diversified global manufacturing and technology company. It operates in two segments: Automation Solutionsand Commercial & Residential Solutions. Automation Solutions enables process, hybrid and discrete manufacturers througha broad offering of products and integrated solutions, including measurement and analytical instrumentation, industrialvalves and equipment, and process control systems. Commercial & Residential Solutions provides products and solutionsthrough heating, air conditioning and refrigeration technology, as well as a broad range of tools and appliance solutions.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.33 57,709 22,882.0 51,543

Consensus Forecasts (FY end) Sep 2020 Sep 2021E Sep 2022E

Revenues ($M) 16,785.00 17,623.46 18,583.57

Net Income ($M) 2,098.8 2,212.3 2,394.9

EV/EBITDA (x) 15.2 14.2 13.1

EPS ($) 3.46 3.68 4.09

P/E (x) 24.8 23.3 21.0


13 11 0


What drives our opinionWe see Emerson as Most Preferred as we expect an acceleration incompany revenues over the next year with a valuation at a discount topeers. The company has a large exposure to process automation thatshould see benefits from improving spending from oil & gas. EMR'sstock has lagged peers over the past year mainly due to weaker oilprices. However, with oil prices off their bottom and likely headinghigher on an improved economy, the outlook for spending shouldimprove. Longer-term, we see the company as favorably exposed tothe secular trends of automation and technology evolution in man-ufacturing. The risks to our view are low energy prices, and weakerglobal growth and capital spending.

Oil and gas capital spending is an important driver of Emerson'sautomation solutions revenue, which should improve with highercrude prices. UBS CIO recently upgraded their oil forecast and nowexpects Brent oil prices to increase to the USD 73 range by mid year.As over 25% of Emerson's revenue is tied to oil and gas activity, itsstock performance is highly correlated with oil prices. Lower oil priceshave hurt automation orders over the last year and caused the stockother cyclical peers.

However, we believe the increased activity the company is seeing intheir business pipeline should begin to accelerate orders and revenuein the second half of the year. EMR's valuation is also attractive versusindustrial peers and is about a 15%-20% discount to closest peerRockwell Automation (Bellwether).

Emerson's commercial and residential solutions division has also beenhurt by weak China markets for heating and air conditioning prod-ucts, but should pick up with increased emphasis on efficienciesand environmental issues. In fact, sales for this unit has seen a nicerebound in sales with reopening of businesses over the last fewmonths. The long-time CEO of the company announced his retire-ment recently, which could be a catalyst for further value-addedmoves.



Fortive Corp: Most PreferredFortive is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets.The company holds leading positions in intelligent operating solutions, precision technologies, and advanced healthcaresolutions. Fortive is headquartered in Everett, Washington.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.41 25,994 16,051.5 23,058


Revenues ($M) 4,634.40 5,037.90 5,308.03

Net Income ($M) 751.9 903.4 985.3

EV/EBITDA (x) 23.0 18.9 16.9

EPS ($) 2.09 2.49 2.77

P/E (x) 32.7 27.4 24.6


8 11 0

Source: Factset, UBS, as of 11 March 2021

What drives our opinionWe view Fortive as Most Preferred as we believe the stock does notreflect the potential for improving sales trends post COVID-19. Fortiverecently split off its transportation technologies businesses that webelieve should unlock value. The stock has underperformed this pastyear despite growing earnings faster than the sector and valuation isat a discount to its peers. We also believe the stock does not reflect thepotential of accretive M&A. It has added value since its spinoff fromDanaher by buying faster growing and less cyclical businesses. Therisks to our view are further weakness in its more cyclical businesses,escalation of trade frictions and lack of M&A catalysts.

Core organic growth for Fortive this past year has been weighed downby the slowing in global growth seen in short cycle businesses. Thishas been most evident in the company's Tektronix and Fluke divisions.However, we expect that stabilization in global growth post COVID-19should allow for a resumption of growth over the next few quarters.

Management of the company comes primarily from Danaher with astrong background in cost control and M&A which has added fastergrowth and increased recurring revenue to the portfolio. M&A hasbeen an important lever for the company to grow earnings fasterthan peers. The main focus from the company has been bolt-on dealsin the connected enterprise and healthcare spaces. Increased growthand M&A could help Fortive's stock gain back some of its premiumvaluation after having de-rated significantly over the last 12 months.

Fortive also recently completed the spin off of its transportation tech-nologies and franchise distribution segments into a new companythis year. This leaves the remaining company exposed to the highergrowth industrial technology and health care markets with less cycli-cality. The spinoff also resulted in a much better balance sheet that islikely to enable an increased focus on M&A to drive shareholder value.



Honeywell International Inc.: Most PreferredHoneywell International is a worldwide diversified technology and manufacturing company. It invests in commercializedtechnologies to address critical areas around energy, safety, security, productivity, and global urbanization. The companyoperates through four business segments: Aerospace, Home and Building Technologies, Performance Materials andTechnology, and Safety and Productivity Solutions.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.80 150,848 64,586.0 141,755


Revenues ($M) 32,637.00 34,281.74 36,625.02

Net Income ($M) 4,779.0 5,537.7 6,151.0

EV/EBITDA (x) 19.5 17.9 16.3

EPS ($) 7.10 7.87 8.85

P/E (x) 28.5 25.7 22.8


12 10 0

Source: Factset, UBS as of 11 March 2021.

What drives our opinionWe have Honeywell on our Most Preferred list as we see it favorablyexposed to the major growth themes of automation, environmental,and energy solutions. Honeywell's CEO is putting a renewed focus ondriving top-line growth. The company's balance sheet is less leveredthan peers, which gives them increased optionality regarding acqui-sitions or returning cash to shareholders. The weakness in the aero-space division should weigh on earnings in the near term, but webelieve the recent vaccine news will alleviate concerns in this area.The largest risks to our view is a slowdown in global GDP growthand industrial capital spending, weaker aerospace demand, or lowercommodity prices.

We see Honeywell's stock as attractive due to its superior balancesheet, strong management, and earnings growth profile longer term.The company's attractive portfolio of businesses and exposure tofaster growing areas have enabled it to grow faster than peers. Thenear term is likely tougher for Honeywell given its exposure to aero-space, but as their revenues are very diversified we do not see earn-ings growth weaker than peers. The company's recently announcedrestructuring program should help boost margins once the COVID-19crisis subsides.

Honeywell has also been involved in many of the key themes with-in the industrials sector. It has been at the forefront of connectivitysolutions through its building and aerospace businesses. The acquiredfast-growing supply chain and warehouse automation business ofIntelligrated should be a beneficiary from the growth in e-commerce.Energy efficiency has also been a major theme at Honeywell throughits Building and Materials Technology segments. These areas have ledto sector-leading earnings growth over the last cycle.

The company's balance sheet could also be a source of future growth,and we expect management to be more aggressive on value-addeddeals going forward given the recent spin-off announcements.



Kansas City Southern: Most PreferredKansas City Southern is a transportation holding company. It focuses on the growing north or south freight corridorconnecting key commercial and industrial markets in the central United States with major industrial cities in Mexico. Thecompany also engages in the freight rail transportation business operating through a single coordinated rail network.Kansas City Southern was founded by Arthur E. Stilwell in 1887 and is headquartered in Kansas City, MO.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.81 23,128 10,087.5 18,440


Revenues ($M) 2,632.60 2,965.28 3,179.50

Net Income ($M) 656.6 798.8 899.0

EV/EBITDA (x) 15.9 13.7 12.6

EPS ($) 6.96 9.02 10.64

P/E (x) 29.2 22.5 19.1


10 10 0


What drives our opinionWe have shares of KSU on our Most Preferred list as we see its imple-mentation of precision scheduled railroading (PSR) as improving over-all service issues that have plagued the company and should lead toimproved profitability. KSU's should see continued improvements inoperating ratios that should exceed peers with higher volume growthdue to expanding trade in the US-Mexico corridor. The company isalso less exposed to potential higher US tax rates than peers. The risksto our view are unfavorable trade policy between the US and Mexico,a weaker peso, political risks from the new Mexican government, andany failure to implement precision railroading.

The company's focus on PSR included the 2019 hire of Sameh Fahmywho is a veteran of Canadian National and has considerable expe-rience in this area. Progress on PSR since has been very good withfewer cars and locomotives on line, which is a sign of an improvingnetwork. Over time we should see the company simplify its networkby removing excess equipment and improving train start rationaliza-tion to create a more efficient and fluid network. This has allowed thecompany to forecast continued margin improvements through 2022which we expect to lead to double digit earnings growth.

KSU has also historically achieved higher volume growth than otherrails with its exposure to increased growth on the US-Mexico corridor.We expect this to continue in light of the USMCA trade agreementsand more reshoring closer to home by US companies. We expectgrowth in the near term to accelerate as network operations improve,client attrition lessens, and new plants are opened for refined prod-ucts. This should be a catalyst for share outperformance.

COVID-19 is a near-term headwind to volumes, but it has allowedthem to reduce costs further. The new populist government in Mexicoremains a risk to KSU, but the new president has shown no inclinationto change rail contracts at this point.



Lockheed Martin Corp.: Most PreferredLockheed is a global security and aerospace company principally engaged in the research, design, development,manufacture, integration, and sustainment of advanced technology systems, products, and services. The company hasfour segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems. It serves both USand international customers with products and services that have defense, civil, and commercial applications. Its principalcustomers are agencies of the US government.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.83 107,591 50,710.0 97,064


Revenues ($M) 65,398.00 68,055.61 70,518.70

Net Income ($M) 6,888.0 7,366.0 7,808.9

EV/EBITDA (x) 10.5 9.7 9.0

EPS ($) 24.50 26.34 28.15

P/E (x) 14.1 13.2 12.3


11 9 0


What drives our opinionWe view Lockheed Martin as Most Preferred due to its attractive val-uation along with accelerating sales growth and cash flow. Recentguidance for 3% sales growth for 2021 gives good visibility for strongearnings growth and possible estimate upgrades into the next yearfrom a company that normally guides very conservatively. Further-more, we believe expectations for a cut in the fiscal 2021 defensebudget are likely overdone. Annual free cash flow of over USD 6bngives the stock an attractive free cash flow yield, in our view. Thedownside risks to our view are cuts in defense spending or disappoint-ments in the F-35 program's pricing or production.

We see Lockheed and the defense industry as beneficiaries fromgrowing spending budgets at home and abroad. Support for anoth-er increase in the fiscal 2020–21 US budget led to a higher defensebudget, with both congressional parties seeing the need for increasedspending. Lockheed's growth should benefit from a diversified port-folio, with growth driven by its aerospace, space, and missile systemsprograms, which are strongly supported by the US budget and grow-ing international demand. Increased global tension from Russia, Chi-na, and North Korea has boosted demand for these programs.

The F-35 fighter jet is Lockheed's biggest program and should contin-ue to see continued growth next year, although growth should slow abit as we get into the middle of the decade. While the F-35 programis the most expensive in defense history and has been plagued by costoverruns and delivery delays, the procurement and delivery scheduleseems to have been firmed up and should continue to ramp up.

Lockheed's growing exposure to international markets is also a posi-tive as demand is accelerating due to increasing geopolitical threatsoverseas. International sales are likely to grow to over 30% of its rev-enues as F-35 production continues to increase.



Parker-Hannifin: Most PreferredParker-Hannifin Corporation is a leading worldwide diversified manufacturer of motion and control technologies andsystems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. Parkeroperates in two business segments: Diversified Industrial and Aerospace Systems.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.18 45,560 19,738.2 38,346

Consensus Forecasts (FY end) Jun 2020 Jun 2021E Jun 2022E

Revenues ($M) 13,695.52 13,970.44 15,138.25

Net Income ($M) 1,206.3 1,826.8 2,064.0

EV/EBITDA (x) 17.3 15.2 13.5

EPS ($) 10.79 14.01 15.86

P/E (x) 27.5 21.2 18.7


14 4 1

Source: Factset, UBS, as of 11 March 2021

What drives our opinionWe have a favorable view on the shares of Parker Hannifin for thefollowing reasons: expanding margins, radical change in manage-ment culture, and accretive acquisitions. These factors make Parker anattractive self-help story that should allow it to outperform peers with-out relying solely on a better economic environment. Margin improve-ment combined with increased cash flow and capital return shouldresult in earnings growth above industry peers over the cycle. Acqui-sitions should help improve margins and the growth profile of thecompany. The risks to our view are weakness in industrial activity, inte-gration problems with recent acquisitions, and failure to achieve costrealignment goals.

The elevation of Tom Williams to CEO in early 2015 has resultedin a significant culture change by making the company more per-formance- and profit-focused. The previous Parker Hannifin had toomuch in redundant costs and excess manufacturing operations due toprior acquisitions, in our view. The new management culture is mak-ing progress in the multi-year plan to shrink the extended footprintof Parker’s manufacturing base and expand margins, and appears onits way to exceeding its longer-term margin goals. The goals do notseem aggressive to us in that its margins have been consistently belowpeers. Earnings growth should also be supplemented by increasedcash flow and acquisitions as operational results improve. This shouldlead to peer-leading earnings growth over the medium term.

The Clarcor deal is forecast to add to earnings and cash flow anddiversifies the company further into the attractive filtration area. Therecent headwind to margins from the integration has dissipated andthe company has posted very strong incremental margins which weexpect to continue. The company has recently announced two addi-tional acquisitions that should add to sales and margin growth in thelonger term.



Raytheon Technologies: Most PreferredRaytheon Technologies Corp. engages in the provision of aerospace and defense systems and services for commercial,military, and government customers. It operates through the following segments: Collins Aerospace Systems, Pratt andWhitney, Raytheon Intelligence and Space, and Raytheon Missiles and Defense. THe company was formed in 2020 fromthe merger of Raytheon with United Technologies.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

NA 159,700 162,153.0 113,703


Revenues ($M) 57,148.00 65,407.51 71,076.63

Net Income ($M) 4,906.0 5,420.7 7,380.3

EV/EBITDA (x) 14.7 13.2 11.0

EPS ($) 2.73 3.68 5.07

P/E (x) 27.4 20.4 14.8


What drives our opinionWe view RTX as Most Preferred as we see the merger of Raytheonand United Technologies as creating a stronger company with animproved balance sheet and strong recurring cash flow. Revenues aresplit almost evenly between commercial aerospace and the defensebusinesses. While the near-term is negative for commercial aerospacedue to the impact of COVID-19, we expect a sharp bounceback inactivity after the crisis is over. The defense business should continue togrow in 2021 and acts like a buffer to the current aerospace down-turn. The downside risks are further weakness in air travel, failure tointegrate the merger and any reduction in the US defense budget.

The combination of the UTX aerospace division with Raytheon shouldcreate a more formidable competitor with a superior balance sheet.The UTX aerospace division is well positioned for a recovery in theair travel and aircraft industry once the COVID-19 crisis dissipates.The Collins aerospace division acquisition in 2018 was very accretiveto earnings and enhanced UTX's competitive profile. The earningslosses from the Pratt & Whitney engine businesses should continue toimprove going forward as more engines are delivered. The productionissues at Pratt are looking to be manageable and the design issuesappear to be normal for a new engine program.

The defense division should be a prime beneficiary from a larger USdefense budget and increasing demand for defense services aroundthe globe. We expect increased defense sales growth into 2020-21 ledby their missile and missile defense programs. This has been an areathat traditionally has seen more lackluster growth, but is now seeingoutsized growth. Increased global tension from Russia, ISIS, and NorthKorea has boosted demand for these programs. This demand led tostrong growth in backlog last year. Nearly a third of Raytheon's rev-enues are coming from international customers where demand hasaccelerated due to threats overseas.



Stanley Black & Decker: Most PreferredStanley Black & Decker operates through the following three segments: Tools and Storage, Industrial, and Security. TheTools and Storage segment comprises of the power tools and equipment, and hand tools, accessories, and storagebusinesses. The Industrial segment comprises of engineered fastening and infrastructure businesses. The Security segmentincludes the convergent security solutions and mechanical access solutions businesses.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.58 30,239 23,566.3 28,132


Revenues ($M) 14,534.60 15,564.70 16,847.59

Net Income ($M) 1,409.6 1,617.9 1,792.6

EV/EBITDA (x) 12.5 10.6 9.4

EPS ($) 9.04 10.10 11.20

P/E (x) 19.4 17.4 15.7


10 7 0


What drives our opinionWe view SWK as Most Preferred as we see an improvement in organ-ic sales coupled with lower headwinds from the higher costs thathurt earnings growth in 2018-19. Earnings going forward should behelped from last year's turnaround primarily from improved sales andcost initiatives. One likely growth avenue is exercising their option tobuy the remaining 80% stake in outdoor tools maker MTD. Tariffshave been a big drag on margins due to trade tensions with China,so any further de-escalation on trade frictions would be a positive.The risks to our view are increased US-China trade tensions, failure toachieve planned sales increases and margin targets and overall hous-ing weakness.

We see further catalysts to grow earnings post COVID-19 throughnew sales initiatives and cost cutting programs. The company hasrolled out a cost reduction margin plan that should result in USD 200million in savings to offset the additional 2019 tariffs. This is in addi-tion to the previously announced USD 300-500 margin improvementprogram to be realized by 2022. Lapping the increased tariffs and cur-rency headwinds should also be a positive for margins. Tariffs, how-ever, continue to remain a wildcard as SWK sources significantly (near40%) from China.

Sales growth on its tools and storage unit should be helped longerterm by the continued distribution rollout of the Craftsman brand thatwas acquired from Sears Holdings. The Craftsman brand had sufferedyears of market share losses due to poor execution from prior man-agement.

Residential activity and home improvement spending should behelped as lower interest rates are a positive for the housing markets.The company’s balance sheet is also another avenue of growth andwe expect accretive acquisitions over the next few years to help boostgrowth above peers. The security business has been a chronic under-performer, but the margins have begun to improve in this unit throughrepositioning efforts and increased demand from COVID-19.



Union Pacific: Most PreferredUnion Pacific offers freight and railroad services for agricultural, coal, intermodal, chemical, automotive and industrialproducts. Its major area of operations are in the western two-thirds of the US. Through their network of over 32,000route miles they link the Pacific Coast and Gulf Coast ports with the Midwest and Eastern US cities. They also connectwith Canada's rail system and serve all the major Mexico gateways.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.84 169,859 63,466.0 142,287


Revenues ($M) 19,533.00 21,016.85 22,142.31

Net Income ($M) 5,558.0 6,291.1 6,820.4

EV/EBITDA (x) 16.1 14.8 13.9

EPS ($) 8.19 9.54 10.69

P/E (x) 25.8 22.1 19.8


16 7 0


What drives our opinionWe expect Union Pacific to benefit from an improvement in marginsfrom better rail pricing and cost improvements. Their hiring of JimVena in 2019 to implement precision scheduled railroading (PSR) hashad a material improvement on its cost structure. Its move to aggres-sively improve costs is in response to the dramatic improvements inmargins at other rails. UNP's strong balance sheet and cash flow is alsobeing used for dividends and a material increase in its share repur-chase program. The major risks to our recommendation are any pro-nounced economic weakness that leads to weaker volume and pric-ing or a rollback in its recent plan to cut costs and improve networkoperations.

Our longer-term outlook for Union Pacific is based on a lessening ofthe negative factors behind weaker rail volumes and pricing, alongwith an increased focus on reducing costs. Reducing costs havereceived increased attention by management after disappointing flatmargins in 2018. UNP has moved aggressively to adopt precision rail-roading, which if successful could materially improve margins, as wasdone at peer company CSX. We expect weaker volumes to persistin the near term from COVID-19, but shouldn't be an impedimentto implementing PSR and reducing the long-term cost structure ofthe company. Volumes have recently begun to bottom and should bepositive in 2021

Pricing should also benefit over time from less pressure from its west-ern competitor of Burlington Northern and tighter truck markets in2020. Burlington Northern made significant increases to its capacityto improve service levels and we believe led them to use price to fill itsnetwork. As current plans are to reduce capital spending and its net-work is closer to being full, we see Burlington as being less aggressiveon pricing going forward. UNP also has a strong balance sheet, in ourview, which led to its announcement to repurchase USD 20 billion ofstock by 2021.



United Airlines: Most PreferredUnited Airlines is a leading passenger and cargo airline operating more than 4900 flights a day to more than 360 airports.They serve destinations across 5 continents with hubs in Newark, Chicago, Denver, Houston, Los Angeles, San Francisco,Washington DC. The airline also offers regional service via subsidiary United Express.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 31,427 59,548.0 17,139


Revenues ($M) 15,355.00 22,853.55 34,392.50

Net Income ($M) (7,703.0) (3,047.8) 981.6

EV/EBITDA (x) NM 120.3 8.0

EPS ($) (27.57) (10.31) 2.97

P/E (x) (2.0) (5.3) 18.5


8 7 4


What drives our opinionWe view UAL as Most Preferred considering the potential benefit ofseveral vaccines to address COVID-19 over the near term. UAL's stockperformance has been the worst among peers, but we believe valu-ation does not reflect the improvements management has made inprofitability over the last several years. A vaccine and the resultinglower infection rates should lead to improved flying activity over timeand materially improve the company's cash flow. Previous pandemicssuch as Ebola and SARS resulted in a strong bounce back in air travelonce the peak of the damage had passed. The downside risks to ourview are depressed air traffic, no improvement in the pandemic andeconomic weakness.

While UAL's recovery will likely lag other airlines due to its interna-tional long haul and corporate exposure, we believe that is reflectedin the stock as its performance has materially lagged peers such asSouthwest and Delta. We believe the stock's valuation is more reflec-tive of the current depressed environment, but does not fully discountthe potential positives of a COVID-19 vaccine and faster than expect-ed return to normal of air travel in the US and internationally. Theroad back to normal could take years, but stocks tend to discountimprovements well ahead of time. While near-term volatility couldpersist with infections surging, continued vaccine progress should bea positive offset over the year.

UAL's CEO Scott Kirby appointed last year has also reinvigorated theUnited brand and profitability since joining the company as Presidentin 2016. United is now more focused on improving dominance andmargins within its biggest hubs. The company also managed costsbetter than peers in the pre-COVID environment and were fast closingtheir margin gap versus the industry. While the current coronavirusis a severe challenge in the near term, airlines have greatly improvedliquidity versus prior cycles. UAL should end 1Q with over USD 19billion in liquidity.



United Parcel Service Inc.: Most PreferredUnited Parcel Service, Inc. is a logistics and package delivery company that which provides supply chain managementservices. Its logistics services include transportation, distribution, contract logistics, ground freight, ocean freight, air freight,customs brokerage, insurance, and financing. The company operates its business through three segments: US DomesticPackage, International Package, and Supply Chain & Freight.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.42 166,837 62,492.0 143,921


Revenues ($M) 84,591.00 87,538.43 90,867.50

Net Income ($M) 7,166.0 7,837.6 8,434.9

EV/EBITDA (x) 14.3 12.8 11.6

EPS ($) 8.23 8.95 9.67

P/E (x) 20.3 18.6 17.3


12 7 4


What drives our opinionWe view UPS as Most Preferred as we believe the new management islikely to make changes to significantly improve the pricing and prof-itability of its businesses. While UPS will be impacted by weaker glob-al markets in the near term, the surge in e-commerce activity shouldalso provide a positive offset versus the sector. We still see UPS's earn-ings growth pressured by lower margins from e-commerce coupledby higher than normal capital spending, but a lot of these pressuresshould be reaching peak currently. The downside risk to our thesisis further erosion of margins and increased spending on operationsalong with any loss of their Amazon business.

New management, led by CEO Carol Tome', is making a significanteffort to improve the lagging profitability and growth of UPS. This isevident from recent price increases for the industry which are moresignificant than we have seen previously and is evidence that the newCEO is making an imprint on the company quickly; a company thatwasn’t run for profit, but for revenue in our opinion. The price increas-es are a response to margins that have been hurt over the last fewyears as the surge in e-commerce activity has boosted volumes, butlowered profitability due to its lower density and higher costs.

Further opportunity for UPS is in improving profitability through afocus on costs and a better not bigger philosophy.. As the CEO hassaid that "everything is under review," we believe it could result in asignificant improvement in margins and profits over time.

The risk of Amazon becoming a shipping competitor is still a longer-term threat, but its likely the threat has been pushed out for yearsgiven their surge in orders is straining their capacity. Another positivecatalyst for the parcels could be the new head of the Postal Servicemaking moves to reduce service and potentially increase prices. Thesechanges could boost volume and prices for the parcel carriers as aresult.



3M Co.: Bellwether3M is a diversified industrial company with a global presence in the following markets: health care, industrial, display andgraphics, consumer and office, safety, security and protection services, electronics, telecommunications and electrical, andtransportation. 3M has operations in more than 70 countries and is headquartered in St. Paul, MN.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

3.25 120,144 47,344.0 104,782


Revenues ($M) 32,184.00 34,372.33 35,724.64

Net Income ($M) 5,088.0 5,593.3 6,062.2

EV/EBITDA (x) 13.6 12.5 11.6

EPS ($) 8.74 9.61 10.46

P/E (x) 20.7 18.8 17.3


4 11 2


What drives our opinion3M was a company which traditionally expanded margins with verystrong free cash flow conversion. However, headwinds have held backsales and margin growth in recent years, which has been below peers.The major areas of disappointment have been weaker auto, consumerand healthcare sales. Under-absorption of overhead has also been arecurring issue for margins. Given their growth challenges and poten-tial environmental liabilities, we see the risk/reward in the stock as cur-rently balanced. Upside risks to our view are a stronger global econ-omy and sales and margin outperformance; the downside risk is aweaker global economy and margins than we expect.

3M has had disappointing sales and earnings growth versus peersover the last few years. Most of the issues are company specific withchallenges continuing in their auto, consumer and healthcare divi-sion. The company's recent reorganization and streamlining couldhelp improve returns, but will likely take time. Sales should get a boostnear term due to its exposure to safety areas, but this isn't likely to besignificant change to earnings growth.

3M is using levers such as portfolio management of their business-es, R&D investing, and overall segment transformation to boost mar-gins. However, weaker sales have hurt margins. Environmental liabil-ities are another risk to its valuation given increased lawsuits recent-ly, although this should not be material enough to impair the overallbalance sheet of the company. Increased environmental liabilities andpayouts is more a risk to its valuation going forward.

The company is likely to increase M&A activity, which could furthersupport earnings growth. The stock would likely be more defensive topeers on any economic pullback, but believe at current levels is fairlyvalued absent any material increase in earnings expectations.



Caterpillar Inc.: BellwetherCaterpillar, Inc. is the world's leading manufacturer in the manufacture of construction and mining equipment, diesel andnatural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates through the following segments:Construction Industries, Resource Industries, Energy & Transportation, and Financial Products. Caterpillar delivers itsproducts through a worldwide network of dealers.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.85 150,511 78,324.0 121,314


Revenues ($M) 41,748.00 45,859.07 50,809.59

Net Income ($M) 3,153.5 4,218.3 5,338.2

EV/EBITDA (x) 18.5 15.2 12.7

EPS ($) 6.56 8.15 10.64

P/E (x) 33.9 27.3 20.9


9 10 2


What drives our opinionWe see Caterpillar benefiting from a resurgence in mining and resi-dential construction capital expenditures over 2021-22. However, webelieve much of this positive news is already reflected in the stock'srecent share price outperformance. Thus, we see the risk/reward asfairly balanced currently. Spending in nonresidential construction andenergy markets should also still be a headwind to a full recovery atCAT. The downside risk to our view is any material weakness in China'seconomy, increased trade tensions, and lower oil prices. The upside isbetter demand in mining and energy, a large infrastructure spendingbill and any material improvement in China's economy.

CAT's earnings likely hit bottom in 2020 on weak end markets of min-ing and energy. We expect strong growth in construction and min-ing to support a rebound in earnings over the 2021-22 time period.However, with the stock near 27 times this year's earnings we believethis rebound is expected by shareholders and reflected in its currentstock price. Energy related spending has also hit bottom, but will likelylag overall spending due the depressed oil prices over the past year..Materially higher oil prices or a large infrastructure bill from Washing-ton could make us more positive on the stock,.

The main risk for the stock is the failure of future trade deals andany further retaliation by China on US exports would be a materialnegative that could slow economic growth in the US and China. WhileCAT only has a 10-15% direct exposure to China, growth in China isvery important to overall global commodity prices. As China comprisesnearly 50% of the demand for the major base metals, any lack ofrebound in their economy from tariffs would be a headwind for CAT'smining businesses. While a long term trade deal with China wouldbe a positive for CAT, a quick full resolution in this area continues tobe elusive.



Crane Co.: BellwetherCrane Co. operates as an engineered industrial products company that offers payment machines, currency printing,airplane braking devices, pumps, valves, and other industrial goods. Their primary markets are chemicals, power, oil & gasand aerospace & defense, along with a wide range of general industrial and consumer related end markets. Crane operatesthrough four business groups: Fluid Handling, Aerospace and Electronics, Payment and Merchandising Technologies, andEngineered Materials. Crane Co. is headquartered in Stamford, Connecticut.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.96 5,931 4,588.9 5,095


Revenues ($M) 2,936.90 3,071.68 3,279.51

Net Income ($M) 181.0 297.8 360.7

EV/EBITDA (x) 12.6 9.8 8.2

EPS ($) 3.84 5.05 6.09

P/E (x) 22.3 16.9 14.0


4 3 0


What drives our opinionWe view Crane Co. as Bellwether as we see headwinds impactingearnings growth for 2020-21 that should limit near-term stock out-performance. Headwinds from its payment and fluid divisions fromCOVID-19 could last into 2021 as businesses activity remains muted.Furthermore, a headwind from the slowdown in 737 Max productionshould drag on near term growth in Crane's aerospace division. How-ever, its currency division growth should rebound strongly this year.Downside risks to our view are weaker industrial activity and ener-gy prices, and further inventory destocking issues in currency. Upsiderisks are a rebound in currency orders, improved industrial activity andany material share repurchase.

We believe the expected accretion from its Crane Currency acquisi-tion is likely to be delayed due to a near-term excess inventory ofUS currency notes. Growth is expected to resume in 2021, but willlikely only go back to prior year levels. Furthermore, the company'saerospace division could have more muted growth near term due toits exposure to the 737 Max production and slower growth there.Crane's revenues are also somewhat more exposed to the impactsfrom COVID-19 across its businesses. However, as these drags shouldbe temporary and valuation is already at a substantial discount, we donot see the stock as an underperformer to the sector. Longer term,we expect Crane to return to double-digit growth in 2021-23. Anysizable return of capital would be a positive offset to the slower earn-ings growth now expected.

The payment technologies group should remain a standout businessfor Crane longer-term and should continue to be boosted by theadoption of retail self-checkout systems. These systems have showna significant reduction in labor costs and increased consumer prefer-ence.

Its fluid handling business backlog has flattened out with lower oilprices, but should still benefit from restructuring savings. Any sizablepullback in energy prices would be negative for this segment.



Cummins: BellwetherCummins, Inc. designs, manufactures, and distributes engines, filtration and power generation products. Cummins alsoservices engines and related equipment, including filtration, after treatment, turbochargers, fuel systems, controls systems,air handling systems and electric power generation systems. Customers are served through a network of approximately600 wholly-owned and independent distributor locations and over 7,400 dealer locations in more than 190 countriesand territories.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.04 40,291 22,624.0 38,352


Revenues ($M) 19,811.00 22,186.82 23,654.53

Net Income ($M) 1,789.0 2,042.6 2,341.9

EV/EBITDA (x) 12.4 11.1 9.9

EPS ($) 12.18 14.02 16.41

P/E (x) 21.3 18.5 15.8


6 16 0


What drives our opinionWe view the risk/reward on CMI shares as balanced given the stock'sstrong performance recently reflects an expected rebound in US truckdemand. Truck industry orders have begun to bounce back stronglyin recent months after a downturn over the past year. Furthermore,the company's warranty issues on older engines are still a risk thathad depressed margins in 2017-18 and could impact margins goingforward. Longer term we see CMI as a major innovator and brandleader in the market. The risks to our view are a loss in market shareor weakness in the truck market and continued warranty issue on thedownside, and better earnings and sustainable truck engine demandon the upside.

North American truck demand is finally seeing a material recoveryafter a prolonged downturn over the past year and a half. While weexpect earnings to be boosted by increased truck production over thenext year, the stock's valuation multiple should start to compress fromits current high levels as we move through the cycle. Thus, we believea material rebound in truck demand is already somewhat discountedin the stock. Higher than expected profit margins or a longer truckcycle could make us more positive on the stock.

The diversification of CMI's revenues and its continued strong marketshare should also help sales weather any potential downturn and hasreduced company earnings volatility over time. The strength of theCummins' brand with customers also appears to have stemmed offfurther market share losses as engine market share for the compa-ny has been stable and remains above expectations. The company isexploring hydrogen fuel technology through a joint venture, but anymaterial impact on earnings is likely modest in the near term.

Their balance sheet is a possible positive offset to any weaker sales asit is nearly net debt free. This should give them options for acquisitionsto improve their technology and product offerings.



Deere & Co.: BellwetherDeere & Company manufactures and distributes a range of equipment used in agricultural, forestry, construction, and turfcare to customers worldwide. It also manufactures engines and power train components. The company operates throughthree segments: Agricultural and Turf Equipment, Construction and Forestry, and Financial Services. The financial servicessegment primarily finances sales and leases to John Deere dealers of new and used equipment.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.88 147,602 75,091.0 108,316

Consensus Forecasts (FY end) Oct 2020 Oct 2021E Oct 2022E

Revenues ($M) 31,272.00 38,008.72 41,469.73

Net Income ($M) 2,751.0 5,033.0 5,657.2

EV/EBITDA (x) 23.7 15.3 13.4

EPS ($) 8.69 15.84 18.19

P/E (x) 39.8 21.8 19.0


14 4 2


What drives our opinionWe view Deere as Bellwether as we believe its stock valuation isnow more reflective of the favorable trade resolution with Chinaand improved crop markets. Increased buying of crops from Chinaand weather disruptions has led to materially higher crop prices. Thisshould lead to an improved crop machinery market in 2021 that isbalanced by less government support and potentially increased cropsupply. The replacement cycle should also continue to provide supportfor agricultural equipment as used inventory remains low. The risksto our view are stronger crop prices and construction markets on theupside; with weaker crop prices and any further trade conflicts withChina as the downside.

Crop prices have rebounded significantly as China has resumed buy-ing of US crops in line with the Phase 1 US trade deal signed last year.We also expect less friction on trade going forward from the incomingBiden Administration to positively support demand. Higher crop pricesshould support near term machinery demand into 2021, but there arelikely headwinds in terms of reduced government support paymentsto the farmer next year and likely higher corp acreage next year. Cropsupport payments from Washington have helped boost farm incomein 2018-20, but are likely to be significantly curtailed next year giventhe improved trade environment.

Increased demand and accelerated cost cuts should help Deere's mar-gins get to their 15% target somewhat ahead of schedule. Precisionagriculture has been a major focus of Deere recently and has lead toincreased market share over the past year. Deere expects precision agsales to reach $2 billion in the near term.

Another positive for ag equipment is that we are still early in thereplacement demand cycle, that should help offset any major declinein sales. While we expect Deere's earnings should benefit fromimproved demand, we believe a lot of the recent positive news is nowreflected in the stocks premium valuation.



FedEx Corp.: BellwetherFedEx provides shipping, transportation, logistics, packaging and ancillary services through its integrated network. Thecompany operates worldwide through the following business segments: FedEx Express, TNT Express, FedEx Ground, FedExFreight, and FedEx Services. The company was founded by Fred Smith in 1971.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.88 109,197 73,537.0 78,000

Consensus Forecasts (FY end) May 2020 May 2021E May 2022E

Revenues ($M) 69,200.00 76,751.13 80,529.84

Net Income ($M) 2,490.0 4,206.9 4,626.5

EV/EBITDA (x) 14.4 10.5 9.4

EPS ($) 16.21 16.21 17.71

P/E (x) 18.3 18.3 16.8


17 7 0


What drives our opinionWe see the risk/reward for FDX shares as currently balanced given therun-up in the shares in response to recent pricing announcements. Weare also concerned that further economic weakness in Europe couldpose additional challenges in the integration of its TNT business nearterm. TNT targets were already lowered last year. Furthermore, thedepartures last year of the COO and head of Express could hampera quick turnaround of operations. Risks to our view are economicweakness, margin pressure and potential competitive threats on thedownside; while upside risks are better global growth, pricing and arebound in TNT operations.

Both UPS and FDX have recently instituted higher pricing for surgeand holiday shipments to offset the negative margin impact fromincreased e-commerce shipments. The price increases are a responseto margins that have been hurt over the last few years as the surgein e-commerce activity has boosted volumes, but lowered profitabilitydue to its lower density and higher costs. As the parcel carriers dom-inate their industry we believe they should have the ability to passalong this higher pricing.

Despite the positive pricing, we are still concerned about integrationof TNT operations at FDX given the weaker growth in Europe. Weakergrowth from TNT has been the source of prior earnings disappoint-ments. Furthermore, we do not see FedEx having the same focus oncutting costs as with peer UPS. Overall, price increases should helpcompany earnings to rebound, but we see that currently reflected inthe stock's valuation.

The risk of Amazon becoming a shipping competitor is still a longer-term threat, but its likely the threat has been pushed out for yearsgiven their surge in orders is straining their capacity. Another poten-tial positive catalyst for the parcels could be the new head of thePostal Service making moves to reduce service and potentially increaseprices.



General Dynamics Corp.: BellwetherGeneral Dynamics Corp. operates as an aerospace and defense company that offers a broad portfolio of products andservices in business aviation, combat vehicles, weapons systems and munitions, shipbuilding, and communication andinformation technology systems and solutions. The company operates through four business groups: Aerospace, CombatSystems, Marine Systems, and Information Systems and Technology. The Aerospace group designs, manufactures andoutfits a comprehensive family of Gulfstream business jets.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.62 60,295 51,308.0 48,110


Revenues ($M) 37,925.00 38,779.27 40,425.54

Net Income ($M) 3,167.0 3,168.9 3,421.1

EV/EBITDA (x) 11.5 11.4 10.6

EPS ($) 11.00 11.09 12.23

P/E (x) 15.3 15.2 13.7


11 7 2


What drives our opinionWe expect continued challenges in its Gulfstream aerospace businessto weigh on earnings growth and see GD's stock performing in linewith the sector. Business jet buying sentiment has continued to beweak which could also get added focus given COVID-19 headwinds.Thus, we believe it is less likely for the stock to rerate in the nearterm. GD's defense business is positioned well for growth, but it isnot enough to offset sluggishness at Gulfstream. Risks to the down-side are weakness in domestic or international defense budgets anda renewed downturn in the business jet market. Upside risks are abetter demand environment for business jets and higher US defensebudget.

While General Dynamics should benefit from an improvement in theirdefense businesses, negative business jet sentiment likely keeps thestock from outperforming. GD's aerospace business is currently 40%of company profits. The company is currently undergoing a producttransition as it brings in new plane models on the high end, whichcould depress near-term demand and margins for other models. Fur-thermore, we are concerned that the acquisition of government ITprovider CSRA is becoming a tougher integration than expected.Growth for the division has been lower than expected.

GD's defense businesses should remain strong on the back of increas-ing defense spending in the US and abroad and still enable the com-pany to grow earnings in that division. The combat units should seemid to high single digit revenue growth based on some large winsfrom Saudi Arabia and the UK. The marine business has been steadyand should see growth from the Ohio class replacement program thatshould start to ramp up over the next few years. The balance sheet forGD is strong and can be used to return cash to shareholders throughstock buybacks or acquisitions.



General Electric Co.: BellwetherGeneral Electric develops and manufactures products for the generation, transmission, distribution, control and utilizationof electricity, aircraft engines and medical equipment. Its product and services range from aircraft engines, powergeneration, oil and gas production equipment, to medical imaging, financing and industrial products. It operates in sevensegments Power, Renewable Energy, Oil and Gas, Aviation, Healthcare, Transportation, and Lighting, and GE Capital.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.30 151,430 255,050.0 115,035


Revenues ($M) 79,619.00 80,840.10 85,098.55

Net Income ($M) 109.0 2,268.8 4,620.5

EV/EBITDA (x) 20.5 16.8 12.5

EPS ($) 0.01 0.25 0.47

P/E (x) 1,312.0 51.9 28.0


14 7 0


What drives our opinionWe view GE as performing in line with the sector due to concernsover their weak free cash flow conversion balanced by the potentialimprovement in their balance sheet. GE's cash conversion has laggedits competitors due to recurring gains and accounting recognitionmethods, making its true earnings power somewhat lower than itappears. New management has stabilized operations and improvedits balance sheet, but future growth appears muted. Cash flow is likelyto improve as aviation rebounds, but we believe this is reflected in thestock's current valuation. The downside risks to our view are weakeraerospace and power markets; upside risks are better than expectedearnings and cash flow.

GE's earnings have been under significant pressure over the past sev-eral years due to weakness in its power, oil and gas and transporta-tion segments. The power business is suffering from a combinationof weak demand and overcapacity in the industry. GE's oil and gasbusinesses was also more focused on deep water and subsea areasthat were materially impacted by lower oil prices. Management resetexpectations in 2019, which led to a material reduction in earningsand cash flow guidance. The outlook for 2020 was for improvement,but the impact from COVID-19 likely continues to keep any recoveryon hold in the near term. Its major profitable segment of aviation hasweakened significantly with the recent decline in air traffic.

The current CEO, Larry Culp, is highly regarded, but we believe anyturnaround will likely take time. While we do not see GE as having liq-uidity issues, the focus on reducing leverage could impact the longer-term value of the equity. Deleveraging moves such as asset sales arelikely to be dilutive to earnings power, but should have the positiveimpact in reducing the need for a capital raise. With the stock's cashflow valuation in excess of peers despite their weak cash conversion,we find the risk/reward in the shares as fairly balanced currently.



Huntington Ingalls: BellwetherHuntington Ingalls Industries, Inc. engages in the shipbuilding business. It operates through the following businesssegments: Ingalls, Newport News, and Technical Solutions. The Ingalls segment develops and constructs non-nuclear ships,assault ships, and surface combatants. The Newport News segment designs, builds, and maintains nuclear-powered shipswhich include aircraft carriers and submarines. The Technical Solutions segment provides professional services, includingfleet support, integrated missions solutions, nuclear and environmental, and oil and gas services.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

2.25 9,006 8,741.0 7,584


Revenues ($M) 9,361.00 9,256.53 9,572.17

Net Income ($M) 696.0 482.3 564.2

EV/EBITDA (x) 8.0 11.1 10.0

EPS ($) 17.14 12.28 14.63

P/E (x) 11.0 15.3 12.9


5 8 1


What drives our opinionAlthough we find HII's position in the shipbuilding segment of thedefense market to be attractive, this is currently balanced by near-term revenue and cash flow growth that we believe could likely lagpeers. Thus, we see the risk/reward as fairly balanced. Company guid-ance has been somewhat disappointing with limited near-term mar-gin growth which again was lowered in 2020. Faster growth in rev-enues or margins is the upside risk in the stock at this point and couldmake us more favorable on the HII story. Downside risk is a lower USdefense budget, execution issues on new programs and weaker thanexpected margins.

The recent strength in the navy's shipbuilding budgets should giveHuntington visibility for sales growth over the next several 3-5 yearsas new projects begin to ramp up. Huntington is the largest US shipbuilder with exposure to carriers, attack ships and submarines. Therehas been a lot of upward pressure from Congress to increase the ship-building budget and modernize and expand the size of the Naval forcein the US. However, this visibility is balanced by muted sales growthand margin pressure from new projects in the near term.

While HII trades at a discount to its defense peers, we believe thisis deserved due to its lower sales growth and overall lack of projectdiversification. The company should also have a larger drag from low-er pension income than peers in the near term. Execution for the com-pany has still been spotty and is a risk given the current ramp up indevelopment work. We could become more favorable on the stockif we were to see a better sales ramp and rebound in margins. Thecompany has a relatively unlevered balance sheet that could also pro-vide upside if the company decides to be more aggressive with cap-ital deployment to boost growth. Its smaller size could also make itattractive to a larger firm seeking to gain exposure to this segment.



Johnson Controls: BellwetherJohnson Controls International plc, headquartered in Cork, Ireland, is a global diversified technology and multi industrialleader serving a wide range of customers in more than 150 countries. The Company is a global market leader inengineering, developing, manufacturing and installing building products and systems around the world, including heating,ventilating, air-conditioning ("HVAC") equipment, HVAC controls, energy-management systems, security systems, firedetection systems and fire suppression solutions.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.85 49,311 40,815.0 40,407


Revenues ($M) 22,317.00 23,257.90 24,308.75

Net Income ($M) 1,688.0 1,843.3 2,069.8

EV/EBITDA (x) 15.0 13.6 12.3

EPS ($) 2.24 2.55 2.92

P/E (x) 25.0 22.0 19.2


9 9 0


What drives our opinionWe view the risk/reward on JCI shares as balanced as we believe thecurrent stock valuation reflects recent improvements in their business-es. The sale of their battery power division greatly helped improvecash flow and reduced the cyclicality of their business. This has ledto an overall revaluation of the stock. JCI's operates in the attractiveHVAC market that has seen very strong demand in light of stay athome activity with COVID-19. While positive, there is an increasedrisk that this could borrow from 2021 earnings. The upside risk to ourview is better organic growth, and cash flow; downside risk includesmarket share loss, weak cash flow and a decline in nonresidentialconstruction.

We also remain concerned that JCI's organic growth could lag peersdue to their higher exposure to weak nonresidential markets thatcould likely have a tough 2021. Earnings, however, should continueto be supported by deploying proceeds from the sale of their batterypower business. The sale also had the benefit of reducing the cyclical-ity of their overall business mix as services now comprise about 25%are are relatively stable. The sale also removed a weakening businessthat was not a good fit with the rest of the company, but was dilu-tive to overall near term earnings power. Cash flow as a result hasimproved to near 100% after several weak years which has been abenefit to its overall stock valuation.

Recent trends in their core businesses have been favorable, but withthe stock back past prior high levels we see the risk/reward on theshares as balanced currently. Its heating and air conditioning (HVAC)business while strong appears to be losing share to competitors thathave better offerings.

With an increased focus by JCI on its HVAC business, any consolida-tion in the industry would likely be seen as positive. Furthermore, anyfurther acceleration in cash flow and organic sales from a large infra-structure bill could also make us more favorable on the stock in thenear term.



Lennox International: BellwetherLennox International, Inc. engages in the design, manufacture, and marketing of products for heating, ventilation, airconditioning, and refrigeration. It operates through the following business segments: Residential Heating and Cooling,Commercial Heating and Cooling, and Refrigeration. The Residential Heating and Cooling segment manufactures andmarkets furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment, and accessories.The Commercial Heating and Cooling segment sells unitary heating and cooling equipment used in light commercialapplications.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.08 12,043 2,032.5 10,906


Revenues ($M) 3,634.10 3,846.55 4,021.94

Net Income ($M) 383.1 420.5 455.4

EV/EBITDA (x) 20.4 18.6 17.4

EPS ($) 9.94 11.09 12.34

P/E (x) 28.7 25.7 23.1


1 12 4


What drives our opinionWhile we have a high regard for management and its growthprospects, we believe these positives are currently reflected in thevaluation premium afforded the stock. Thus, we see the currentrisk/reward on the shares as balanced currently. Lennox is a leadingprovider of climate controls for the heating, ventilation and air con-ditioning markets (HVAC). Its US focus could be seen as a relativenear-term positive given the recent trade war with China and slowingglobal economy. Upside risks to our view are increased market share,industry consolidation and improved US construction markets. Down-side risks are weaker pricing and market share loss and any downturnin US construction.

Lennox earnings rebounded as it anniversaried the drag of higher rawmaterial costs and the sales impact from tornado damage. However,it has been more difficult than expected for Lennox to regain its lostmarket share. Any continued discounting to win back market sharelosses could limit longer-term earnings growth. Increased consolida-tion is a potential positive catalyst that could make us more favorableon the shares and could become more likely with recent peer spinoutsof their HVAC businesses.

Lennox has been a proven share gainer in the HVAC markets thathas led to above-average earnings growth over the last cycle. It hasachieved these market share gains through superior quality and ser-vice while controlling their distribution network through the build outof its PartsPlus network of stores. Through the cycle, the HVAC mar-ket has also been strong due to rebounding residential and non-res-idential construction markets along with a strong replacement cycledue to increased energy efficiency demands. Continued improvementin efficiency standards should further increase the demand for newHVAC units, which makes this industry one of the more attractiveones in the industrial sector, in our opinion.



Norfolk Southern: BellwetherNorfolk Southern is primarily engaged in the rail transportation of raw materials, intermediate products, and finishedgoods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of UnitedStates. The company also transports overseas freight through several Atlantic and Gulf Coast ports. Its major services arefor agricultural, coal, intermodal, chemical, automotive and industrial products.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.53 75,610 38,414.0 61,925


Revenues ($M) 9,800.00 10,746.61 11,310.29

Net Income ($M) 2,375.0 2,802.0 3,072.5

EV/EBITDA (x) 16.0 13.7 12.7

EPS ($) 9.25 11.26 12.76

P/E (x) 26.6 21.8 19.3


15 7 2


What drives our opinionWe have a Bellwether view on the shares of Norfolk Southern as wesee the stock's recent performance reflecting its operational improve-ments. The company has greatly improved service metrics across itsrailroad which should help lower costs over time. However, NSC isrelying more on future price increases for margin improvement versuscosts cuts, which we think is a tougher formula for earnings growth.Peers appear more aggressive on the cost side. Thus we see the risk/reward in NSC shares as currently balanced. The major risks to ourview are weaker volume and pricing and any rollback in their costcutting programs on the downside; with better costs, volumes andpricing on the upside.

NSC stock has outperformed in the past year on improved service met-rics and higher margins. However, the company is planning on relyingmore on future price increases for operational margin improvementswhich could be tough to attain in the slower freight market that wehave seen recently. Thus, we expect their margin improvements tolag peers in the near-term and see the stock as performing in linewith the sector. Other rails are being more aggressive on adoptingprecision scheduled railroading which should drive even faster marginimprovements.

NSC has also gained market share from competitor CSX in the pastyear as CSX works to cull lower margin business. With CSX servicemetrics now among the best in the industry we believe they couldbegin to win back some of the lost business from NSC and put pres-sure on their volumes.

Longer-term, NSC management has enacted a cost-cutting plan toimprove their operating ratio to 60% by 2021. Since then, however,its close peer CSX has been taken over by new management andreduced this ratio to below 60% in 2019. We believe this could putpressure on Norfolk to cut costs further longer term. Any change inmanagement or more aggressive moves to cut costs would likely resultin a more interesting stock versus our current expectations.



Republic Services Inc.: BellwetherRSG provides integrated waste management services, which offers non-hazardous solid waste collection, transfer,recycling, disposal and energy services. It operates in 40 states and Puerto Rico through 343 collection operations, 204transfer stations, 195 active landfills, 90 recycling centers. The company was founded in 1996 and is headquartered inPhoenix, AZ. In 2008 RSG purchased Allied Waste, which substantially increased its size and presence in the market.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.85 37,795 23,434.0 28,570


Revenues ($M) 10,153.60 10,791.86 11,255.41

Net Income ($M) 1,137.8 1,179.5 1,285.3

EPS ($) 3.56 3.69 4.09

P/E (x) 25.2 24.3 21.9


7 8 0


What drives our opinionWe see the risk/reward on RSG shares as balanced as we believe itsvaluation currently reflects its improving growth prospects. Earningsfor the company should continue to benefit from the reopening ofthe economy, but should have less upside from the cyclical recoverywe expect to continue in 2021. Furthermore, RSG is more exposed toany increase in corporate tax rates under the incoming Biden Admin-istration. We still expect better pricing and volume from a growingeconomy, coupled with cash deployment, to result in a 9-10% earn-ings growth rate for RSG over time. The risks to our view are weakerwaste volume and pricing on the downside, with improved volumesand pricing on the upside.

The waste management industry is a defensive/late-cycle one thatshould benefit from an improving US economy in areas of housingand industrial/commercial activity. This continued growth and a con-solidating industry is also leading to better overall waste pricing. RSGis working to improve pricing further by converting many of their con-tracts to minimum annual increases and away from pricing based onCPI. The waste companies also got a large benefit from tax reform astheir rates were higher than the group. These benefits should also freeup additional cash flow for RSG to spend on accretive stock repur-chases and acquisitions.

However, the waste stocks are less cyclical than the economy over-all and any acceleration in the US economy and will likely see earn-ings growth to lag the sector. Thus, we view the risk/reward on theshares as balanced at its current valuation versus the sector. As thecompany's operations are mostly in the US, their earnings would alsobe more negatively impacted than peers by potentially higher corpo-rate taxes if the Democrats are successful in raising rates. These twofactors will likely keep the stock from outperforming the sector in thenear term, in our opinion.



Rockwell Automation, Inc: BellwetherRockwell Automation is a global supplier of industrial automation equipment, software, and services. The company offersproducts such as control systems, motor control devices, sensors and industrial control panels. The company operates intwo segments, Architecture & Software and Control Products & Solutions segment.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.68 30,560 7,367.3 28,479


Revenues ($M) 6,329.80 6,783.64 7,177.19

Net Income ($M) 1,023.4 979.7 1,066.0

EV/EBITDA (x) 22.6 20.8 18.9

EPS ($) 7.68 8.67 9.48

P/E (x) 31.9 28.3 25.9


7 12 6


What drives our opinionRockwell operates in the sweet spot of industrial capital spending,which is the long-term industrial automation growth cycle. Its posi-tioning should lead to organic growth in excess of the industry, butat an over 15% premium to its peers we believe the stock reflectsthis positive outlook and will likely perform in line with the sector.Its valuation also reflects a premium due to its attractiveness as astrategic asset for a larger player wanting to get exposure to this seg-ment. Upside risks to our view are an acceleration of industrial capitalexpenditures leading to improved sales, and downside risks are over-all weakness in the global economy and lower energy prices.

Rockwell's favorable exposure to the industrial automation marketand a focus on manufacturing productivity should translate into top-line revenue growth that over time should longer-term exceed mostof its electrical/multi-industry peers. Rockwell should also be a majorbeneficiary of potential manufacturing re-shoring that could accel-erate given COVID-19 impacts on the supply chain. Recent growth,however, has been hampered by slowing sales in its automotive andshort cycle exposed businesses. As Rockwell's revenue growth has notbeen better than peers in the last few years, we believe its premiumvaluation could be at risk if growth in automation does not accelerate.

Rockwell is also looking to re-engage on the acquisition front toenhance their already strong organic growth rate. The company's lowleverage has given them capacity for recent acquisitions that haveexpanded their footprint and installed base.

We believe Rockwell should trade at a premium to its peers to reflectits superior long-term organic growth rate, attractive balance sheetand M&A potential; highlighted by the prior takeover attempt byEmerson Electric. However, with the stock trading at a P/E of over28 times 2021 consensus EPS estimates, we believe current valuationfairly reflects these strengths.



Southwest Airlines: BellwetherSouthwest Airlines was formed in 1971 and has grown today into the largest US airline that provides scheduled airtransportation throughout the United States and near-international markets. The company operates 700 planes in over 100cities. The company also launched international service in 2014, ending 2016 with service to 14 international destinationsthrough 13 international gateway cities within the 48 contiguous United States.

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

0.00 31,533 36,573.0 34,153


Revenues ($M) 9,048.00 13,874.65 19,748.94

Net Income ($M) (3,512.0) (1,066.9) 1,753.9

EV/EBITDA (x) 21.2 81.4 8.3

EPS ($) (6.22) (1.92) 2.81

P/E (x) NM NM 20.6


14 6 1


What drives our opinionWe view Southwest as a Bellwether mainly due to its outperformanceover last six months. We still see it benefiting from a rebound in airtraffic with one of the best cost structures and balance sheet in theindustry. The company's recent capital raises and relatively unleveredbalance sheet gives them very strong liquidity and puts them in a goodposition to emerge stronger than peers once the current crisis passes.However, with the stock now back near pre-COVID price levels wesee the risk/reward as more balanced in the near term. The downsiderisk to our view is continued weak air travel demand with the upsidea faster return to normal travel activity.

We see Southwest as one of the strongest players in the airline indus-try that should benefit from a gradual return to normal levels in airtravel activity. The company reduced its cash burn under USD 15ma day by the end of last year, which was better than expected, andranks at the top of peers. Given their lower cost structure, we expecttheir current liquidity of over USD 15bn to last the company well past2021 without any improvement in air travel from currently depressedlevels. The lower cost base means that air travel at only 50%-60%of normal would get Southwest close to breakeven cash flow; fasterthan peers.

However, with the stock rebounding to near pre-COVID level we seeless room for near-term outperformance as the rebound should beginto benefit more stressed players. The risks of a further infection spikeare still substantial and is the largest risk for the stock. Any contin-ued significant concerns over the virus would likely keep air travelbelow levels for the company to become profitable again. However,we believe the company's strong balance sheet and liquidity helpsmitigate these near-term concerns.



Trane Technologies: BellwetherTrane Technologies is the former climate businesses of Ingersoll-Rand Plc. The Climate segment includes transportrefrigeration, residential and commercial heating, ventilation, and air conditioning systems with brands includingTrane ,American Standard and Thermo King.. The Americas will include three strategic business units (SBUs): CommercialHVAC, Residential HVAC and Transport Refrigeration

Key MetricsDividend

Yield (%)

Enterprise

Value ($M)

Total

Assets ($M)

Market

Value ($M)

1.36 40,182 18,156.7 37,040


Revenues ($M) 12,454.70 13,471.31 14,101.95

Net Income ($M) 1,083.4 1,320.1 1,449.7

EV/EBITDA (x) 19.7 17.4 16.2

EPS ($) 4.46 5.42 6.11

P/E (x) 34.8 28.7 25.4


8 14 0


What drives our opinionTrane is the climate control business that was spun out of Inger-soll-Rand last year. Management of Trane has greatly improved itsproduct, culture, and capital allocation over the last five years, whichhas resulted in industry leading earnings growth. However, we seemuch of the improvement reflected in the current valuation and seethe risk/reward as fairly balanced currently. Residential sales growthlikely moderates as it is likely approaching a peak given the upgradecycle over the last several years from the housing bubble in the early2000's. The downside risks to our view are weaker sales and margins,while the upside case is higher sales than we expected.

Trane has refreshed a majority of their product portfolio versus peers,which should lead to further market share gains. We see the spin outof Trane as positive in that it will increase focus and leave the brandas a pure play HVAC player that can participate in future industryconsolidation. Potential sales upside is possible from an infrastructurebill that includes upgrades of buildings to improve efficiency.

The heating, ventilation and cooling (HVAC) sales of Trane have beenhelped by continued growth in non-residential and residential con-struction, despite fears of a near-term peak. Price increases contin-ue to be pushed through in line with improvements in product fea-tures and quality. Growth in non-residential market should improveafter the COVID-19 crisis, but the pace is likely to moderate going for-ward considering the age of the cycle. However, a majority of Trane'sexposure is for replacement sales which shouldn't be impacted by anyweakness in new construction.

The residential replacement market is likely to moderate as it cyclesoff some strong years impacted by higher than normal replacementdemand. Their transportation refrigeration truck orders have recentlyimproved from depressed levels and could benefit from vaccine trans-portation demand in 2021.



Sector financial highlights - Industrials

Name Ticker Price Industry Market P/E 1 yr

Group High Low cap* forward

3M Company MMM Bellwether 184.57 Capital Goods 187.27 114.04 Large 18.9

Acuity Brands, Inc. AYI Not Rated 135.01 Capital Goods 136.90 67.46 Mid 16.0

Allegion PLC ALLE Not Rated 115.00 Capital Goods 121.33 77.37 Large 23.8

AMETEK, Inc. AME Not Rated 121.91 Capital Goods 125.81 54.82 Large 27.6

Arconic,Inc. ARNC Not Rated 31.05 Capital Goods 31.59 5.80 Mid 14.5

Boeing Co BA Most Preferred 252.00 Capital Goods 256.65 89.00 Large 242.5

Caterpillar Inc. CAT Bellwether 219.76 Capital Goods 226.67 87.50 Large 26.0

Crane Co CR Bellwether 91.78 Capital Goods 92.61 36.77 Mid 17.4

Cummins Inc. CMI Bellwether 269.80 Capital Goods 274.06 101.03 Large 18.6

Deere & Co DE Bellwether 364.46 Capital Goods 366.82 106.14 Large 21.9

Dover Corporation DOV Not Rated 133.86 Capital Goods 134.88 62.95 Large 20.8

Eaton Corp. Plc ETN Not Rated 139.21 Capital Goods 141.37 56.42 Large 24.0

Emerson Electric Co. EMR Not Rated 91.31 Capital Goods 93.38 37.75 Large 23.3

Fastenal Company FAST Not Rated 46.37 Capital Goods 51.89 26.72 Large 29.6

Flowserve Corporation FLS Not Rated 40.81 Capital Goods 42.14 18.98 Mid 25.7

Fluor Corp FLR Not Rated 20.94 Capital Goods 21.50 2.85 Mid 23.7

Fortive Corp. FTV Most Preferred 68.18 Capital Goods 82.12 37.31 Large 26.4

Fortune Brands Home & Security FBHS Not Rated 89.45 Capital Goods 93.40 33.90 Large 17.6

General Dynamics Corp GD Bellwether 172.67 Capital Goods 175.27 100.55 Large 15.5

General Electric Co GE Bellwether 12.27 Capital Goods 14.42 5.48 Large 41.5

Honeywell International Inc. HON Most Preferred 212.50 Capital Goods 216.70 101.08 Large 26.5

Illinois Tool Works Inc. ITW Not Rated 213.05 Capital Goods 224.69 115.94 Large 26.7

Ingersoll-Rand Plc IR Not Rated 49.02 Capital Goods 51.61 17.01 Large 25.3

Jacobs Engineering Group Inc. JEC Not Rated 125.06 Capital Goods 127.00 59.29 Large 20.3

Johnson Controls Intl plc JCI Bellwether 61.09 Capital Goods 61.41 22.78 Large 22.5

Lockheed Martin Corp LMT Most Preferred 339.73 Capital Goods 417.62 266.11 Large 12.8

Masco Corp MAS Not Rated 57.05 Capital Goods 60.16 27.04 Large 16.6

Northrop Grumman Corp NOC Not Rated 299.41 Capital Goods 357.12 263.31 Large 12.6

PACCAR Inc PCAR Not Rated 97.75 Capital Goods 103.19 49.11 Large 16.2

Parker-Hannifin Corp PH Most Preferred 308.27 Capital Goods 313.79 93.00 Large 20.3

Pentair plc PNR Not Rated 60.12 Capital Goods 61.00 22.01 Mid 21.6

Quanta Services, Inc. PWR Not Rated 87.41 Capital Goods 88.25 23.77 Large 20.1

Rockwell Automation, Inc. ROK Bellwether 264.25 Capital Goods 268.91 115.38 Large 28.7

Roper Technologies, Inc. ROP Not Rated 387.44 Capital Goods 455.72 240.00 Large 26.0

Snap-on Incorporated SNA Not Rated 214.80 Capital Goods 221.59 90.72 Large 17.2

Stanley Black & Decker, Inc. SWK Most Preferred 191.98 Capital Goods 195.00 70.00 Large 18.4

Textron Inc. TXT Not Rated 53.22 Capital Goods 54.16 20.26 Large 18.5

TransDigm Group TDG Not Rated 597.29 Capital Goods 625.05 200.06 Large 43.9

United Rentals, Inc. URI Not Rated 310.78 Capital Goods 321.94 58.85 Large 16.5

United Technologies Corp UTX Not Rated 77.05 Capital Goods 110.77 48.05 Large 19.9

W.W. Grainger, Inc. GWW Not Rated 386.67 Capital Goods 427.90 200.61 Large 20.5

Xylem Inc. XYL Not Rated 101.06 Capital Goods 108.84 54.62 Large 38.0

Cintas Corporation CTAS Not Rated 360.04 Commercial & Pro Svcs 369.20 154.33 Large 36.1

Equifax Inc. EFX Not Rated 170.72 Commercial & Pro Svcs 196.47 103.01 Large 25.5

Health Services Group HCSG Not Rated 29.48 Commercial & Pro Svcs 35.80 15.80 Mid 25.7

Nielsen Holdings Plc NLSN Not Rated 26.06 Commercial & Pro Svcs 26.54 11.62 Mid 16.4

Republic Services, Inc. RSG Bellwether 95.20 Commercial & Pro Svcs 103.79 65.37 Large 25.3

Robert Half International Inc. RHI Not Rated 77.34 Commercial & Pro Svcs 83.50 32.38 Mid 22.3

Stericycle, Inc. SRCL Not Rated 68.67 Commercial & Pro Svcs 79.50 38.45 Mid 27.0

Verisk Analytics Inc VRSK Not Rated 173.21 Commercial & Pro Svcs 210.66 116.61 Large 31.3

Waste Management, Inc. WM Not Rated 120.00 Commercial & Pro Svcs 125.56 85.34 Large 25.0

52 Week



Sector financial highlights - Industrials

Name Ticker Price Industry Market P/E 1 yr

Group High Low cap* forward

52 Week

Alaska Air Group, Inc. ALK Not Rated 65.69 Transportation 69.17 20.02 Mid NA

American Airlines Group, Inc. AAL Not Rated 22.15 Transportation 22.80 8.25 Large NA

C.H. Robinson Worldwide, Inc. CHRW Not Rated 94.53 Transportation 106.75 56.94 Large 21.6

CSX Corp CSX Most Preferred 93.82 Transportation 97.54 46.81 Large 21.0

Delta Air Lines, Inc. DAL Most Preferred 48.32 Transportation 50.20 17.51 Large NA

Expeditors Intl of Washington, Inc. EXPD Not Rated 99.04 Transportation 99.36 52.55 Large 23.5

FedEx Corporation FDX Bellwether 268.49 Transportation 305.66 88.69 Large 14.4

J.B. Hunt Transport Services, Inc. JBHT Not Rated 159.29 Transportation 164.30 75.29 Large 25.5

Kansas City Southern KSU Most Preferred 214.86 Transportation 223.59 92.86 Large 23.0

Norfolk Southern Corp NSC Bellwether 260.75 Transportation 264.86 112.62 Large 22.8

Ryder System, Inc. R Not Rated 78.94 Transportation 79.15 22.62 Mid NA

Southwest Airlines Co. LUV Bellwether 58.47 Transportation 60.70 22.47 Large NA

Union Pacific Corp UNP Most Preferred 214.52 Transportation 221.28 105.08 Large 22.0

United Continental Holdings, Inc. UAL Not Rated 54.06 Transportation 55.93 17.80 Large NA

United Parcel Service, Inc. Class B UPS Most Preferred 167.24 Transportation 178.01 82.00 Large 18.4

*Small (<USD 2bn), Mid (USD 2-10bn), Large (>USD 10bn)

Source: Factset, UBS as of 11 Mar 2021



Sector Snapshot - Industrials

Capital GoodsCommercial and

Professional ServicesTransportation Sector

Weighting Neutral Neutral Most Preferred

Key Themes Automation/digitalization e-commerce

N America energy independence Restructuring/M&A

Restructruing/M&A

Performance (%)

Absolute

1 month 7.2% 1.0% 6.5% 6.52%

3 months 9.6% 0.9% 6.4% 8.08%

6 months 28.2% 10.5% 17.9% 24.16%

12 months 47.5% 29.5% 68.1% 49.98%

Relative

1 month 0.7% -5.5% 0.0%

3 months 1.5% -7.2% -1.7%

6 months 4.1% -13.6% -6.2%

12 months -2.5% -20.5% 18.1%

No of companies in subsector 47 12 15 74

Subsector Market Cap (USD m) 1,954,051.11 259,719.66 654,935.95 2,868,706.72

Subsector weightings 68.12% 9.05% 22.83% 100.00%

Top subsector weights (%)

HON 7.6% WM 18.0% UNP 22.1% HON 5.2%

CAT 6.1% CTAS 12.2% CSX 11.0% BA 4.7%

RTX 6.0% VRSK 10.8% NSC 10.1% UPS 4.2%

DE 5.8% CPRT 8.8% FDX 9.9% CAT 4.2%

GE 5.5% EFX 8.0% LUV 5.3% RTX 4.1%

MMM 5.4% RSG 7.7% DAL 4.7% DE 4.0%

LMT 4.3% J 6.2% ODFL 3.4% GE 3.7%

ITW 3.1% LDOS 4.9% KSU 3.1% MMM 3.7%

ETN 2.8% EXPD 2.6% LMT 2.9%

Source: Factset, UBS as of 11 Mar 2021

Weighting definitions--Most Preferred: The subsector is expected to outperform the sector benchmark in the next 12 months. Neutral: The subsector is expected

to perform broadly in line with the sector benchmark in the next 12 months. Least Preferred: The subsector is expected to underperform the sector benchmark in



Recent recommendationsCompany Change CommentHealthcare Services Group Not Rated We are dropping coverage of HCSG. We no longer see the stock as a

Bellwether given the continued pressure on its revenues and marginsthat are likely to persist for the forseeeable future.

Ingersoll-Rand Not Rated The Ingersoll-Rand company is now a product of the merger of itsindustrial businesses with peer company of Gardner Denver. As themajority business of the old Ingersoll Rand will be spun out in a separatecompany of Trane (TT), rated Bellwether, we are dropping coverage onIngersoll-Rand. All previous ratings and estimates should not be reliedon.

Raytheon Co. Not Rated We are dropping coverage of Raytheon as they are merging with UnitedTechnologies and will no longer trade. Our prior estimates and ratingsshould no longer be relied upon.

United Technologies Corp. Not Rated We are removing United Technologies from the Most Preferred the listand discontinuing coverage as they are merging with Raytheon and thestock will no longer trade. Our prior estimates and ratings should nolonger be relied upon.

Boeing Co. Most Preferred We believe the stock's valuation is now more reflective of the currentdepressed environment, but does not discount the potential positives ofa COVID-19 vaccine and gradual return to normal of air travel. Longerterm, we still see air travel in a secular upturn, which should benefitBoeing once the environment normalizes.

CSX Corp. Most Preferred CSX has greatly improved operations over the past year through cost-cutting and instituting precision railroading that was pioneered byformer CEO Hunter Harrison. 2020 was more of a transition year asthe company cycles through lower coal pricing and profitability, buttheir focus on costs should lead to material cost leverage when volumesrebound this year.

Delta Air Lines Inc. Most Preferred We see Delta as Most Preferred list as we believe its current valuation isattractive considering the increased probability of a vaccine to addressCOVID-19 in the near term. A vaccine and the resulting lower infectionrates should lead to improved flying activity over time. The company'srecent capital raises gives them liquidity and should carry them forseveral years without raising additional capital.

Emerson Electric Co. Most Preferred We see Emerson as Most Preferred as we expect an acceleration incompany revenues over the next year with a valuation at a discount topeers. The company has a large exposure to process automation thatshould see benefits from improving spending from oil & gas.

Fortive Corp Most Preferred We view Fortive as Most Preferred as we believe the stock does notreflect the potential for improving sales trends post COVID-19. Fortiverecently split off its transportatiion technologies businesses that webelieve should unlock value. Management of the company is primarilyfrom Danaher with a strong background in cost control and M&Awhich has added faster growth and increased recurring revenue to theportfolio.

Honeywell International Inc. Most Preferred We see Honeywell as favorably exposed to the major growth themesof automation, environmental, and energy solutions. Management isexpected to have a renewed focus on top-line growth and valued-added business portfolio changes. An underleveraged balance sheetprovides a future catalyst from M&A and capital return.



Kansas City Southern Most Preferred We view KSU as Most Preferred as we see its implementation ofprecision scheduled railroading (PSR) as improving overall serviceissues that have plagued the company and should lead to improvedprofitability. KSU's should see continued improvements in operatingratios that should exceed peers with higher volume growth due toexpanding trade in the US-Mexico corridor.

Lockheed Martin Corp. Most Preferred Lockheed is favorably exposed toward areas of increasing globaldemand within defense such as aeronautics, missile, and missiledefense. The company's F-35 program should drive earnings growththrough the end of this decade. We believe annual free cash flow ofover USD 6bn gives the stock an attractive free cash flow yield.

Parker-Hannifin Most Preferred We expect Parker Hannifin to benefit from an improved economicclimate, a radical change in management culture, and the acquisitionof Clarcor Inc., which we regard as a strategic positive fit. Thesefactors make Parker an attractive self-help story that should allow it tooutperform peers, in our view.

Raytheon Technologies Most Preferred The combination of the UTX aerospace division with Raytheon shouldcreate a more formidable competitor with a superior balance sheet.The Collins aerospace division acquisition in 2018 was very accretive toearnings and enhanced UTX's competitive profile. The defense divisionshould be a prime beneficiary from a larger US defense budget andincreasing demand for defense services around the globe.

Stanley Black & Decker Most Preferred We view SWK as Most Preferred as we see an improvement in organicsales coupled with less headwinds from higher costs that hurt earningsgrowth in 2018-19. Earnings going forward should be helped from lastyear's turnaround primarily from improved sales and cost initiatives.One likely growth avenue is exercising their option in 2021 to buy theremaining 80% stake in outdoor tools maker MTD.

Union Pacific Most Preferred We expect Union Pacific to benefit from an improvement inmargins from better rail pricing and cost improvements. UNP recentlyannounced a move to adopt precision railroading which if successfulcould materially improve margins; as was done at peer company CSX.We believe its superior balance sheet should lead to solid capital returnto shareholders.

United Airlines Most Preferred We view UAL as Most Preferred considering the potential benefit ofseveral vaccines to address COVID-19 over the near term. A vaccineand the resulting lower infection rates should lead to improved flyingactivity over time and materially improve the company's cash flow.

United Parcel Service Inc. Most Preferred We view UPS as Most Preferred as we believe the new managementis likely to make changes to significantly improve the pricing andprofitability of its businesses. This is evident from recent price increasesfor the industry which are more significant than we have seenpreviously. Future opportunity for UPS is improving profitability througha focus on costs and a better not bigger philosophy.

3M Co. Bellwether Over the last few years management has made successful moves toremake 3M as a better run and leaner company. However, we areconcerned that continued pressure on sales growth could serve toerode some the stock's valuation versus peers. Environmental liability isanother risk to its valuation given increased lawsuits recently, althoughthis should not be material enough to impair the overall balance sheetof the company.



Caterpillar Inc. Bellwether We expect strong growth in construction and mining to support arebound in earnings over the 2021-22 time period. However, with thestock near 27 times this year's earnings we believe this rebound isexpected by shareholders and reflected in its current stock price.

Crane Co. Bellwether We see the risk/reward for Crane as balanced as we see headwindsimpacting earnings growth for 2020 that should limit near term stockoutperformance over the next 6-12 months. Longer-term, we expectCrane to return to double digit growth in 2021-23.

Cummins Bellwether We view the risk/reward on CMI shares as balanced given the stock'sstrong performance this year likely reflects an expected rebound in UStruck demand. Higher than expected profit margins or a longer truckcycle could make us more positive on the stock.

Deere & Co. Bellwether We view Deere as Bellwether as we believe its stock valuation isnow more reflective of the favorable trade resolution with China andimproved crop markets. Increased buying of crops from China andweather disruptions has led to materially higher crop prices and shouldcontinue to boost demand for ag machinery.

FedEx Corp. Bellwether We see the risk/reward for FDX shares as currently balanced giventhe recent run-up in the shares in response to recent pricingannouncements. We are also concerned that further economicweakness in Europe could pose additional challenges in the integrationof its TNT business near term.

General Dynamics Corp. Bellwether We see General Dynamics shares as a market performer as we expectcontinued challenges in its Gulfstream aerospace business to weighon earnings growth. The segment is undergoing a product transitioninto new models that’s likely to pressure margins and income growth.GD's defense businesses, however, should remain strong on the backof increasing defense spending in the US and abroad.

General Electric Co. Bellwether We view GE as performing in line with the sector due to concerns overtheir weak free cash flow conversion. New management has stabilizedoperations and improved its balance sheet, but growth appears muted.We believe the restructuring moves by the company can result in amore interesting stock, but any turnaround will likely take time.

Huntington Ingalls Bellwether While we find HII's position in the shipbuilding portion of the defensemarket to be favorable, that is currently balanced by near-term revenueand cash flow growth that lag peers. Thus, we see the risk/reward asfairly balanced.

Johnson Controls Bellwether The recent stabilization and improvement in organic growth is apositive, but we believe this is currently reflected in the stocks recentoutperformance and current valuation. Any further acceleration in cashflow and organic sales could make us more favorable on the stock inthe near term.

Lennox International Bellwether While we have a high regard for management and the company'sgrowth prospects, we believe these positives are currently reflected inthe valuation premium afforded the stock. Thus, we see the currentrisk/reward on the shares as balanced currently.

Norfolk Southern Bellwether We believe Norfolk Southern is well positioned for continuedimprovement in its rail volumes and costs that should drive stronggrowth in earnings. However, we believe the stock's valuation reflectsmuch of the improved outlook. As a result, we see the risk/reward inNSC shares as currently balanced.



Republic Services Inc. Bellwether The waste stocks are less cyclical than the economy overall and anyacceleration in the US economy will likely cause earnings growth to lagthe sector. Thus, we see the risk/reward on the shares as balanced attheir current valuation versus the sector. As the company's operationsare mostly in the US, their earnings also should be more negativelyimpacted than peers by any higher corporate taxes

Rockwell Automation, Inc Bellwether Rockwell operates in the sweet spot of industrial capital spending beingthe long-term industrial automation growth cycle. The company'spositioning should lead to organic growth in excess of the industry, butat an over 15% premium to its peers we believe the stock fairly reflectsthis positive outlook and see it as a sector performer.

Southwest Airlines Bellwether We still see Southwest benefiting from a rebound in air traffic with oneof the best cost structures and balance sheet in the industry. However,with the stock now back near pre-COVID price levels we see the risk/reward as more balanced in the near term.

Trane Technologies Bellwether Management of Trane has greatly improved its product, culture, andcapital allocation over the last five years, which has resulted in industryleading earnings growth. However, we see much of the improvementreflected in the current valuation and see the risk/reward as fairlybalanced currently.



Appendix

Sector Allocation

Note: Scale represents degree of preference relative to the S&P 500 benchmark allocation.

Source: UBS, as of 11 February 2021

Tactical preferences from benchmark

Utilities

Energy

Least preferred Most preferred

Financials

Healthcare

Industrials

Communication services

Materials

Technology

Real estate

Consumer staples

Consumer discretionary

- - + ++- - - +++- n

- moderately less preferred

- - less preferred

- - - least preferred

+ moderately preferred

+ + preferred

+ + + most preferred

n = neutralnew

old

Disclosures (12 March 2021)3M Co. 1, 2, 3, Boeing Co. 1, 2, 3, 5, 12, Caterpillar Inc. 1, 2, 3, 6, Crane Co. 1, 4, 11, CSX Corp. 1, 2, 3, 6, 7, 10,Cummins 1, Deere & Co. 1, 2, 3, Delta Air Lines Inc. 1, 5, 6, 7, 11, 12, Emerson Electric Co. 1, FedEx Corp. 1, 5, FortiveCorp 1, General Dynamics Corp. 1, 2, 3, General Electric Co. 1, 2, 3, 5, 6, 7, 9, 13, Honeywell International Inc. 1, 2,3, 4, Huntington Ingalls 1, 5, Johnson Controls 1, 2, 3, Kansas City Southern 1, 2, 3, Lennox International 1, LockheedMartin Corp. 1, 2, 3, 4, 5, 8, 9, Norfolk Southern 1, 2, 3, Parker-Hannifin 1, 2, 3, 11, 14; Raytheon Technologies 1,2, 3, 5, Republic Services Inc. 1, 4, Rockwell Automation, Inc 1, 4, 11, Southwest Airlines 1, 2, 3, 12, Stanley Black &Decker 1, 2, 3, Trane Technologies 1, 2, 3, Union Pacific 1, 2, 3, 5, United Airlines 1, 12, United Parcel Service Inc. 1, 2,3, 5, 6, 7, 8, 9,

1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services otherthan investment banking services from this company.4. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.5. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products andservices other than investment banking services from this company/entity.6. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment bankingservices from this company/entity or one of its affiliates.7. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investmentbanking services are being, or have been, provided.



Appendix

8. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investmentbanking securities-related services are being, or have been, provided.9. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securitiesservices are being, or have been, provided.10. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement ofsecurities of this company/entity or one of its affiliates within the past 12 months.11. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company's common equitysecurities as of last month's end (or the prior month's end if this report is dated less than 10 days after the most recentmonth's end).12. Because this security exhibits higher-than-average volatility, the FSR has been set at 15% above the MRA for a Buyrating, and at -15% below the MRA for a Sell rating (compared with 6/-6% under the normal rating system).13. The UBS Wealth Management strategist, a member of his or her team, or one of their household members has along common stock position in this company.14. UBS Financial Services Inc. its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issuedshare capital of this company.

Required Disclosures

For a complete set of required disclosures relating to the companies that are the subject of this report, please maila request to UBS CIO Global Wealth Management Business Management, 1285 Avenue of the Americas, 8th Floor,Avenue of the Americas, New York, NY 10019.

Companies mentioned in this report (12 March 2021):Boeing Co. (BA - Most Preferred, $252.00), Caterpillar Inc. (CAT - Bellwether, $219.76), Cummins (CMI - Bellwether,$269.80), Crane Co. (CR - Bellwether, $91.78), CSX Corp. (CSX - Most Preferred, $93.82), Delta Air Lines Inc. (DAL- Most Preferred, $48.32), Deere & Co. (DE - Bellwether, $364.46), Emerson Electric Co. (EMR - Most Preferred,$91.31), FedEx Corp. (FDX - Bellwether, $268.49), Fortive Corp (FTV - Most Preferred, $68.18), General Dynamics Corp.(GD - Bellwether, $172.67), General Electric Co. (GE - Bellwether, $12.27), Healthcare Services Group (HCSG - NotRated, $29.48), Huntington Ingalls (HII - Bellwether, $189.91), Honeywell International Inc. (HON - Most Preferred,$212.50), Ingersoll-Rand (IR - Not Rated, $49.02), Johnson Controls (JCI - Bellwether, $61.09), Kansas City Southern(KSU - Most Preferred, $214.86), Lennox International (LII - Bellwether, $292.62), Lockheed Martin Corp. (LMT - MostPreferred, $339.73), Southwest Airlines (LUV - Bellwether, $58.47), 3M Co. (MMM - Bellwether, $184.57), NorfolkSouthern (NSC - Bellwether, $260.75), Parker-Hannifin (PH - Most Preferred, $308.27), Rockwell Automation, Inc (ROK- Bellwether, $264.25), Republic Services Inc. (RSG - Bellwether, $95.20), Raytheon Co. (RTN - Not Rated, $116.96),Raytheon Technologies (RTX - Most Preferred, $77.05), Stanley Black & Decker (SWK - Most Preferred, $191.98), TraneTechnologies (TT - Bellwether, $162.94), United Airlines (UAL - Most Preferred, $54.06), Union Pacific (UNP - MostPreferred, $214.52), United Parcel Service Inc. (UPS - Most Preferred, $167.24), United Technologies Corp. (UTX - NotRated, $86.01)

Analyst certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be,directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the researchreport.

Statement of Risk

Equities - Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology,geopolitical conditions and other important variables.



Appendix

Required Disclosures

CIO Americas, Wealth Management equity selection systemEquity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwetherdesignation.

Rating DefinitionsMost Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next

12 months.

Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in thenext 12 months.

Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sectorstrategist expects the stock to perform broadly in line with the sector benchmark in the next12 months.

*A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment ResearchBuy rated stock cannot be selected as Least Preferred.Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractualor best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investmentbanking transaction in regard to the concerned company.

Equity selection: An assessment relative to a benchmarkEquity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional orthematic benchmark. The chosen benchmark is disclosed on the front page of each EPL.Stocks can be selected for several EPLs. To keep consistency, a stock can only be selected as either Most Preferred or LeastPreferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list towhich they could theoretically be added.



Appendix

Disclaimer

UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Managementbusiness of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS").The investment views have been prepared in accordance with legal requirements designed to promote theindependence of investment research.Instrument/issuer-specific investment research – Risk information:This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sellany investment or other specific product. The analysis contained herein does not constitute a personal recommendationor take into account the particular investment objectives, investment strategies, financial situation and needs of anyspecific recipient. It is based on numerous assumptions. 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Adam Scheiner, CFA, Industrial and Materials Analyst ...

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