Morgan Stanley: Machinery Stocks To Face 'Doom And Gloom,' But This One Stock Could Survive

• Nicole DeBlase of Morgan Stanley noted that machinery investors should beware of the "doom and gloom" ahead of Q3 earnings.
• DeBlase is expecting an "outsized" number of misses.
• DeBlase added she is "tactically bullish" on United Rentals, Inc. URI

Nicole DeBlase of Morgan Stanley cautioned Machinery investors ahead of the group's third quarter earnings. In a report published Wednesday, DeBlase stated that "persistently negative" end market trends should keep investors "cautious," but the "extremely negative sentiment" should make investors "nervous." As such, investors should wait for fiscal 2016 consensus estimates to fall to "more achievable levels" before becoming constructive on the group – an event that could actually catalyze this quarter and spur a year-end rally. "We are inclined to believe that the group could enjoy a rally into year-end," DeBlase wrote. "The predominant reason for this view is asymmetrically bearish investor sentiment; we cannot remember the last time we facilitated a positive conversation on the coverage universe." DeBlase added that machinery stocks tend to outperform in November and December versus the S&P 500 and that any "modestly positive" incremental macro news could "precipitate this outcome." Positive On United Rentals DeBlase pointed out that better than expected European truck market results has resulted in upside to third quarter earnings per share estimates for PACCAR Inc PCAR and WABCO Holdings Inc. WBC Accordingly, the analyst is expecting similar upside for United Rentals, especially when considering the company's management noted at an industry conference in mid-September that it is tracking towards the high-end of its full year EBITDA guidance. DeBlase added that United Rentals is embedding negative year over year rental rates during the back half of 2015 given excess equipment and oil & gas headwinds. However, the analyst suggested that the company may be factoring in a "healthy dose of conservatism" into its outlook as recent checks indicate that 89 percent of dealers expect rental rates to be flat or up sequential this quarter, up from 86 percent in June. Finally, DeBlase stated that despite "choppiness" in US non-residential data this quarter, the market will continue to grow in 2016 and rental rates can return to positive territory, making United Rentals an "attractive" stock at its current price. Shares of United Rentals are Overweight rated with an $86 price target. The company is scheduled to report its third quarter results after market close on 10/14. The consensus estimate is calling for an earnings per share of $2.33 while DeBlase is more bullish with a $2.61 per share estimate.