JPM EE & MI 2012 Outlook_2012-01-06

www.morganmarkets.com

North America Equity Research06 January 2012

EE/MI 2012 OutlookBorn in the USA

Electrical Equipment & Multi-Industry

C. Stephen Tusa, Jr CFA AC

(1-212) 622-6623

[email protected]

J.P. Morgan Securities LLC

Drew Pierson

(1-212) 622-6627

[email protected]


Paul Mammola, CFA

(1-212) 622-6382

[email protected]


Jigar P Vora

(91-22) 6157-3282

[email protected]

J.P. Morgan India Private Limited

See page 101 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

We enter 2012 in a rather patriotic spirit, maintaining our preference for names with earnings close to trough and with exposure to inflecting US late-cycle markets, where we are more optimistic than we have been for some time (admittedly a relative call from a low base). Our global macro caution remains, and we expect a slow start to the year with little upside to standing ’12 estimates, a reason we are not chasing the group. In all, this is less about a refreshed macro call and more about relative opportunities around names that can outperform in a Consensus economy while offering less downside risk in a recession. Our top picks/pairs are GE>EMR, SPW>DOV, and IR.

Macro risks linger, 2012 likely back-end loaded. We’re concerned about Europe/China, favoring the US, but don’t have a major update to our macro call. Indeed, out of key end markets we’d been watching earlier this fall, tech remains weak, Europe short cycle has turned down, while US autos/industrial have held up better. Still, a sluggish 1H12 and added FX headwinds (~2% at present) suggest standing guidance is back-end loaded, and a stretch for some. We remain ~5% below Consensus.

Early-cycle EM to late-cycle US handoff continues. We think 2H11 marked an important inflection away from short-cycle momentum, with a playbook in which later-cycle names drive greater earnings beats and also relative multiple expansion. This call seems more consensus now, but we don’t think sentiment is stretched given orders/revenues still well off of prior peaks.

Key 2012 themes are about mean reversion, at inflection: US T&D/non-res as good US late-cycle, off-the-trough stories (HUB/B, IR, TYC, SPW); commodity price stabilization and margin mean reversion (IR, HUB/B, LII); US HVAC finally beating expectations (LII, IR, WSO); slow 1H12 start driving revision risk (EMR, MMM); near-term volatility putting good franchises at cheap valuations (WBC, ST).

Group risk/reward balanced, low multiples here to stay, but some relative opportunities. We are broadening our valuation framework to include 2012 recession scenarios, plus a bottom-up view of cycle peak (~2015E) and next trough –in this context, valuation for the overall group looks fair. We think secularly lower multiples are here to stay, making re-rating a tough Bull case. Where taking cyclical risk, we prefer names with markets close to trough (GE, SPW, IR), not those already closest to mid-cycle with the most downside risk in recession (ROK, DOV).

Top picks: GE, SPW, IR. GE finally looks to have the wind at its back, with Industrial positioned to outgrow peers for the first time in a decade and a differentiated cash “gusher” at GECS. SPW remains the most compelling pure end-market-leverage play in the group, now with visibility on the key US transformer cycle. IR also makes the top tier, a call on negative sentiment and earnings revision stabilization.

Top avoids: DOV, EMR, MMM. The DOV relative UW remains a call on slowing earnings momentum. At EMR, we see earnings risk and too many questions to justify a continued premium, expecting further underperformance versus peers like GE/HON. MMM maintains “relative safety” characteristics, in our view, but lacks enough cycle upside to justify lingering EPS revision risk.

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C. Stephen Tusa, Jr CFA(1-212) [email protected]

Equity Ratings and Price Targets

Mkt Cap Rating Price TargetCompany Symbol ($ mn) Price ($) Cur Prev Cur PrevGeneral Electric Co. GE 203,010.40 18.55 OW n/c 20.00 19.00Hubbell Inc. HUBB 4,005.20 68.00 OW n/c 69.00 63.00Honeywell HON 41,358.96 55.59 OW n/c 59.00 56.00Sensata ST 4,822.15 26.67 OW n/c 30.00 33.00Wesco WCC 2,747.30 54.51 OW n/c 56.00 50.00Source: Company data, Bloomberg, J.P.Morgan estimates. n/c = no change. All prices as of 05 Jan 12.

Table of Contents2012 Outlook: “Born in the USA”............................................3

Sector Thesis...........................................................................................................4

Key 2012 Themes: Reversion to the Mean, at an Inflection ......................................9

Macro Update: Slow Start to 2012.........................................14

Developed Market Macro Data Bifurcated.............................................................14

China Remains a Swing Factor, and Companies Need to Overcome a Slow Start to 2012......................................................................................................................18

End Market Overview: Early- to Late-Cycle Handoff Continues................................................................................27

Short-Cycle Update: 2H11 Slowing Continues into 2012 .......................................27

Late-Cycle Markets at Inflection............................................................................34

2012/2013 Earnings Outlook..................................................39

A Look Back at 2011 ............................................................................................39

2012 Non-Fundamentals Mostly Dialed In.............................................................41

Growth Assumptions.............................................................................................44

We Remain ~5% Below Consensus, Mostly on Growth .........................................45

Cycle Thoughts: Far from “Normal”, but Late-Cycle Playbook Intact .......................................................................47

Versus Last Cycle, Some High-Level Similarities ..................................................47

Earlier-Cycle Exposures Again Drove the Most Upside in 2011… .........................48

...But in a Normal Upturn, Late-Cycle Should Start to Outperform.........................49

Not All 2012 Earnings Are Created Equal..............................................................53

Valuation .................................................................................56

Price Targets: Sticking with Our Conservative Target Multiple ..............................56

Scenario Analyses Key to an Uncertain 2012.........................................................61

Cycle Peak? A Framework for 2015 Earnings Potential .........................................63

Thinking About Next Trough ................................................................................72

All-In Framework .................................................................................................74

Valuation and Price Target Methodology.............................78

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2012 Outlook: “Born in the USA”

We enter 2012 in a rather patriotic spirit, maintaining our preference for names with earnings close to trough and exposure to inflecting late-cycle markets, with a focus on the US, where we are more optimistic than we have been for some time (admittedly a relative call from a low base). We acknowledge that this view is starting to sound consensus, but we are hard pressed to believe the thesis is played out with orders/revenues still well off peak, and a potential inflection for a multi-year reversion to the mean. In fact, our sector thesis is only slightly changed from a year ago, but plenty has happened to maintain conviction around our view. Although momentum-driven stocks like ROK/DOV continued to beat numbers through 1H11, something we (and Consensus) underestimated, we see 2H11 as the official slowing for the “general industrial” bounce off trough, with a shift to a slower growth environment in which specific late-cycle markets begin to lead. Indeed, as a sign of how things have changed versus late 2010, GE Industrial now looks like the best organic growth guidance in the EE/MI group, while previously shunned end markets such as US power/non-res are being highlighted as the relatively insulated places to be amid a potential China slowing.

Our relative macro caution remains, and even after nearly 10% EPS cuts from the summer peak, we think there is still some dislocation between expectations for trend-like 2012 growth and a macro environment that could be unseasonably weak near term (particularly Europe/China). In other words, there does not appear to be much upside to numbers for now, and a worsening forex headwind does not help the situation. Even our top picks have some potential potholes to navigate over the next several months, and we don’t see valuation for the group as a whole as attractive enough to justify chasing performance near term – we stick to our view that multiples this cycle should be structurally lower than those seen in the past 20 years given a dramatic change from the optimism discounted in the late 1990s.

Nonetheless, our sector view is less about a refreshed call on the macro, as we continue to see relative opportunities around names that can outperform in a Consensus economy while offering less downside risk in a recession. Our top picks are GE, SPW, and IR – all for different reasons – but all names with a US late-cycle flavor that offers significant cycle upside potential. We stick with the earningsvisibility/momentum at HON, HUB/B, and DHR, while we would also use recent market volatility to buy some of the higher-quality mid-caps at a discount (WBC, ST). We continue to avoid short-cycle earnings momentum where earnings are the furthest off trough (DOV, ROK), and do not see enough cycle upside potential at MMM to justify lingering EPS revision risk. We also recommend avoiding EMR, as we see another guidance cut and too many lingering questions to justify a continued premium, expecting further underperformance versus peers like GE.

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Sector Thesis

Macro risks remain – US the best house on a bad block

We have had a more cautious stance on the macro for some time, continuing to seestructural imbalances that will weigh on growth this cycle versus last, and this is reflected in estimates that remain ~5% below Consensus. For the first time in a long time, we think that the US looks like the most fair (relative) risk/reward. We share concerns around Europe (likely a bit worse than Consensus is baking in), and continue to closely watch China as anything short of a 2H11 re-acceleration is likely to be a disappointment versus Consensus – we continue to be skeptical of the “emerging markets” mantra of the past decade. Still, we don’t have much new to say on the macro versus what we have been saying for the past six months, however. Of the key end markets we’d been watching earlier this fall, tech remains weak, Europe short cycle has turned down, while US autos/industrial have held up better –somewhat of a push overall, in our view.

Guidance not conservative in the context of a slower 1H12, forex

We come out of a December guidance season with companies guiding to trend-like ~5% organic revenue growth in 2012, enough to frame Consensus estimates that were down 8% from the July peak, but hardly conservative in the context of a relatively soft 4Q finish (+5% average organic growth, off which normal seasonality implies only 2-3% growth in 2012). The first half should start slowly, with what should be the worst of the European recession and also a soft patch for China, a hole that will be hard to offset even with an improving US picture. With some companies explicitly counting on a restock/normalization in 2H12 (MMM, EMR), in our view most guidance ranges are at best back-end loaded, and at worst could require another round of Street cuts. The recent pullback in the Euro does not help, representing a headwind of ~2% on revenues (or ~100bps incrementally since the December guidance calls). Bottom line, we expect little upward revision momentum in the 1H, with a premium on visible growth, mostly because of cycle positioning – SPW, GE, HON, and TYC stand out here given revenues that are late cycle in nature and close to trough.

Figure 1: 2012 Organic Growth Guidance Calls for Mid-SD Growth...Organic Growth, Y/Y

Source: Company reports.

Figure 2: …Achievable, But Not Conservative in Context of 4QOrganic Growth, Y/Y


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Early-cycle EM to late-cycle US handoff continues

Our preference remains to own US late-cycle stocks near trough, for which valuation is at a discount, and end markets should begin to fundamentally outperform in 2012. We acknowledge that this is starting to sound consensus, but we are hard pressed to believe this thesis has played out before orders inflect and with revenues still close to the trough. Like others, we underestimated the degree of short-cycle momentum in 1H11, something that helped stocks like ROK/DOV outperform early last year. Still, we see 2H11 as an inflection point, with a marked slowing in the “general industrial” exposures that have provided the group’s biggest lift off trough. Unlike 2010, short-cycle EE/MI revenues are now above prior peak and key macro indicators (IP, auto production forecasts) are still being revised down, while we are still seeing cuts to tech-related forecasts and to anything from Europe. Meanwhile, company-specific data points from recent months have further laid the groundwork for a visible ramp in T&D spend, a bottom in non-res construction, and a ramp in gas turbine shipments –three markets that were virtually dormant in 2011. The playbook from last cycle suggests this is much like the setup into 2006, a year when late-cycle industrials notonly outgrew their earlier-cycle peers but also beat expectations by the most, with multiples expanding as a result.

Figure 3: In 2006-07, Later Cycle Industrials Posted the Most EPS Upside

% Actual Beat (Miss) versus FY2 Consensus at Beginning of Prior Year

Source: Company data, Bloomberg, and J.P. Morgan.

Early/mid-group includes ITW, IR, DHR, DOV, HON, MMM, ROK, ETN, PH, UTX, CAT, KMT, and GWW; late-cycle group includes

EMR, SPW, TXT, CBE, HUB/B, TNB, MTW, TEX, and WCC.

Global uncertainty requires a broader valuation view…

With an increasingly complex macro landscape, one change we have made this year is to broaden our valuation framework to include not just 2012/2013 EPS estimates, but also (1) 2012 recession scenarios, (2) a bottom-up view of next peak, including capital allocation upside, and (3) a look at next cycle’s trough, assuming historical cyclicality. This obviously reflects lingering risks of a 2012 double dip, something we have to consider. This also highlights that, with earlier-cycle companies two years off trough and firmly in mid-cycle mode, the risks attached to further earnings growth are very different than for those with late-cycle exposures which are just now inflecting. The table below shows absolute EPS upside/downside from 2011E levels to our view of cycle peak, a severe 2012 recession, and next cycle trough. We conclude that while names like ROK/DOV still offer solid upside potential in a continued upturn, this EPS growth is about in line with the group’s, while they present among the most downside risk in a recession given earnings well off trough. This stands in contrast to a company like SPW, which offers greater upside to peak

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2006 Beat/Miss 2007 Beat Miss

Average Early/Mid Average Late

While not a “normal” cycle, it’s close enough that 2012 should

be the year late-cycle stocks

begin to outperform…

…while late-cycle stocks are

closer to trough if a recession

hits.

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and surprisingly manageable downside risks given earnings close to trough. This longer-term view of risk/reward is key to our stock selection.

Figure 4: Through-the-Cycle EPS Upside/Downside – (1) 2012 Recession, (2) Cycle Peak, (3) Next Cycle TroughUpside/Downside from 2011E EPS

Source: J.P. Morgan estimates.

Figure 5: Through-the-Cycle EPS Risk/Reward – Cycle Peak Upside versus “Worst Case” 2012 Downside Upside/Downside from 2011E EPS


…on which valuation for the group looks fair rather than attractive

Current valuation levels look reasonable in the context of a Consensus economy, but not compelling enough to warrant a more aggressive move on the group as a whole, in our view. The sector currently trades at ~14x our 2012E EPS, ~17x a mild recession, ~20x a severe recession, ~8.5x next cycle peak, and ~13x next cycle trough. Looking at near-term scenario analyses, we think the group is pricing in a one-third chance of a mild 2012 recession, but little probability of a tail risk (i.e.,2008-like scenarios).

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DHR TYC GE Ind MMM SPW EMR TXT HON DOV IR ROK

Severe Recession Cycle Peak Next Trough

<-- Least Downside To Trough Most Downside to Trough -->

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SPW TYC DHR MMM TXT GE Ind EMR IR HON DOV ROK

Worst Case EPS Downside Cycle EPS Upside

<-- More Favorable Earnings Risk/Reward Less Favorable Earnings Risk/Reward-->

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Table 1: Current Group Valuation on Different Scenarios

P/E

2012E SevereRecession

2012E MildRecession

2012JPM Est.

Cycle Peak(2015E)

NextCycle Trough

DHR 20.1 17.2 15.4 11.0 13.8DOV 18.3 15.0 12.4 7.7 14.0EMR 18.2 16.2 14.5 9.6 12.8GE 19.5 15.7 12.4 8.6 10.7HON 18.7 14.9 13.1 8.7 12.4MMM 16.1 15.5 13.9 9.7 11.4MSI 18.9 17.5 17.3 8.8 11.8ROK 28.9 21.0 14.9 9.0 20.1SPW 17.5 15.5 13.5 7.2 13.0TXT 26.2 20.2 13.7 7.8 14.2TYC 17.3 16.0 13.8 9.1 11.4IR 19.6 13.7 10.7 6.1 12.2Lg Cap Avg 20.0 16.5 13.8 8.6 13.2

LII 21.5 18.9 14.8 8.1 11.5WSO 19.0 26.8 19.7 10.5 14.0GNRC 7.6 15.8 14.5 10.8 14.4HUB/B 37.0 16.5 14.5 9.4 13.4ROP 37.2 22.0 19.9 13.0 15.3ST 14.7 13.7 12.4 7.2 10.4WBC 20.4 13.6 10.5 4.9 9.9WTS 20.1 19.0 15.8 12.1 15.1WCC 24.6 16.6 12.5 7.4 14.8Avg All 21.0 17.2 14.3 8.9 13.2


Longer term, there looks to be plenty of upside to cycle peak, but an ~8.5x multiple on peak EPS potential is somewhat comparable to this point in prior cycles when we adjust for today’s lower market multiple. We continue to believe that historical absolute multiples of 15-17x for the group are less relevant to the valuation discussion, given not only structurally lower growth this cycle versus the 1990s/2000s, but also increased volatility – indeed, ~10% cuts to Consensus EPS estimates and a recession in the world’s largest economy (Europe) are hardly “normal” in year three of an upturn. Our price targets continue to assume a 12.5x average P/E on 2013E EPS, and while group multiples likely will swing with macro sentiment, we hesitate to count multiple re-rating as a centerpiece for a Bull thesis on the group.

Figure 6: Multiples Look to Be in Secular Decline, Complicating “Historical Average” ArgumentsAverage EE/MI FY2 P/E

Source: Bloomberg and J.P. Morgan.

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Multiples are likely to move with

macro sentiment, but we think

historical absolute multiples (15-17x) are less relevant in the

current environment.

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Figure 7: In the Context of Today’s Lower Multiples, Peak 2015E Earnings Look ReasonableP/E


Still, there are some specific names that screen better than others, meaning we still see some relative opportunities. Later in our report, we calculate an overall risk/reward that is weighted equally between near-term scenarios (35% 2012 JPM price targets, 5% severe recession, 10% mild recession) as well as the longer-term potential (25% cycle peak, 25% next cycle trough). This, in our view, provides a balanced picture of upside/downside under a wide range of scenarios, and one in which several stocks stand out.

Table 2: Consolidated Risk/Reward FrameworkStock Price Upside/Downside (From Today)

CurrentPrice

2012EJPM

Severe Recession

Mild Recession Peak

Next Trough

2012EJPM

Severe Recession

Mild Recession Peak

Next Trough

WeightedRisk/Reward

DHR $48.59 51 30 44 69 48 5% -38% -9% 42% 0% 9%DOV $58.68 55 32 49 94 46 -5% -45% -16% 61% -21% 4%EMR $47.72 49 28 39 68 43 3% -42% -19% 42% -10% 5%GE $18.55 20 10 16 28 20 6% -47% -14% 53% 7% 14%

HON $55.59 59 30 47 83 49 7% -47% -16% 50% -11% 8%MMM $83.80 80 60 74 118 89 -5% -29% -11% 41% 6% 7%MSI $46.67 46 30 39 69 44 -1% -36% -16% 47% -7% 6%ROK $75.79 74 30 50 120 46 -3% -60% -35% 58% -40% -3%SPW $64.95 75 37 53 106 55 16% -43% -19% 63% -16% 14%TXT $19.11 21 8 13 29 13 11% -58% -32% 49% -30% 3%TYC $48.22 52 26 34 62 42 8% -45% -30% 29% -13% 1%IR $32.22 41 14 25 58 25 26% -57% -23% 81% -23% 18%

Lg Caps 6% -46% -20% 51% -13% 7%

LII $35.54 34 17 24 51 30 -5% -54% -34% 45% -14% 0%WSO $67.99 60 47 41 97 70 -12% -32% -39% 43% 2% 1%GNRC $27.46 21 27 16 25 16 -25% -2% -41% -10% -43% -26%HUB/B $68.00 69 19 52 94 56 1% -73% -23% 38% -17% 0%ROP $89.47 76 30 64 112 81 -15% -66% -29% 25% -10% -8%ST $26.67 30 17 23 45 27 14% -35% -13% 67% 1% 19%

WBC $46.20 56 20 37 97 45 21% -57% -20% 110% -3% 29%WTS $36.45 34 18 24 40 27 -7% -50% -34% 9% -26% -13%WCC $54.51 56 19 35 86 34 3% -65% -36% 58% -37% -1%

Avg All 3% -49% -23% 51% -13% 6%

Source: J.P. Morgan estimates. Priced as of January 5, 2012.

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13.211.6

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17.7

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This Cycle 2000-2001 Peak 2007-2008 Peak

P/E on peak, 3yrs prior Average FY2 P/E

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Key 2012 Themes: Reversion to the Mean, at an Inflection

While not a top-down call, we see several bottom-up themes across the sector, with the common thread being reversion to the mean. First, US late cycle versus early cycle EM, with growth rates expected to converge. We also see commodity stabilization, a departure from the decade-long bull market here built on China infrastructure slowing. There are also separate issues around margins, with which we struggle, related to a slowing of the inflation-driven price gain and less labor arbitrage potential as EM labor inflation continues. In the end, these are not quarterly or even annual calls, but could remain major factors over the course of the next few years.

US late cycle “best house on a bad block”: T&D and non-res most attractive

We continue to see opportunities to shift exposure away from Europe/China volatility, and toward the late-cycle markets in the US that are near inflection. This is increasingly consensus, but with average revenues here barely off trough, we are hard pressed to call this the peak in sentiment. We have been highlighting US T&D, one of the few pockets of visible earning momentum into 2013, a story around pent-up spending from the last downturn that is relatively insulated from global macro pressures. The non-res construction markets are more economically sensitive, but at bottom, with likely limited downside in a recession and significant upside potential versus low expectations over the next 1-2 years. Mid-caps such as HUB/B and WCC provide the cleanest play on these end markets, with 90%+ North American exposure. Even among the large caps, however, there are ways to play the theme: this includes those with heavy US non-res with below-average exposure to cyclical risks in Europe (IR, TYC), or companies like SPW which have key earnings drivers (US transformers) that are US-focused. Keep in mind that, even when including M&A for those like DOV/DHR/MMM, average US revenues for the group are still below priorcycle peak, and over 10% below peak for many of the late-cycle players.

Figure 8: 2011E US Revenues versus Prior Cycle PeakIncludes Acquisitions, with Exception of DHR/BEC and IR/Trane

Source: Company data and J.P. Morgan estimates.

Commodity prices (finally) stabilize

After two years of dramatic metals inflation, we now see potential for raw materials to stabilize at these lower levels, driven by moderating China growth and a sluggish developed world. This would not derail the commodity capex story, as investment is still attractive at current prices, but it would likely cool sentiment around names that have the most exposure here (EMR, ROK, DOV). Meanwhile, lower copper/steel

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Stocks to target: HUB/B, WCC, SPW, TYC, IR

Stocks to target: IR, HUB/B, LII

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would help margins at several players in the group, but with the biggest benefits to those that have seen the most 2010-2011 drag: HUB/B, IR, and LII.

“Hair of the Dog”: Short-cycle volatility puts high-quality stories at a discount

In some cases, however, the best antidote for global macro volatility may be to buy those that are most directly impacted: the key here is to find names for which momentum is most washed out, there’s a clear visibility discount in valuation, but with a high-quality longer-term story that can be bought on the cheap. This is most apparent among some of the mid-caps, including WBC (see our upgrade from late December). Near-term fundamentals are tough, but with European truck volume still 20% below prior peak we think multi-year declines are unlikely, and shares trade at ~5x cycle earnings potential (~$9). Sensata is somewhat similar; it’s a company that has hit the teeth of the 2H11 inventory correction and underperformed by over 25%since September, but for which there remains a solid content growth story and 20%+ EPS growth potential in 2013 and beyond, in our view. Both companies have felt macro headwinds first given their short-cycle profile, but we think either the group follows them lower into recession (more priced in at WBC/ST than others), or the discount is unwarranted and 2013 acceleration is above average. With attractive underlying franchises at each, we think longer-term investors can afford to be early.

US HVAC: More of a sentiment play, but it should work one of these years

A corollary the US theme is a return to the North American HVAC market, an industry with plenty of disappointments over the last several years, but one that is detached from global volatility and where expectations remain low. For commercial HVAC, this remains a clean play on the non-res theme with an added kicker from energy efficiency via the retrofit market. For the resi market, this is more about market stabilization after the R-22 headwinds, particularly for players like IR that underperformed the most in 2011 where sentiment remains terrible. Among the OEMs, there is also the related play on commodity deflation.

A weak 1H12 drives revision risk

Finally, we also see a dynamic where a slow start to 2012 drives 1H numbers below normal seasonality, putting pressure on Consensus estimates. First, we see a dynamic in which 1Q12 Consensus could be ~10% too high across the group, meaning initial guidance for HON, DHR, and TYC is likely to come in below the Street – this is a negative from a news-flow perspective, but less of a concern over the course of 2012 as annual guidance still looks reasonable even off a lower 1Q. Names like GE/TXT also screen poorly here, though seasonality is less consistent here given lumpy delivery patterns. There are a few names, however, that also suggest 2012 guidance will be back-end loaded. Emerson is the name that most stands out; even after adjusting for one-time F1Q items, the FY12 simply looks too aggressive to us and we expect a cut here. 3M is another, more about trends in the 4Q and a management counting on a re-stock to hit annual numbers. Lastly, SPX guidance, to come at their investor day in mid-January, is likely to come with the customary 2H-weighted seasonality, but given anticipated late-cycle inflection we are willing to look beyond a weak 1Q guide one last time for this cycle.

Stocks to target: WBC, ST

Stocks to target: LII, WSO, IR

Stocks at risk: EMR, MMM, SPW

https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-748378-0.pdf

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Table 3: Normal EPS Seasonality Off of C4Q Suggests 1Q12 Consensus ~10% Too High…

1Q12 EPS – Normal Sequential Seasonality Off C4Q11 Consensus (EMR Adjusted for One-Time Items)

4QE 1Q

Seasonality 1Q Implied1Q

ConsensusImplied

Vs. ConsGE 0.33 -23% 0.26 0.30 -15%TXT 1.05 -16% 0.88 1.02 -14%HON 0.38 -25% 0.31 0.36 -13%SPW 1.82 -69% 0.56 0.65 -13%TYC 0.78 -9% 0.71 0.81 -13%EMR 0.70 12% 0.78 0.84 -7%ROK 1.19 1% 1.20 1.28 -6%DHR 0.78 -12% 0.69 0.72 -4%DOV 1.08 -4% 1.04 1.05 -1%MMM 1.31 15% 1.50 1.50 0%

IR 0.67 -17% 0.56 0.46 21%Average -13% -9%

Source: Company data, Bloomberg, and J.P. Morgan estimates.

Table 4: …Suggesting Early 2012 Will Track Below Normal Seasonality for Many

EPS

1Q Implied(Seasonality)

1Q Normal% of Year Implied 2012

2012Consensus

Implied vs Cons

SPW 0.56 14.2% 3.97 5.32 -25%TXT 0.26 20.1% 1.27 1.68 -24%GE 0.28 21.8% 1.30 1.57 -17%

EMR 0.78 24.0% 3.25 3.55 -8%ROK 1.20 23.9% 5.02 5.32 -6%

IR 0.56 18.7% 2.99 3.14 -5%HON 0.88 20.7% 4.25 4.44 -4%MMM 1.50 24.1% 6.22 6.31 -1%DHR 0.69 21.2% 3.25 3.29 -1%TYC 0.71 19.5% 3.62 3.60 1%DOV 1.04 20.6% 5.04 4.95 2%

Average 21% -8%


Stock Selection

Top picks: GE, SPW, IR

GE remains a top pick, with a late-cycle Industrial portfolio inflecting and positioned to outgrow its peers in an upturn for the first time since CEO Immelt’s tenure, and a differentiated cash “gusher” at GECS with the potential for $15B+ in special dividends to the parent, by our estimates. Execution is key after the year-end rally, but with a 4%+ dividend yield, a simplified/de-risked portfolio, and the cycle finally at its back, GE now looks as well positioned versus peers as it has any time in recent memory. For absolute cyclical upside, we see the best risk/reward at SPW and IR. SPW is the most compelling pure end-market-leverage play in the group, with visibility on the key US power transformer cycle and a valuation that now discounts near-term risks at Thermal, in our view. IR is somewhat of a different story, a call on negative sentiment and stabilization in earnings revisions, for which end market leverage alone should drive dramatic upside off a depressed valuation.

HON and HUB/B solid 2012 stories, but drifting toward “momentum” territory

In our search for end-market visibility and acceleration, these two names continue to screen toward the top, key to our continued Overweight ratings. Still, valuation moves them down the pecking order. For HON, after strong acceleration through 2011 and a pickup into 2012, we think the stock has finally shaken its historical discount to peers, but we acknowledge this has become a bit of a momentum play on

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2012 earnings. The longer-term thesis becomes more about an eventual move to a premium multiple, something that will require continued outperformance in 2013/2014, in our view. For HUB/B the story is similar, as the stock is not as cheap as it was a year ago, but we continue to like the end-market profile here and we see a scarcity value to the potential visible earnings acceleration. The US geographic focus should limit risks versus more global peers.

Remain Overweight DHR and TYC

We are sticking with DHR, a stock that still screens well given the expected BEC accretion and conservative growth guidance; but, this moves down the pecking order as the word is out on Beckman upside potential, and 1H12 organic growth and 1H12 catalysts may be harder to come by. We also maintain our Overweight on TYC, one of the most attractive breakup stories we have seen in this sector. We understand the “dead money” thesis, but don’t think this takes into account the potential for end-market acceleration through 1H12, and catalysts should pick up mid-year as the split comes into view.

Maintain DOV relative Underweight; still on sidelines for EMR, ROK, MMM

Dover remains a relative Underweight, in part on headwinds from the Tech businesses (starting to be discounted), but also waning earnings momentum in the face of a bullish Consensus. For EMR, MMM, and ROK, we remain on the sidelines at Neutral, all for different reasons. At EMR, we understand the “good company, good dividend” thesis, but off the historically weak F1Q we see further cuts to Consensus and need an anchor on earnings before warming up to the name. There are simply too many lingering questions to justify a continued premium in our opinion, and we’d expect further underperformance versus peers like GE/HON. At MMM, expectations are lower and we acknowledge the “relative safety” dynamics through a cycle, but do not see enough cycle upside potential from current levels to make shares interesting, and risk to standing 2012 guidance remains a distraction. For ROK, we like the franchise but still do not feel compelled to chase momentum for a stock this far into its earnings cycle – we would wait for some dislocation in either valuation or sentiment to consider becoming more interested.

In mid-cap space, WBC and ST offer most interesting risk/reward

Among the mid-cap names, WBC is our top idea, a stock with tough end markets near term but for which valuation does not incorporate the longer-term share upside,in our view. Sensata is a similar content play on the auto sector, for which the recent inventory correction sets up an attractive entry point for a good long-term story. WCC remains an Overweight, an attractive end-market play where earnings should outperform our group, though with shares’ outperformance into year-end the valuation setup is less attractive. We also remain Overweight LII (deep value) and WSO (“relative safety stock” with a dividend yield), the two key US HVAC plays, but at current valuation still see IR as the more opportunistic way to play a 2012 stabilization in resi HVAC trends.

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Estimate and Price Target Revisions

We are making several tweaks to our estimates and price targets. These include an update to our Sensata estimates (to reflect the late-December pre-announcement), as well as increases to our Hubbell/Wesco estimates. We are raising PTs for GE, HON, HUB/B, and WCC, while lowering our PT for Sensata.

Table 5: Summary of Estimate and PT Revisions

2012E EPSOld

2012E EPSNew

2013E EPSOld

2013E EPSNew

PT Old

PT New

GE n/a 1.50 n/a 1.65 19 20HUB/B 4.55 4.70 5.05 5.25 63 69HON n/a 4.25 n/a 4.75 56 59ST 2.30 2.15 2.85 2.65 33 30WCC 4.05 4.35 4.75 5.00 50 56


Figure 9: EE/MI Comp Sheet

Source: Company reports, Bloomberg, and J.P. Morgan estimates.

Ticker JPM Price Div Price Upside Target Vs 10 Year Mkt Cap Firm

Rtg. 1/05/12 Yield Target (Downside) Multiple Group Avg ($MM) Value 2009 2010 2011E 2012E 2013E 2010 2011E 2012E 2013E 2010 2011E 2012E 2013E 10yr Avg 2011E 2012E

Large Caps

Danaher DHR OW 48.59 0.2 51 5% 15.0 120% 125% 34,093 38,824 1.74 2.31 2.82 3.15 3.40 21.0 17.2 15.4 14.3 110% 115% 113% 116% 125% 12.1 10.6

Dov er DOV UW 58.68 2.1 55 -5% 10.9 87% 101% 11,091 12,246 1.99 3.74 4.47 4.75 5.10 15.7 13.1 12.4 11.5 82% 88% 90% 94% 100% 8.1 7.3

Emerson EMR N 47.72 3.4 49 3% 13.1 105% 107% 496,240 499,039 2.27 2.70 3.24 3.40 3.75 17.7 14.7 14.0 12.7 93% 98% 102% 104% 110% 94.5 91.4

General Electric GE OW 18.55 3.7 20 6% 12.0 96% 128% 196,816 212,315 1.03 1.13 1.36 1.50 1.65 16.4 13.6 12.4 11.2 86% 91% 90% 92% 125% 9.5 10.7

Honeywell HON OW 55.59 2.7 59 7% 12.5 100% 93% 43,998 51,620 2.85 2.98 4.00 4.25 4.75 18.7 13.9 13.1 11.7 98% 93% 96% 95% 93% 9.4 8.6

3M MMM N 83.80 2.6 80 -5% 12.5 100% 113% 60,294 64,534 4.69 5.72 5.90 6.05 6.40 14.7 14.2 13.9 13.1 77% 95% 101% 107% 110% 8.7 8.5

Motorola Solutions MSI N 46.67 1.9 46 -1% 14.4 115% 15,858 13,306 1.37 1.87 2.56 2.70 3.20 n/a 18.2 17.3 14.6 n/a 122% 126% 119% n/a 8.7 8.7

Rockwell ROK N 75.79 2.2 74 -3% 13.1 105% 105% 11,005 11,823 1.51 3.05 4.79 5.10 5.60 24.8 15.8 14.9 13.5 130% 106% 109% 110% 110% 11.2 10.1

SPX Corp SPW OW 64.95 1.5 75 16% 13.1 105% 89% 3,311 4,366 3.80 3.65 4.40 4.80 5.75 17.8 14.8 13.5 11.3 93% 99% 99% 92% 90% 8.6 7.9

Tex tron TXT OW 19.11 0.4 21 11% 12.5 100% 87% 5,895 8,774 0.59 0.75 1.10 1.40 1.70 25.5 17.4 13.7 11.2 134% 116% 100% 92% 90% 7.5 7.0

Ty co TYC OW 48.22 2.1 52 8% 13.2 105% 90% 23,097 26,558 2.36 2.62 3.24 3.50 3.95 18.4 14.9 13.8 12.2 97% 99% 101% 99% 90% 7.9 7.4

Large Cap Avg 2.1 4% 12.5x 104% 19.1 15.0 13.7 12.3 16.9 16.2

HVAC

Ingersoll Rand IR OW 32.22 2.0 41 26% 11.3 90% 90% 10,977 13,226 1.67 2.38 2.70 3.00 3.60 13.5 11.9 10.7 9.0 71% 80% 78% 73% 90% 6.8 6.7

Lennox LII OW 35.54 2.0 34 -5% 11.5 92% 90% 1,891 2,172 1.77 2.39 2.06 2.40 2.95 14.9 17.3 14.8 12.0 78% 115% 108% 98% 90% 9.4 8.7

Watsco WSO OW 67.99 3.6 60 -12% 14.4 115% 100% 2,089 1,984 1.51 2.50 2.90 3.45 4.15 27.2 23.4 19.7 16.4 143% 157% 144% 133% 105% 11.5 9.3

2.6 3% 12.4x 18.5 17.5 15.1 12.5 9.2 8.2

Small-Mid Caps

Generac GNRC N 27.46 0.0 21 -25% 11.9 95% n/a 1,856 2,205 n/a 1.76 1.95 1.90 2.15 15.6 14.1 14.5 12.77 82% 94% 106% 104% n/a 13.8 13.4

Hubbell HUB/B OW 68.00 2.2 69 1% 13.1 105% 95% 4,106 4,020 3.15 3.74 4.35 4.70 5.25 18.2 15.6 14.5 13.0 95% 104% 106% 105% 95% 8.0 7.5

Roper Industries ROP N 89.47 0.6 76 -15% 15.1 121% 120% 8,813 9,625 2.70 3.15 4.26 4.50 5.05 28.4 21.0 19.9 17.7 149% 140% 145% 144% 120% 12.1 11.6

Sensata ST OW 26.67 0.0 30 14% 11.5 92% n/a 4,830 6,370 n/a 1.77 1.95 2.15 2.65 15.1 13.7 12.4 10.1 79% 91% 91% 82% n/a 12.4 10.8

WABCO WBC OW 46.20 0.0 56 21% 10.6 85% 80% 3,174 2,958 0.39 2.57 4.70 4.40 5.25 18.0 9.8 10.5 8.8 94% 66% 77% 72% 85% 6.3 6.8

Watts Water WTS N 36.45 1.2 34 -7% 12.5 100% 100% 1,374 1,419 1.50 2.00 2.22 2.30 2.70 18.2 16.4 15.8 13.5 96% 110% 116% 110% 100% 7.0 6.8

WESCO WCC OW 54.51 0.0 56 3% 11.3 90% 80% 2,747 3,280 2.29 2.50 3.80 4.35 5.00 21.8 14.3 12.5 10.9 114% 96% 92% 89% 80% 9.3 8.9

Sector Average 0.6 -1% 12.3x 20.9 15.4 14.6 12.8 9.8 9.4

P/E Vs. GroupEPS P/E EV/EBITDA

14



Macro Update: Slow Start to 2012

We have had a more cautious stance on the macro for some time, continuing to see structural imbalances that will weigh on growth this cycle versus last, reflected in estimates that remain ~5% below Consensus. That said, our sector view is less about a specific call on the macro. For the US, we continue to see a mid-cycle slowing rather than a 2008-like collapse – while we are less optimistic than some on the ability for the US to carry global growth if other regions slow, it does look relativelymore insulated versus uncertainties in Europe/Asia. We take risks in Europe seriously given exposure across the group, though a differentiated view here is difficult, in our view. We also continue to closely watch China, a key direct/indirect driver of EE/MI growth, where the Consensus call for 2H12 reacceleration poses risks if growth is pushed out. In total, even under more benign macro scenarios, Europe/China dynamics mean 2012 is likely to start slowly with a growth profile that is back-end loaded, somewhat negative in the context of expectations for trend-like growth across the EE/MI sector.

Developed Market Macro Data Bifurcated

US data not great, but a perhaps a less volatile place to be

Data from the US has been a relative bright spot, and while we are not as bullish as Consensus that the US can remain immune from global cross-currents, we agree that this looks like the least volatile place to be in the near term. Indeed, we continue to believe this looks more like a mid-cycle slowing than it does a repeat of 2008-2009. Recall that financial markets were a key driver of the past two downturns, with lending standards tightening well in advance of the realized downturn in capital spending. Today, lending standards continue to be loosened and C&I loan growth has actually gained momentum through 2H11.

Figure 10: Lending Standards Still Accommodative, Helping InvestmentY/Y Change Lending Standards % Tightening

Source: BEA and FRB.

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Figure 11: Near-Term ISM Indicators Remain Healthy

Source: ISM.

It is also worth noting that the most credit-sensitive areas of the economy, while having moved nicely off trough, are still operating at relatively low levels as a percentage of GDP. The chart below from our economics team illustrates this point, showing the total spending from business capex, business structures, consumer durables, and residential investment as a percentage of GDP. From an EE/MI perspective, this is most applicable for products related to housing (i.e., HVAC) or non-residential construction, end markets that are close to trough and likely have less room to fall in a recession.

Figure 12: Key US End Markets Remain at Low Levels

Source: BEA and J.P. Morgan Economics.

Europe risks remain acute

Europe is the clearest risk area, and we have relatively little to add to the ongoing macro debate surrounding the region. It’s worth noting, however, that financial market volatility has already begun to show up in macro data, specifically the 4Q uptick in bank lending standards. Credit-driven recessions have historically been negative for capital goods industries, and Europe looks to have the greatest risk of a negative feedback loop.

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Figure 13: Euro IP vs. Lending Standards

Source: Eurostat and ECB.

The European PMIs have also rolled over in recent months, moving firmly into recession territory. If we use the new order indices of the PMI as high-level indicators for industrial production, current surveys imply IP down ~2-3% in 1H12, about in line with J.P. Morgan economist forecasts for the first half of the year (down~2.5%). From an EE/MI perspective, however, we note that European exposure in our large-cap universe is not that differentiated, averaging ~25% of sales and with few companies meaningfully outside the 20-30% range – there are some large caps with key US-focused businesses (i.e., IR HVAC, SPW Transformers), but it is difficult to avoid Europe risk entirely. Among the mid-cap names, however, there are some US-centric plays (i.e., HUB/B, WCC, GNRC, LII, WSO) that are less exposed to risks here.

Figure 14: Eurozone PMI vs. IP – New Orders Imply IP Down 2-3% in 2012

Source: Bloomberg.

Table 6: Revenue by Region% of 2010 Revenues

NA EMEA OtherDanaher 50% 28% 22%Dover 54% 17% 29%Emerson 43% 20% 36%GE 47% 27% 26%Honeywell 61% 25% 14%3M 35% 31% 34%Rockwell 51% 20% 29%SPX 48% 32% 20%Textron 67% 18% 15%Tyco 49% 23% 28%Ingersoll Rand 66% 16% 18%Average 47% 26% 26%


2H11 inventory swings distort underlying demand, but we are hesitant to bank on a 2012 restock

Inventory fluctuations have played a significant role in 2011 growth dynamics, in part due to exogenous factors (Tohuku, Thai flooding), but also from a mismatch in production and weaker end demand that needed to be adjusted throughout the year. The US looks to be better adjusted after a 3Q inventory destocking – indeed, this is a key part of the Bull thesis on the US, a view shared by our economists who expect inventories to begin to rebuild in 4Q11. Europe has seen a similar 3Q correction, but with expectations for further declines into 2012, as inventories have not yet moved in line with the lower end demand.

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Figure 15: US GDP Inventory Contribution% of GDP, SAAR

Source: BEA and J.P. Morgan Economics estimates.

Figure 16: Euro-Area GDP Inventory Contribution% of GDP, SAAR

Source: J.P. Morgan Economics estimates.

The finished goods inventory components of global PMI surveys (a measure not included in the US ISM) also provide a good illustration of this dynamic. While inventories globally have been relatively stable in recent months, moving only gradually lower, there has been a significant drop in the Euro-area readings. This reinforces commentary from short-cycle players across our sector (ST, HON, DHR, WBC, EMR, MMM), all of which highlighted customer/distributor destocking in Europe as a driver of 4Q slowing. This should eventually correct when demand stabilizes, but we are hesitant to dial in a restock as we note (a) uncertainty in thefinal demand outlook and (b) inventory PMI readings in Europe that are somewhat in line with long-term history, despite the 4Q destock, suggesting that inventories may have been unusually high in 1H11.

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Figure 17: JPM Global PMI (ex-US) – Finished Goods Inventories

Source: J.P. Morgan Economics.

Figure 18: Euro-Area PMI – Finished Goods Inventories

Source: NTC Research and J.P. Morgan.

Figure 19: Industrial Production Has Generally Recoupled with End Demand…


Figure 20: …Though Production Growth Has Lagged Final Sales in Recent Months


China Remains a Swing Factor, and Companies Need to Overcome a Slow Start to 2012

China’s importance goes far beyond direct revenue exposure

As we have talked about frequently in the past, China’s importance to the sector goes far beyond the direct revenue exposure, which is slightly over 5% on average for the group. Some of this obviously relates to the high growth rates in the region, contributing disproportionately to EE/MI organic growth. The other key factor relates to China’s impact on global commodity prices, as China represents over 10% of global oil demand and close to 50% of global steel/copper demand. Note that capex from resource-related customers account for another 10-15% of EE/MI revenues, something that would be at risk in a China downturn.

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Figure 21: China as a % of Global Steel/Copper Demand


Figure 22: China as a % of Global Oil Demand


Figure 23: China Exposure Highest at EMR, SPW, DOV, and DHR

% of 2010 Sales

Source: Company reports and J.P. Morgan estimates.

Figure 24: Resources Exposure Highest at ROK, DOV, and EMR

% of 2010 Sales to Resource (Oil/Gas/Refining/Metals/Mining) Customers


Indeed, if we deconstruct 2011E organic growth for the group, assuming an average 15% growth for direct China exposure and 10% for commodity-related exposures, it would suggest that “China-related” businesses accounted for nearly one-third of the ~9% organic growth expected in 2011.

Table 7: China-Related Business Accounted for Nearly One-Third of EE/MI 2011E Organic Growth

% of Sales Growth Contribution

China Sales 7% 15% 1.1%China related (i.e., commodities, exports) 15% 10% 1.5%Other 78% 8% 6.4%Total 2011E Organic Growth, EE/MI 8.9%


Recent economic data “okay,” but EE/MI China revenues slowing…

The growth rates for the most commonly watched macro readings (i.e., Industrial Production, FAI) have moderated in 2H11, consistent with declines in loan growth and the government’s ongoing efforts to slow the economy. Meanwhile, leading indicators such as the PMI moved into negative territory through most of late 2011, only moving above the 50 threshold in December.

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Figure 25: China Industrial Production versus Loan Growth% Y/Y

Source: NBS, PBOC, and J.P. Morgan.

Figure 26: China Fixed Asset Investment versus Loan GrowthLoan Growth, % Y/Y Fixed Asset Investment, % Y/Y

Source: NBS, PBOC, and J.P. Morgan.

Figure 27: China PMI ReadingsPMI (Overall and New Orders Index) Orders-Inventories Spread

Source: CLSA-Markit and J.P. Morgan.

Within the EE/MI sector, however, there are pockets of weakness beyond what headline data would suggest. These include EMR Asia Climate (heavily tied to construction trends), China truck production (as estimated by WBC), as well as Sensata’s Controls segment (heavily tied to Chinese appliance exporters). Rockwell’s China business has held in sequentially, but y/y growth rates have moderated versus

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challenging comparisons. Looking to 4Q, we’d expect further moderation across the sector, as companies like DHR have already called out a slowing in their China-related businesses. Similarly, HON talked about y/y declines in their China ECC and Life Safety businesses for 2H11, evidence of a broad-based slowing in both construction and general manufacturing activity.

Figure 28: ROK China SalesY/Y Growth (Calendar Quarters)


Figure 29: China Truck Production (WBC Estimates)Y/Y Growth


Figure 30: EMR Climate Asia Underlying SalesY/Y Growth (Calendar Quarters)


Figure 31: Sensata Controls Segment Organic VolumesY/Y Growth


…given big exposure to property construction…

The most obvious headwind is the well-noted slowing in the property construction markets, something with implications for everything from construction machinery to steel production, to household appliances. Keep in mind that many businesses within the EE/MI sector will have a high direct exposure to construction trends, including Emerson Climate, Honeywell ECC/HBS, and Ingersoll Comm’l HVAC/Security. Others, such as WBC’s China truck sales, will be closely related. After a dramatic two-year run in construction trends, J.P. Morgan’s economists/strategists expect declines in both housing starts/prices next year, despite the ongoing government expansion of affordable housing.

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4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11-40%

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3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

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4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E

22



Figure 32: Even with Affordable Housing, Starts Likely to DeclineChina Housing Starts, Millions of Square Meters

Source: CEIC and J.P. Morgan Strategist estimates.

Figure 33: China Housing Prices Also Expected to Move Lower% Y/Y Chg

Source: J.P. Morgan Strategist estimates.

Behind this are cooling financial markets and property transaction volumes, as higher rates and the lack of mortgage quotas have brought 2011 transaction volumes back to 2008 levels. Primary sales, as a percentage of total transactions, continue to move lower as newly constructed floor space is absorbed. It is also notable that prices in the secondary market have only recently started to move lower, an indication that the price correction will likely extend well into 2012.

Figure 34: Secondary Market Values Only Recently Moved LowerIndexed Value

Source: Centaline Leading Index and J.P. Morgan.

Figure 35: Primary Sales as a % of Total Transaction Volume%

Source: J.P. Morgan.

+20%+14%

+49%

+22%-7%

0

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011E 2012E

Private Starts Affordable Housing

-8% to -15%

-6% to Flat

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Tier-1 and top Tier-2 cities Low Tier-2 & Tier 3/4 Cities

318.0

293.7

298.3

234.2

390.6

100

150

200

250

300

350

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450

May/

04

Sep

/04

Dec/

04

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/05

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05

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/06

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/07

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7

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/07

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/08

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9

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/09

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10

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10

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/10

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10

Feb

/11

May/

11

Aug

/11

Nov/

11

Shenzhen Guangzhou Beijing Shanghai Tianjin

29% 30%24% 22% 21%

18% 19%14% 13%

48% 50%

39% 39% 38%32% 34%

25% 23%

0%

10%

20%

30%

40%

50%

60%

2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

Volume Value

23



Figure 36: Monthly Property Transactions in Major Cities (Beijing, Shenzhen, Shanghai, Chongqing, Chengdu, Tianjin, Hangzhou, Guangzhou)Primary Sales Secondary Sales

Source: Centaline, City real estate trading centers, and J.P. Morgan.

The housing slowdown has already been seen most clearly in areas like Construction equipment, which have rolled over hard in 2H11 after a strong start to the year. Shipment data below for excavators, bulldozers, and wheel loaders (which represent 80% of industry volume) show pronounced declines in 2H11, with expectations for further weakness into 1H12.

Figure 37: China Construction Equipment Declining Y/Y in 2H11% Y/Y Chg, Unit Shipments

Source: China Construction Machinery Association and J.P. Morgan.

This also highlights the need for China to rebalance its fixed-investment growth, which over the past two years has been heavily slanted toward property investment. Indeed, real estate represents ~25% of China fixed-investment with growth of >30% y/y the past two years, but expected to drop to ~10% in 2012. This will likely need to be offset by increases in areas like transportation and other public infrastructure.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

5001,000

1,500

2,0002,500

3,000

3,5004,000

4,500

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Primary Sales (total) Secondary Sales (total)

-50

-25

0

25

50

75

100

125

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Wheel loaders Excavators Bull dozers

24



Table 8: Property Has Been a Big Driver of Recent Fixed Investment

2009 2010 2011 YTD 2012E% of FAI Y/Y Y/Y Y/Y Y/Y

Primary Industry 2% 31% 25% 25% 18%Textile and related 2% 50% 18% 26% 25%Metals and commodities 12% 17% 29% 35% 15%Machinery & electronic equipment 9% 33% 35% 40% 25%Transportation equipment 3% 31% 32% 32% 15%Electricity, gas, and water 5% 29% 7% 4% 12%Real estate 26% 20% 34% 33% 10%Transportation infrastructure & construction 10% 49% 21% 9% 20%Water conservation & environmental 8% 45% 25% 17% 35%Healthcare, social security, & education 4% 45% 17% 21% 25%

Source: NBS and J.P. Morgan Economics estimates.

…and with weak exports increasingly a concern

Outside of the property market, the other near-term concern is the slowing in exports, a big engine of China’s manufacturing growth. China’s exports have historically been closely tied to global IP, and therefore have slowed in the last several months (keep in mind Europe is nearly 20% of China export demand). This is expected to remain weak into 1H12, with total 2012 export growth expected at only 8% y/y versus increases of 31%/20% in 2010/2011, respectively.

25



Figure 38: China Exports Follow Global Industrial Production…China Exports, Y/Y Global IP, Y/Y


Figure 39: …and Weakening into 1H12…


Figure 40: …With Deceleration Expected for Next Year

Source: CEIC and J.P. Morgan estimates.

Figure 41: China Exports by Region


Drivers of a reacceleration in place, but could take time and risks remain

To be clear, we understand the drivers for a potential 2H12 rebound in China, which include easing of monetary policy as well as a government kick-start for investment into the next five-year plan. This is consistent with the view of our economists as well as J.P. Morgan China Strategist Frank Li, who expects a bottom in growth during 1H12. Keep in mind that FY11 marks the first year of China’s 12th Five-Year Plan, and many related investment projects that have been budgeted are expected to kick off entering late 2011. Historically, FAI growth in China has tended to accelerate through the first three years of each five-year plan before moderating in the last two years, and the recent uptick in FAI growth for new projects would be consistent with this historical pattern.

-20%

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China Exports Y/Y Global IP Y/Y

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Y/Y

3m/3m SAAR

Y/Y, est

3m/3m SAAR, est

17%

-16%

31%

20%

8%

-20%

-10%

0%

10%

20%

30%

40%

2008 2009 2010 2011E 2012E

EU19%

US17%

Other64%

26



Figure 42: China CPI: Cooling Through NovemberChange Y/Y

Source: CEIC and J.P. Morgan.

Figure 43: China FAI Growth for New ProjectsReal Growth, Y/Y

Source: CEIC and J.P. Morgan.

Figure 44: China’s Average Nominal and Real FAI Growth in Each Year of the Past Five-Year Plans (7th to 11th)

Source: CEIC and J.P. Morgan Economics.

Our main concern for EE/MI companies is around 1H12, when growth from China is likely to be slow, doing little to offset the downshift already occurring in Europe and (perhaps) the US. Further, with a broad Consensus of both companies and economists/strategists projecting acceleration through next year, any hiccups to the China story could weigh heavily on the group.

Figure 45: China 2012 Industrial Production Growth Forecasts Are Back-End Loaded% Y/Y

Source: J.P. Morgan Economics estimates.

-4

-2

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6

8

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1

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-11

19.823.6

32.3

17.514.2

16.920.5

23.5

10.27.5

0.0

5.0

10.0

15.0

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25.0

30.0

35.0

1st y r of FYP 2nd y r of FYP 3rd y r of FYP 4th y r of FYP 5th y r of FYP

Nominal FAI grow th Real FAI grow th

%

12.0%

15.8%

9.8% 9.6%8.0%

13.5%

15.2% 15.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

27



End Market Overview: Early- to Late-Cycle Handoff Continues

We also look at the macro from the perspective of end markets, key to building bottom-up growth forecasts for each company. The challenge last summer was that macro volatility led to estimate cuts across the group, despite few bottom-up, end-market data points. Entering 2012, visibility is far from perfect, but 2H11 dynamics give us a clearer sense of the key fundamental trends into next year. Overall, we see a picture that is consistent with our standing stock views, with early-cycle growth likely to moderate, handing off momentum to later-cycle end markets just moving off trough.

Table 9: Key Sector Data/Expectations for 2012

Cycle 2011E 2012E Outlook 2012 NotesAerospace – Commercial OE Late Up Mid-to-High Single Up Mid-Teens JPM Analyst Comm OEM est: +14%Aerospace – Commercial AM Mid Up Mid-Teens Up Double Digits HON +7-12%, JPM A&D estimates up mid-teensAerospace – Bizjet OE Late Flattish Up High Single JPM Analyst OE production est: +9% (Avg. of all OEMs)Aerospace – Bizjet AM Mid Up High-Single Up High Single Up with utilization IncreasesAuto – US Early Up High Single Up Mid-Single CSM: +6%, JPM Analyst +6%Auto – Europe Early Up Mid-Single Down Mid-Single CSM: -5%, JPM Analyst -5%Construction – Residential Early Up Mid-Single Up Low Double JPM Econ est: +12% Construction – Non-Residential Late Down Mid-Single Up Low Single Private Non-res: AIA +6.4%, JPM Econ est: +7.9%Defense N/A Down Single Digits Down Mid-Single HON: down 4-5%, JPM Analyst estimates -7%Semiconductor Cap Equipment Mid Up Double Digits Down Low Double Gartner -20%, DOV: -7-11%General Industrial Mid Up Single Digits Up Low Single JPM Econ US IP est: +2.8, Eurozone -2.5%HVAC – Residential Early Flattish Up Mid-Single JPM Est. +6%HVAC – Commercial Late Up High Single Up Mid-Single JPM Est. +5%HVAC – Refrigeration Mid Up Mid-Single Up Mid-Single TGT P-Fresh up 0-5%; WMT capex -8%, remodels -50%Oil/Gas – NA Rig Counts Late Up Mid-Double Up Low Double JPM Analyst NA Rig Count est: +10%Oil/Gas – International Late Up Mid-Single Up Mid-Single JPM Analyst NA Rig Count est: +8%Power Transmission Late Up High Single Up Double Digits SPW Transformer orders +40% q/q, ABB +18% y/y in 3QTelecom & IT Cap Equipment Late Up Double Digits Up Low Single Gartner +5%, JPM est +4%Truck – US Early Up Double Digits Up High Single JPM Analyst est +19%; ACT +24%Truck – Europe Early Up Double Digits Down Mid Teens Company guidance down 0-10% JPM analyst est -13%


Short-Cycle Update: 2H11 Slowing Continues into 2012

Last summer, we had identified four key short-cycle markets we were watching for signs that the macro volatility was filtering into bottom-up, industry data points: these were (1) short-cycle general industrial markets, (2) automotive production, (3) technology markets, and (4) North America rig counts. These areas, in our view, were likely to be the first to register any signs of a potential 2012 recession, and there were several mileposts we were watching in 2H11 to gauge progress. Overall, there have been mixed dynamics here (see our updates on each below), and 2H11 has been far from a worst-case scenario. Still, there are clear signs to suggest these end markets won’t drive the same upside as seen in 2010/2011.

General industrial activity moderating, with a slow finish to 2011

As background, we view ~35% of sector revenues as coming from short-cycle industrial markets, either in the form of components for OEMs, industrial consumables, or quicker-turn capital goods – this is a broad generalization, but captures revenues that are all closely linked to global industrial production trends. While not all of these revenues are “early cycle” in the traditional sense, they have seen the quickest bounce off the bottom this cycle, driven by a faster recovery in

While not turning down sharply, short-cycle momentum is

weakening amid global volatility.

28



capital spending, a benefit from the normalization of very low factory utilization rates, and a tailwind from exaggerated swings in customer inventories.

Figure 46: We See ~35% of Revenues Tied to “Short Cycle” Industrial/Capex Trends…


Indeed, these short-cycle industrial segments have been the best revenue performers in 2010/2011, up 14%/10%, respectively. A key driver of the strength was the depth of the 2009 trough – unlike last cycle when these segments recovered to prior peak just a year after the trough, it has taken nearly two years to return to 2008 levels this time around, meaning a longer initial bounce. Note, however, that it is normal for these businesses to slow as the cycle progresses. Below we show our forecast for related segments as compared to last cycle, for which we see growth slowing from 10% in 2011 to 3% in 2012. This is a similar dynamic to 2005-2006, when short-cycle segments moderated with growth moving more in line with the overall sector.

Figure 47: Short-Cycle Segments Outperformed Overall EE/MI Growth in 2010/2011 – We Expect Underperformance in 2012, Similar to Past CyclesY/Y Organic Revenue Growth


Industrial & Short Cycle Capex (~35%)examples:ROK A&SDHR Industrial TechnologiesMMM I&TEMR Industrial AutomationHON Transportation SystemsITT Mo/Flow

Other EE/MI Revenues (~65%)examples:GE Energy & AviationEMR ProcessSPW Thermal & IndustrialHON AerospaceTYC Security, Fire, & FlowDHR Life SciencesIR Residential

-20%

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-5%

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2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Industrial/Short Cycle Capex Overall EE/MI Growth

29



Figure 48: Organic Revenues for Short-Cycle/Industrial EE/MI Segments, Indexed to 2002


A slowing is also consistent with a macro picture that has weakened materially since the summer. In addition to auto production cuts (discussed in the next section), 2012 US IP growth has been revised down ~200bps since June, while Europe is now expected to enter a recession and China forecasts have been lowered incrementally. Corporate capex remains healthy for now, a positive, but something that could also wane if the economy weakens further. The chart below shows a weighted end-market index of the major short-cycle industrial macro indicators, which has correlated well historically with growth for related EE/MI segments, and looks set to slow further next year.

Figure 49: Slowing Short-Cycle Industrial Growth Is Consistent with Standing Macro ForecastsEnd Market Index Consists of: 40% US IP, 15% US Capital Spending, 20% Europe IP, 10% China IP, 10%

US Auto Production, and 5% EU Auto Production

Source: Company data, CSM, FRB, NBS, and J.P. Morgan estimates.

Notably, from a bottom-up perspective, several EE/MI companies have noted a slowing in their shorter-cycle sales for 4Q11, the first widespread signs of weakness in the sector for some time. Anecdotally, most companies are citing customer destocking as the main driver, though the breadth of the slowing is notable and it will take time to know whether or not this is a temporary dynamic. The 4Q reporting season will provide greater clarity on the 2011 exit rates as well as the early weeks of 2012, but our expectation is for a soft finish to the year for short-cycle businesses across the sector.

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Back to Peak in ~1 Year

Industrial/Short Cycle Capex

Back to Peak in ~2 Years

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

End Market Index Average Growth

The breadth of negative 4Q

commentary during EE/MI guidance season is the clearest

sign yet of a short-cycle

downshift.

30



Table 10: Short Cycle Commentary from EE/MI Companies

Company 4Q11 Guidance/Commentary 2012 Guidance/Commentary

HON Expects 4Q short-cycle sales/orders down sequentially (first q/q decline since 2008); tightened 2011 sales guidance to the low end.

Expects short-cycle revenues to be up 2-5% in 2012, with short-cycle European revenues (2)-2%.

DHR Reiterated EPS guidance, but indicated that 4Q11 organic growth would come in slightly weaker than the previously expected 3-5%.

Overall company organic growth guidance of +2-5%, with Industrial +1-4% and T&M +2-6%; company indicated shorter-cycle business.

MMM Maintained 2011 guidance despite a ~$0.05 tax benefit in 4Q; drivers include general macro weakness and disruptions from Thai flooding.

Total company organic sales guidance +3-6%, with I&T and SS&P both up 4-8%.

EMR Maintained 2012 EPS guidance, but 1Q12 coming in much weaker than anticipated, with order rates decelerating m/m from +5 to flat in November. Network Power and Climate main drivers of weakness.

1Q12 total sales down 3-5% y/y, EPS <$0.50. Thailand flooding expected to hit Process sales $300-$400 mm. Core sales still guided +4-7% for the year, with EPS $3.50-$3.63.

ST Pre-announced 4Q negatively, with revenues missing by ~5% versus prior guidance. Drivers include inventory reductions at European auto OEMs and Thai flooding disruptions.

No guidance yet for 2012.

Source: Company reports and J.P. Morgan.

Auto: US better than feared, Europe rolling over

Automotive production is a closely watched sector not just because of the direct exposure (~5% of EE/MI revenues) but also because of its broad impact on the economy and other manufacturing industries. Furthermore, auto production is often the first to move at the inflection of a cycle, making it somewhat of a leading indicator for the sector. In the late summer, we were closely watching the US Auto SAAR, with a view that weak retail sales (i.e., SAAR below 13mm by year-end) would eventually flow through to y/y declines in 2012. In fact, the US auto SAAR has held in okay, accelerating to north of 13.5mm in November/December on a normalization of Japan effects, mirroring stability in overall US macro data. US auto production forecasts for 2012 have been cut (prior expectations for double-digit growth were likely too bullish), but still stand at +6% y/y in the most recent CSM forecast. While there may be further downside, this is somewhat better than we had feared.

31



Figure 50: US Monthly Auto SAAR and Production ForecastsMillions of Units

Source: CSM and J.P. Morgan.

Figure 51: CSM 2012 NAFTA Auto Production Forecasts % Y/Y

Source: CSM.

In Europe, however, it is a different story as production now looks set to follow economic data lower into 2012. The Western Europe SAAR has held in reasonably well, but our autos team highlights a lag between sales and registrations (often 1-3 months), suggesting weakness is likely in early 2012. More notable have been the cuts to production expectations, with CSM now forecasting a 5% decline in 2012 versus prior expectations for modest gains (J.P. Morgan Autos analyst Himanshu Patel expects most suppliers to guide to 5-10% production declines in Europe next year). We also point to Sensata’s preannouncement and the dramatic 4Q11 destocking among their European auto customers, an indication that OEMs may be preparing for a weaker 2012.

Figure 52: Western European Auto SAARMillions of Units

Source: ACEA and J.P. Morgan.

Figure 53: CSM 2012 European Auto Production Forecasts% Y/Y

Source: CSM.

9.09.5

10.010.511.011.512.012.513.013.514.0

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10F

eb-1

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May 2011 December 2011


32



Figure 54: Semiconductor Industry Association (SIA) Y/Y Sales and JPM Forecasts

Source: SIA and J.P. Morgan Semiconductor research team.

Tech a debacle in 2H11…bottom in 1H12?

Technology-related exposures have been the clearest weak point and source of earnings pressure in the group for 2H11, felt most directly at companies like MMM and DOV – in fact, with weakness into year-end, the question becomes whether this could become the first area potentially to recover in mid-2012. Broadly, demand for wafers, equipment, and semi components fell sharply h/h in 2011, partially spurred by inventory/supply conditions due to the Japan earthquake this Spring. More recently, fab capacity demand has been choppy, a break from the steady demand observed during the 2003-2007 time period, as semi mini cycles have increased. Certainly, there are exogenous shocks like Japan and Thailand, which only make it harder to gauge underlying demand. Further, wafer demand is down about 4% q/q in 4Q11, the first decline since 1Q09, raising broader questions about the ultimate trajectory of the market.

Figure 55: Fab Capacity Utilization, Q/Q Change (2002-2012E)

Source: SICAS and J.P. Morgan estimates.

Figure 56: Wafer Demand, Q/Q Change (2002-2012E)

Source: SICAS and J.P. Morgan estimates.

December preannouncements from a wide range of players from integrateds to equipment suppliers show a challenging environment. Heading in, most companies guided revenue down low-single digits q/q in 4Q11, only to recently revise expectations to down double digits in the most severe cases. Thailand is a factor, but many are citing weak demand from an array of markets including PC, enterprise, communications, and memory/HD. The degree of change in the guidance after only a

-60%

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Jan-

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-10%

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1Q02

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E3Q

12E

-30%

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-10%

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1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

E3Q

12E

33



couple months is the most surprising element of the revisions, in our view, underscoring the highly uncertain environment, despite repeated calls for a bottom.

Table 11: Negative Tech Preannouncements Picked Up in December

Ticker -/+ Preannouncement Revenue (Was) Revenue (New) CommentaryALTR - -7-11% q/q -13-16% q/q Revenue outlook has deteriorated across all major vertical markets, including both

large and small customers. With the exception of North America, which will benefit from rising military sales, all geographic regions will be weak. As the quarter has progressed, economic uncertainty, macroeconomic concerns, and, in some instances, lower-than-planned sales have resulted in customers reducing demand on Altera. Consistent with the third quarter, Altera believes it will continue to under-ship customer end demand in the fourth quarter.

BRCM + Revenue and gross margins toward high end.

FORM - $30-34 mm $28-31mm The lower-than-expected revenue results are primarily due to the challenging DRAM pricing environment and softening demand for probe cards.

INTC - $14.7 B $13.7 B Sales of personal computers are expected to be up sequentially in the fourth quarter. However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012".

LSCC - -4-9% q/q -14-17% q/q Due to further softening of demand primarily in the communications business.

SQNS - $20-23 mm $11 mm Its largest customer’s request to take delivery of approximately 40% of the chips previously scheduled for delivery in December and to cancel the remainder of the scheduled shipment.

TXN - -2% q/q -6% q/q Mgmt said mix and lower utilization hurt. Weakness is broad w/ the exception of wireless. Revs in analog, embedded, and other segments were all weaker.TXN repeats that they think the semi market overall is in a process of bottoming out.

WFR - $0.8-1 B $789-861 mm

XLNX - -3-8% q/q -9-12% q/q Weaker sales during the quarter are driven primarily by a decline in large customer business in the Communications end market.


In the EE/MI sector, we’ve seen a similar dynamic with the sectors most directly exposed to the semiconductor industry (3M E&C, DOV’s old Electronic Technologies segment) decelerating dramatically into 3Q, and 4Q11 appears to be shaping up down ~5% compared to last year, about in line with macro data (wafer demand -4%). Emerson has also seen slowing in their embedded power business within the Network Power segment, while companies such as DHR/CBE with smaller direct tech exposure have also noted weakness in their related businesses.

Figure 57: DOV and MMM Have Felt the Slowing in Their Tech-Exposed SegmentsOrganic Growth, Y/Y


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34



Looking ahead, it appears the industry is under-shipping demand by as much as 10%in the 4Q, a dynamic that should eventually normalize, but timing remains the question. J.P. Morgan Semiconductor analyst Chris Danely sees industry margins/sales bottoming in 4Q11, with potential upside to 1Q12 estimates as demand ramps. Further weakness in end demand could push this out, however. On the capital spending side, the uncertainty on demand is also negative, especially after spending grew over 150% for major players (INTC, Samsung, TSMC) in 2010/2011, something we continue to see as a considerable negative for DOV.

North America rig counts holding up well

While oil & gas equipment has typically been a mid- to late-cycle market, the sharp bounce in commodity prices off of trough drove a corresponding rise in the US rig count off the 2009 low, making North American land drilling somewhat of an “early cycle” market this cycle. DOV has the most direct exposure in the sector to the North America market, while several others like EMR/GE/SPW/TYC/HON have broader exposure to oil & gas capex (both NA and int’l). Last cycle, it took the NA rig count nearly six years to grow ~180% to peak, while it has grown over 120% off 2Q09, recently rising back to prior peak levels. From here, J.P. Morgan estimates call for 10% NA rig count growth in 2012, with 15% growth in upstream capex globally, a solid spending rate given 2011 was +23%. Near-term spending is even accelerating according to a recent JPM survey, showing increased demand for liquid-rich gas, and both conventional/unconventional oil. Dry gas is the only product lacking in robust demand near term, likely due to falling prices. With that said, equipment supply and labor remain tight in the shales, showing no signs of weakening, a key lever for recent industry demand/utilization. In sum, not too much to pick at here; breakeven pricing for oil (~$85) and shale gas (~$3) is keep economics attractive for producers, a positive for related exposure at DOV, EMR, GE, and SPW.

Figure 58: BHI NA Land Rig Count ForecastRigs

Source: BHI and J.P. Morgan estimates.

Late-Cycle Markets at Inflection

Meanwhile, our view through last year was that late-cycle markets would see their growth rates converge in 2011, and then enter 2012 with greater visibility/momentum. Broadly speaking this has played out, with 2H11 providing the bottom-up data points for a strong year for power, commercial aerospace, and to a lesser extent non-res construction – we provide our update on each below.

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counts looks unlikely, but this

appears largely dialed into Consensus.

Most late-cycle markets are

indeed accelerating, a normal

cyclical dynamic that is in line with our standing expectations.

35



T&D remains the most visible late-cycle momentum story

Devoid of exposure to Europe, financing problems, and short-cycle demand, T&D remains one of the few clean momentum stories heading into 2012, one that mirrors the ramp after 2004. We have been pointing out a string of positive T&D data points over the past few months, which have included industrial (transformer-related) backlog at SPX up 40% y/y, MYRG backlog +270%, ABB US Power Products backlog +11%, and HUBB Power sales +22%. More recently, Hubbell commentary also confirms takeaways from the report and the broader thesis. Employees from upper management to the sales force observed utilities tend to under-spend on T&D infrastructure through a downturn, and now when layering on demands from an aging grid, the spending outlook captures the urgency from both factors which is materializing in order rates. Visibility appears to be improving here, along with the project list. Importantly, related players have also started to get pricing on longer-cycle equipment orders, especially important for transformer manufacturers SPX/ABB, suggesting that the underpinnings of the turn are in place.

A key data point for the thesis through the peak is NERC’s recent long-term reliability assessment report, which has data around planned circuit mile additions from utilities. E&Cs such as MYRG and Quanta Services have recently talked about new projects for T&D circuit mile additions across North America boosting the near-term outlook, but it has lacked a broader view of where the total market stands and where it is heading over the next few years. NERC has aggregated five-year projection and actual circuit mile addition data since 1990, and planned additions have tracked pretty tightly to actuals over the past 20 years. The established relationship is important, as planned circuit miles are projected to be nearly triple (~17k) the 20-year average through 2015. The pickup in activity is just starting in 2011, with acceleration in the later years, showing that the cycle is indeed somewhat normal in terms of timing (two-year delay to economic growth), but potentially more powerful in terms of demand – a major plus. The report also highlights the number of planned US transformer projects, in which the front-log of activity (first three years) is up over 30% compared to last year’s report, showing a turn in transformer demand evident in SPW and peer orders. As a result, we favor T&D into 2012, and believe the turn in demand is not fully priced into estimates/multiples for the relevant players.

Figure 59: Planned Circuit Mile Additions Expected to Be 3x 20-Year Average Through 2015


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For a deeper look at T&D data points, see our report from

December 12, 2010.


36



Power Generation more mixed, but areas of strength

The generation side has been a mixed bag and tougher to generalize. On the positive side, GE gas turbine orders have inflected nicely driven by strength in international demand – we see 10%+ shipment growth as likely over the next two years, in line with company guidance. The US gas market remains dormant near term, but with potential for a mid-decade inflection still intact. Other areas have been mixed, however, with a slowing of new coal projects driving SPW’s thermal backlog lower in recent quarters.

Figure 60: GE Gas Turbine Order Growth, Y/Y (Rolling 12 Month)% Y/Y


Figure 61: SPW Thermal Segment Backlog$mm


Non-res continues to heal from the trough

After a brutal downturn, 2011 looks to have marked the bottom for the US non-residential construction market, ending a dramatic consolidation that included a ~40% decline from the 2008 peak. Just as the financial markets were a key driver of the downturn, a return of liquidity to the market has helped stabilize the market, as lending standards have eased and transaction volumes have picked up. The Architecture Billings Index (ABI), which first moved above the growth threshold of 50 in late 2010, has once again led a recovery in private construction activity, which in late 2011 began to grow y/y against easy comparisons for the first time this cycle –most third-party forecasts call for further gains here in 2012. There are likely to be headwinds from weakening public construction activity, a partial offset, but 2012 nonetheless looks set to at least remove the dramatic drag from construction declines seen in 2009-2011.

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For our most recent, in-depth update on non-residential

fundamentals, see the

Commercial HVAC discussion in our annual HVAC Report.


37



Figure 62: Private Non-Res Construction Grew Turned Positive Y/Y in Late 2011…% Y/Y

Source: US Census.

Figure 63: …Led Higher by the ABIPrivate Non-Res Construction, % Y/Y ABI

Source: AIA and US Census.

Figure 64: CRE Lending Standards

Net % Tightening

Source: FRB.

Table 12: Summary of Consensus Non-Residential Construction Outlooks

2011 2012Non Residential Total -5.6 6.4

Commercial Total -6.5 11.8Office -6.1 9.8Retail/Other Comm. -31 11.8Hotel -17.9 18.0Industrial Total -15.8 8.4

Institutional Total -3.4 4.4Health 1.8 7.1Education -5.2 2.6Religious -10.0 6.3Public Safety -2.5 0.9Amusement/Recreation -0.3 5.9

Source: AIA. Consensus includes McGraw-Hill, Global Insight, Portland Cement, Moody's,

FMI, and Reed.

Importantly, EE/MI segments selling into non-res markets have had a strong 2011, as replacement/retrofit markets have offset new construction weakness. While some of this was catch-up spend from investments that were postponed through the downturn, we see much of the retrofit growth as sustainable, driven by energy-efficiency themes such as LED lighting (HUB/B, WCC) and an aging installed base of applied HVAC chillers (IR). Any gains in new construction activity would be additive, in our view. We are generally forecasting just mid-single-digit growth for these segments in 2012/2013, but see potential for stronger growth in a Consensus macro environment with any construction tailwind.

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38



Figure 65: EE/MI’s Non-Res-Focused Segments Grew Nicely in ’11 with No Construction TailwindY/Y Organic Growth


Commercial aerospace provides solid growth/visibility, well understood by Consensus

Lastly, commercial aerospace looks positioned for a strong 2012. This has been broadly apparent through data points over the last 12 months, including OE production rate increases as well as strong aftermarket revenues, and therefore appears well understood by Consensus. Nonetheless, the setup into next year remains attractive relative to other end markets, with above-average visibility in a volatile macro environment. On the OE side, J.P. Morgan Aerospace & Defense analyst Joe Nadol is forecasting commercial OE deliveries up 14% y/y. On the aftermarket side, the industry continues to work off a dramatic trough in 2009-2010, with revenues set to outpace flight hours once again in 2012. Company guidance for aftermarket revenues has centered around growth of ~10% for next year, and our 7% expectation for HON’s business is below the mid-teens growth our A&D team forecasts for COL/TDG, suggesting potential upside.

Figure 66: Comm’l OE Deliveries Y/Y

Source: J.P. Morgan Aerospace & Defense estimates.

Table 13: Commercial Aftermarket

Y/Y (Includes Business Jet Exposure)

Guidance JPM EstimateHoneywell Up 7-12% +7%Rockwell Collins Up Low DD +14%TransDigm Up ~10% +15%Pratt & Whitney Up Mid-SD Up Mid-SDHamilton Sundstrand (organic) Up ~10% Up ~10%


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HUB/B Electrical TYC Fire WCC Construction

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potential, this is a view with

which we agree.

39



2012/2013 Earnings Outlook

A Look Back at 2011

Bridging EPS – 2011 in Review

On the whole, 2011 turned out better than we expected, mostly driven by a strong first half to the year. Our fundamental bridges for the large caps from last year and today show that currency was a bigger helper than we anticipated, while pension and other non-fundamentals were about in line. Outside of these items, the main driver of upside was again organic volumes/mix.

Table 14: Initial 2011E EPS Bridge – As of January 2011

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYC2010 EPS Actual 2.31 3.71 2.86 1.15 3.00 2.35 5.75 3.06 3.62 0.81 2.68 Restructuring/Productivity 0.07 0.18 0.10 0.08 0.07 0.40 0.20 -0.19 0.20 0.18 0.14 Pension -0.01 0.00 -0.01 -0.02 0.04 0.00 -0.23 -0.06 0.17 -0.12 0.00 Currency 0.00 0.02 0.01 0.00 -0.20 0.03 0.08 0.02 0.13 0.01 0.06 All Other Non-Fundamental -0.04 -0.57 -0.36 -0.12 0.38 -0.15 -0.23 -0.09 0.48 -0.52 -0.05Total Non-Fundamental Items 0.02 -0.37 -0.26 -0.06 0.29 0.28 -0.18 -0.32 0.98 -0.45 0.15Base 2011 EPS 2.33 3.34 2.60 1.09 3.29 2.63 5.57 2.74 4.60 0.36 2.83Core Volume Mix 0.37 0.46 0.65 0.24 0.56 0.47 0.43 1.21 -0.05 0.84 0.172011 JPME 2.70 3.80 3.25 1.33 3.85 3.10 6.00 3.95 4.55 1.20 3.00


Table 15: 2011E EPS Bridge – Today

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYC

2010 EPS Actual 2.31 3.71 2.86 1.12 3.00 2.35 5.75 3.06 3.62 0.81 2.68 Restructuring/Productivity 0.06 -0.09 0.08 0.00 0.07 0.20 0.20 0.00 0.00 0.18 0.14 Pension -0.01 0.00 -0.01 0.00 0.17 0.00 -0.23 -0.06 0.22 -0.12 0.00 Currency 0.06 0.04 0.06 0.00 -0.06 0.05 0.16 0.09 0.13 0.01 0.11 All Other Non-Fundamental 0.07 -0.24 -0.17 -0.13 0.10 -0.10 -0.50 -0.55 0.41 -0.41 0.01Total Non-Fundamental Items 0.18 -0.29 -0.04 -0.13 0.28 0.15 -0.37 -0.52 0.76 -0.34 0.26Base 2011 EPS 2.49 3.42 2.82 0.99 3.28 2.50 5.38 2.54 4.38 0.47 2.94Core Volume Mix 0.32 1.05 0.42 0.37 0.74 0.20 0.52 2.25 0.02 0.63 0.302011 JPME 2.81 4.47 3.24 1.36 4.02 2.70 5.90 4.79 4.40 1.10 3.24


Table 16: Difference Between New and Old Models

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYCRestructuring/Productivity -0.01 -0.27 -0.02 -0.08 0.00 -0.20 0.00 0.19 -0.20 0.00 0.00Pension 0.00 0.00 0.00 0.02 0.13 0.00 0.00 0.00 0.05 0.00 0.00Currency 0.06 0.02 0.05 0.00 0.14 0.02 0.08 0.07 0.00 0.00 0.05All Other Non-Fundamental 0.11 0.33 0.19 -0.01 -0.28 0.05 -0.27 -0.46 -0.07 0.11 0.06Total Non-fundamental Items 0.16 0.08 0.22 -0.07 -0.01 -0.13 -0.19 -0.20 -0.22 0.11 0.11

Core Volume/Mix Upside -0.05 0.59 -0.23 0.13 0.18 -0.27 0.09 1.04 0.07 -0.21 0.132011 JPME (Jan 2011) 2.70 3.80 3.25 1.33 3.85 3.10 6.00 3.95 4.55 1.20 3.002011 JPME 2.81 4.47 3.24 1.36 4.02 2.70 5.90 4.79 4.40 1.10 3.24

Actual/Forecast Core Volume/Mix -14% 128% -35% 54% 32% -57% 21% 86% -140% -25% 76%2011E EPS 4% 18% 0% 2% 4% -13% -2% 21% -3% -8% 8%


40



EPS momentum drives stock performance, but less so than in 2010

If we look at the companies that drove the biggest EPS upside on core growth, we again see that earlier-cycle momentum names like DOV and ROK outperformed the most, with HON also putting in a strong year. These stocks also tended to be the better performers in the group, but the correlation with upside was less tight than in 2010, when growth momentum was the primary driver of outperformance. Indeed, 2011 also saw good performance from names like TYC (portfolio play via the breakup) and DHR (capital allocation via the BEC acquisition).

Figure 67: 2011 Core Volume Beats versus Stock Performance% Y/Y


Figure 68: Core Volume and 2010 Stock Performance


2012 estimates cut throughout the summer

It’s also notable that 2012 estimates were cut across the group by an average of 8% since April, lowering the bar into next year. The biggest downward revisions were seen at IR, SPW, TXT, MMM, and EMR.

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41



Figure 69: 2011E EPS Revisions, April-December 2011

Source: Bloomberg.

Figure 70: 2012E EPS Revisions, April-December 2011

Source: Bloomberg.

2012 Non-Fundamentals Mostly Dialed In

The table below highlights the key non-volume-related EPS drivers for the group next year. Unlike past years when there were numerous moving parts below the line, the starting point for next year is generally fairly close to 2011 estimates. Broadly speaking, most companies face headwinds from currency/pension, partially offset by tailwinds from share count. Note, however, that our models assume currency as it stood at the time of guidance in mid-December, with EUR/USD moves since then now implying another 50-100bps hit to EPS growth versus our current models. There are also company-specific dynamics around M&A and tax rate, which we think are mostly dialed into Consensus.

Table 17: 2012 Bridge vs. Implied Core Growth Consensus

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYC

2011E EPS 2.81 4.47 3.24 1.36 4.02 2.70 5.90 4.79 4.40 1.10 3.24 Acquisitions/Divest 0.33 0.25 -0.01 0.02 -0.02 -0.12 0.07 0.00 0.30 0.00 0.00 Restructuring 0.05 -0.05 0.01 0.00 0.14 0.01 0.00 -0.06 0.00 0.00 0.04 Pension -0.01 0.00 -0.03 0.00 -0.16 -0.08 -0.10 0.00 -0.05 -0.05 -0.02 Currency -0.05 0.00 -0.03 0.00 -0.06 0.00 -0.09 -0.05 0.00 0.00 -0.06 All Other -0.06 -0.16 0.03 -0.01 0.06 0.30 0.05 -0.13 0.09 0.00 -0.12Total Non-Fundamental Items 0.26 0.04 -0.03 0.01 -0.04 0.11 -0.07 -0.24 0.34 -0.05 -0.16Base 2012E EPS 3.07 4.51 3.21 1.37 3.98 2.81 5.83 4.55 4.74 1.05 3.08


Assuming normal margin leverage off lower growth

On margins, we are generally assuming normal incremental margins (in the ~25% range on average), despite lower growth expectations in 2011. Headline incremental margins were lower in 2011, though this included headwind from acquisitions as well as mix in the later-cycle businesses and some price/cost headwinds. These should generally normalize in 2012, while restructuring benefits are an incremental helper for some (HON, DHR). But, with the upturn entering its third year, we do not see incremental margins as an earnings upside driver.

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We assume normal incremental

margin of ~25%, reasonable

though not “conservative” at this point in the cycle.

42



Table 18: Segment Incremental Operating Margin (Reported)

2010 2011 2012 2013

DHR 33% 18% 20% 23%DOV 33% 16% 23% 27%EMR N/M 17% 51% 30%GE (industrial only) 6% 1% 21% 22%HON 21% 22% 31% 23%MMM 25% 8% NM 40%ROK 55% 27% 39% 28%SPW NM 6% 10% 25%TXT (ex-TFC) 13% 15% 4% 14%TYC NM 30% 34% 24%IR 46% 29% 23% 24%Avg 29% 17% 26% 25%


From a longer-term perspective, unlike last cycle when the group took 4-5 years to return to prior peak margins, prior peak margins were regained in just 1-2 years this cycle, reflecting restructuring benefits and more efficient cost structures. This is another dynamic to consider, as many companies will need to continue to drive margins above historical levels. This looks achievable at companies with visible margin drivers from restructuring and acquisition integration (DHR, HON, TYC), but perhaps less so at end-market-leverage plays where margins already remain high (MMM, DOV, EMR).

Figure 71: Average EE/MI Segment Margins, 1999-2013EMargin %


Figure 72: 2011E Margins versus Prior Cycle Peak


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43



Price/cost should be roughly neutral as a starting point, but potential for tailwinds

Pricing and commodities, a big focus in 2010/2011, should be less of an issue into 2012, and likely a positive given the recent declines in copper/steel prices. From a top-down perspective, price/cost dynamics for the sector are best illustrated by looking at the PPIs for capital equipment versus a broad basket of industrial commodities (ex-fuel). We see that, after steady inflation over the past two years, capital equipment pricing has begun to catch up in recent quarters, reflecting a number of price increases throughout 2011. Our models assume price/cost will be roughly neutral for most companies in 2012, while in a recession we would likely see a positive spread open up (similar to 2009) in which price increases carry over but commodity prices decline with macro data. In a deflationary environment, we see IR and HUB/B as the companies best positioned for price/cost benefits. LII would also stand to benefit, though the company has hedged the first half of the year at higher prices, meaning tailwinds wouldn’t come until 2H12/2013.

Figure 73: Pricing Is Catching Up with Raw Material Increases, Potentially a Positive in 2012Capital Equipment PPI

Source: BLS and J.P. Morgan.

Figure 74: Copper LME Spot Price ($/lb)

Source: Bloomberg.

Figure 75: CRU Steel Price Index

Source: CRU.

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44



Growth Assumptions

2012 assumed growth versus macro indicators

We assume average organic revenue growth of 3% for the group in 2012. While the relationship between EE/MI growth and macro indicators can vary year to year, in an upturn the group has typically grown on average 1.5x global industrial production (this was the average multiplier between 2003 and 2007, and about in line with what was seen in 2011). A weighted average of J.P. Morgan economist forecasts calls for approximately 3.0% industrial production growth in the EE/MI markets, something consistent with ~2% real global GDP growth, meaning our forecast equates to expected EE/MI growth of only ~1x global IP. Simplistically, if we assume the usual 1.5x multiplier, this means our models imply modest cuts to Consensus economic forecasts (closer to ~2% IP growth, ~1.5% GDP growth globally).

Figure 76: In an Upturn, the EE/MI Sector Historically Has Grown at ~1.5x Global IP GrowthIndustrial Production Growth and EE/MI Avg Organic Growth Multiple of IP

Source: Company data and J.P. Morgan.

Figure 77: Global Industrial Production vs. Global GDPGDP, % Y/Y IP, Y/Y


A “base effect” will help 2012 growth somewhat, though we discount this

We can also look at growth in the context of the 4Q revenue run rate, and what normal seasonality off that level would imply for 2012 – this is because several companies had accelerating fundamentals through the year, putting the 4Q exit rate above the 2011 base. Running the numbers, normal seasonality off our standing 4Q11 estimates would imply ~4% organic revenue growth in 2012. If we exclude

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macroeconomic forecasts.

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off the 4Q11.

45



some of the later-cycle companies like SPW/TXT (for which 4Q can be lumpy and seasonality is less consistent), then implied growth for those with the most short-cycle exposure is ~2%. In other words, our models assume a macro environment relatively consistent with the 4Q, with normal seasonality from here but no acceleration.

Table 19: JPM(E) Organic Growth versus Seasonality Off 4Q11E

% Y/Y

Implied JPM(E) GuidanceDOV 4% 3% 4-7%DHR -1% 1% 2-5%EMR 2% 2% 5-7%MMM 1% 2% 2-5%HON 4% 4% 4-6%IR 0% 2% n/aROK 6% 5% 5-9%SPW 5% -3% n/aTXT 9% 3% n/aTYC 4% 5% 5%Average 4% 2% ~5%Avg. Short Cycle (DOV, DHR, MMM, HON, ROK) 2% 3% ~5%


Organic growth versus last cycle

We assume average organic growth of 3% and 4% in 2012 and 2013, respectively, bringing average growth for the group over the 2011-2013 period to 5%. While not directly analogous, we think it is reasonable to compare growth to the 2005-2007 period, which represented years 2-4 of the last upturn. We think this lower growth is reasonable in the context of (a) an expected European recession in 2012, (b) a strong 2010-2011, which may have pulled forward some early-cycle upside, and (c) lingering structural issues in this cycle versus last which should lead to lower growth.

Table 20: Organic Growth, Past Two Cycles

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYC Avg.

2003 – Organic 2% 3% -1% -5% 0% 5% 4% 7% n/a -9% -2% 0%2004 – Organic 9% 20% 8% 3% 8% 4% 6% 11% n/a 0% 4% 7%2005 – Organic 5% 10% 6% 7% 5% 6% 4% 13% 6% 19% 2% 7%2006 – Organic 7% 14% 12% 7% 7% 9% 6% 11% 10% 14% 5% 9%2007 – Organic 5% 2% 7% 9% 7% 6% 5% 6% 10% 13% 6% 7%2008 – Organic 3% 1% 7% 9% 2% 0% -2% 6% 6% 7% 4% 4%Avg. ’05-’07 Organic 5% 9% 8% 8% 6% 7% 5% 9% 8% 15% 4% 8%

2009 – Organic -12% -24% -13% -8% -14% -16% -8% -19% -15% -25% -4% -14%2010 – Organic 12% 17% 0% -5% 6% 1% 14% 10% -1% 0% -3% 4%2011E – Organic 7% 13% 11% 9% 8% 6% 4% 20% 7% 9% 4% 9%2012E – Organic 1% 4% 3% 6% 4% 3% 2% 5% -3% 3% 5% 3%2013E – Organic 5% 4% 5% 6% 4% 5% 2% 5% 5% 3% 5% 4%Avg. ’11-’13 Organic 4% 7% 6% 7% 5% 5% 3% 10% 3% 5% 5% 5%


We Remain ~5% Below Consensus, Mostly on Growth

All in, our estimates assume EPS growth of 9% y/y in 2012 for our large-cap coverage group, which is about 6% below standing Consensus, even though Street numbers have come down by an average of 8% since July. We think the difference is mostly on organic growth, as our views of margin leverage are generally not meaningfully differentiated versus guidance/Consensus. If we take normal

46



incremental leverage and back into the implied organic growth difference, we think the Street is dialing in ~250bps higher organic growth, or an average of ~5.5% versus our ~3%.

Table 21: 2012 Bridge vs. Implied Core Growth Consensus – EE/MI Large Caps

DHR DOV EMR GE HON IR MMM ROK SPW TXT TYC Avg

2011E EPS 2.81 4.47 3.24 1.36 4.02 2.70 5.90 4.79 4.40 1.10 3.24 Acquisitions/Divest 0.33 0.25 (0.01) 0.02 (0.02) (0.12) 0.07 0.00 0.30 0.00 0.00 Restructuring 0.05 (0.05) 0.01 0.00 0.14 0.01 0.00 (0.06) 0.00 0.00 0.04 Pension (0.01) 0.00 (0.03) 0.00 (0.16) (0.08) (0.10) 0.00 (0.05) (0.05) (0.02) Currency (0.05) 0.00 (0.03) 0.00 (0.06) 0.00 (0.09) (0.05) 0.00 0.00 (0.06) All Other (0.06) (0.16) 0.03 (0.01) 0.06 0.30 0.05 (0.13) 0.09 (0.00) (0.12)Total Non-Fundamental Items 0.26 0.04 (0.03) 0.01 (0.04) 0.11 (0.07) (0.24) 0.34 (0.05) (0.16)Base 2012E EPS 3.07 4.51 3.21 1.37 3.98 2.81 5.83 4.55 4.74 1.05 3.08Core Volume 0.08 0.24 0.19 0.13 0.27 0.19 0.22 0.55 0.06 0.35 0.422012 JPMe 3.15 4.75 3.30 1.50 4.25 3.00 6.05 5.10 4.80 1.40 3.50

Consensus 2011E EPS 3.29 4.92 3.55 1.57 4.44 3.15 6.31 5.32 5.32 1.68 3.60Implied Core Earnings 0.22 0.41 0.34 0.20 0.46 0.34 0.48 0.77 0.58 0.63 0.52Y/Y Growth 8% 9% 11% 14% 12% 13% 8% 16% 13% 57% 16% 16%

JPM vs Consensus EPS -4% -3% -4% -4% -4% -5% -4% -4% -10% -17% -3% -6%JPM vs Consensus Core GrowthJPM Organic Growth 1.1% 4.0% 3.1% 6.1% 3.8% 2.5% 1.6% 5.4% -3.9% 2.6% 5.0% 2.8%EPS per 1% Growth 0.05 0.08 0.06 0.02 0.09 0.10 0.09 0.11 0.12 0.06 0.08Implied Consensus Organic Growth 3.8% 6.0% 5.9% 9.6% 6.0% 4.0% 4.5% 7.4% 0.4% 7.1% 6.3% 5.6%JPM vs Consensus Organic Growth -2.7% -2.1% -2.7% -3.5% -2.2% -1.5% -2.9% -2.0% -4.3% -4.5% -1.3% -2.7%


Figure 78: 2012 EPS Revisions Since July ’11

Source: Bloomberg.

Table 22: JPM versus Consensus, 2012E EPS

EPS

2012E EPS Y/Y EPS GrowthJPM Street % Diff JPM Street

DHR 3.15 3.29 -4% 12% 16%DOV 4.75 4.92 -3% 6% 9%EMR 3.30 3.55 -4% 5% 10%GE 1.50 1.57 -4% 10% 14%

HON 4.25 4.44 -4% 6% 10%IR 3.00 3.15 -5% 11% 15%

MMM 6.05 6.31 -4% 3% 7%ROK 5.10 5.32 -4% 6% 11%SPW 4.80 5.32 -10% 9% 20%TXT 1.40 1.68 -17% 27% 44%TYC 3.50 3.60 -3% 8% 11%

Avg Lg Caps -6% 9% 15%

ST 2.30 2.17 6% 18% 4%MSI 2.70 2.88 -6% 5% 12%

GNRC 1.90 2.09 -9% -3% 10%HUB/B 4.55 4.75 -4% 5% 8%

LII 2.40 2.42 -1% 17% 19%ROP 4.50 4.73 -5% 6% 10%WBC 4.40 4.76 -8% -6% 1%WCC 4.00 4.43 -10% 7% 16%WSO 3.45 3.19 8% 19% 18%WTS 2.30 2.63 -13% 4% 16%

Avg All -5% 7% 11%

Source: Bloomberg and J.P. Morgan estimates.

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Cycle Thoughts: Far from “Normal”, but Late-Cycle Playbook Intact

Before moving to valuation, we take some time to refresh our view on where we stand in the cycle, important context for near-term earnings expectations. We continue to believe this cycle is far from “normal,” as we expect structural imbalances to drive increased volatility, lower multiples, and below-average organic growth versus the mid-2000s. That being said, we see enough similarities to past cycles that our approach to early/late-cycle exposure is not that different versus history. It is also important to consider earnings risk at this point in the cycle, something very different for early- versus late-cycle names.

Versus Last Cycle, Some High-Level Similarities

2012-2013 looks comparable to the 2005-2007 period

To begin, if this is indeed a “normal” upturn, then we begin by indentifying where this cycle stands versus last. There have been plenty of differences in the growth profile this time around, including a faster/deeper downturn followed by a sharper recovery off trough. Nonetheless, from a cycle perspective, we think 2011 looks similar to 2004-2005, which represent the second full year of the upturn for the early-cycle names. This means the setup into 2012 would be similar to how the group looked entering either 2005 or 2006, depending on the company. Generally, however, we lean toward the view that 2012 is most analogous to 2006.

Figure 79: EE/MI Average Organic Growth, Last Cycle% Y/Y


Figure 80: EE/MI Average Organic Growth, This Cycle% Y/Y


High-level data suggests the comparison is reasonable

A cursory look at the US data suggests this is a reasonable comparison, with some aspects of a “normal cycle” in tact. While the decline in US industrial production has been steeper this time around, the overall shape of the recovery to date has been similar, with a relatively healthy move higher from trough. Key indicators like the ISM have also followed a similar pattern to last cycle’s, as volatility in the leading indicators was recorded then as well (indeed, the 2H11 dynamics look similar to the “growth scare” seen in 2005).

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Figure 81: Cumulative US Industrial Production Growth Off TroughIndexed

Source: FRB.

Figure 82: ISM New Orders Tracking a Similar Pattern as WellIndex

Source: ISM.

Earlier-Cycle Exposures Again Drove the Most Upside in 2011…

We can also look at cycle timing from the perspective of earnings momentum, looking at which companies drove the most upside versus Consensus in this cycle versus last. Typically, companies with earlier-cycle exposures have generated the most earnings beats in the first years of an upturn, whereas later-cycle companies have beat earnings as their end markets inflected. Indeed, the early years of this cycle have been no different.

In 2010, companies with the most short-cycle exposure beat by the most

As perspective, looking back on 2010, the companies that beat earnings by the most were those with the most short-cycle, general industrial exposure, representing the stronger-than-expected move off trough for these end markets. Indeed, DOV and ROK are the most exposed in the large-cap group, and were among the best performers from an EPS surprise perspective.

Figure 83: Greater Short-Cycle Industrial Revenue Drove Largest Beats in 2010…%


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2011 was a similar story, but with less momentum

In 2011, we had expected revision momentum to balance out somewhat equally between those with short-cycle industrial exposure and those with later-cycle/industry-specific drivers. While the magnitude of beats did slow, companies like ROK, WCC, WBC, and DOV were again the best performers, indicating that Consensus (including us) generally underestimated the magnitude of strength in short-cycle end markets, particularly through 1H11.

Figure 84: …And Continued into 2011, but with Less Momentum%


...But in a Normal Upturn, Late-Cycle Should Start to Outperform

While we underestimated the degree of early-cycle momentum in 2011, we had always viewed 2012 as the point at which later-cycle markets likely would begin to outperform fundamentally, driving not only stronger all-in EPS growth but also greater revision momentum and, in many cases, multiple expansion. Indeed, this thesis looks firmly on track, and would be consistent with evolution of the past cycle, as we describe below.

In the last cycle, 2006 was the inflection for early/late-cycle momentum

Looking at the EE/MI group last cycle, this dynamic can most clearly be seen by comparing revisions among a subset of the earliest-cycle EE/MI companies (MMM, DOV, ROK) to their latest-cycle counterparts (SPW, EMR, TXT, TYC). At the 2000 peak, the early-cycle group was the first to see their earnings cut at the start of the recession, but by 2004-2005 had seen their estimates revised up dramatically off the bottom, even as later-cycle companies had yet to see upward revisions This cycle has seen a very similar dynamic over the 2008-2011 period.

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Figure 85: Total Late- vs. Early-Cycle FY2 EPS Revisions, 2000-20052000=100


Figure 86: Total Late- vs. Early-Cycle FY2 EPS Revisions, 2008-20112008=100


By 2006-2007, however, this dynamic began to shift, as early-cycle momentum stalled out but later-cycle end markets began to drive earnings beats: cumulative EPS revisions for later-cycle EE/MI companies increased ~70% through 2008, versus only ~20% for the earlier-cycle peers. All-in organic growth and EPS were also stronger over that period. We see 2012-2013 as the period this cycle in which we’d expect a similar inflection.

Figure 87: Total Late- vs. Early-Cycle FY2 EPS Revisions, 2006-2008


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Figure 88: Core Revenue Growth for Early/Late Groups, 2001-2008Y/Y %


Figure 89: EPS Growth for Early/Late Groups, 2001-2008Y/Y %


This shift in momentum can also be seen if we broaden out the analysis and look at a wider group of industrial companies, including multi-industry, machinery, and electrical. Below, we take a wide subset of later-cycle industrials (EMR, SPW, TXT, CBE, HUB/B, TNB, MTW, TEX, WCC, TYC) and compare their results to those with a more early/mid-cycle orientation (ITW, DHR, DOV, HON, MMM, ETN, PH, UTX, CAT, GWW, KMT). One can see that the late-cycle group beat Consensus estimates for 2006/2007, as they stood entering the year, by an average of 25%/18%, versus only 8%/4% upside for the early/mid-cycle group.

Figure 90: In 2006-07, Later-Cycle Industrials Posted the Most EPS Upside

% Beat (Miss) versus FY2 Consensus at Beginning of Prior Year


Early/mid-group includes ITW, IR, DHR, DOV, HON, MMM, ROK, ETN, PH, UTX, CAT, KMT, and GWW; Late-cycle group includes


Multiples also often expand

On top of this, multiples for later-cycle stocks typically have outperformed as the upturn matures, as the market anticipates above-average earnings growth and, to some degree, earnings beats. A look at past cycles suggests that relative multiples typically have been (1) volatile through a recession, followed by (2) higher multiples for earlier-cycle names in the first year of the upturn, then (3) a relative expansion in multiples for later-cycle names as their fundamentals inflect. For example, in the early 2000s upturn, late-cycle stocks moved from a ~20% discount in year one of the recovery to a 5-10% premium by year two of the recovery. What’s notable, however,

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is that late-cycle names maintained that premium consistently for two years before reverting to parity.

Figure 91: Relative Multiples – 2000s

Late-Cycle Relative Premium/Discount to Early/Mid-Cycle Peers, FY2 P/E


Early/mid-group includes ITW, IR, DHR, DOV, HON, MMM, ROK, ETN, PH, UTX, CAT, KMT, and GWW; Late-cycle group includes


Stocks saw a similar dynamic in the 1990s, though to a lesser degree given the downturn was less severe and the recovery more gradual. Still, late-cycle stocks showed similar multiple expansion, trading at a ~10% discount through the 1993 recovery, then moving to a 0-5% premium through most of 1994-1996.

Figure 92: Relative Multiples – 1990s

Late-Cycle Relative Premium/Discount to Early/Mid-Cycle Peers, FY2 P/E


Early/mid-group includes ITW, IR, DHR, DOV, HON, MMM, ETN, PH, UTX, CAT, KMT, and GWW; Late-cycle group includes EMR,

SPW, TXT, CBE, HUB/B, TNB, MTW, and WCC.

This cycle, we began to see some late-cycle multiple expansion in 2011, though this was wiped out by the 2011 macro volatility, as investors generally took all companies to a similar multiple. More recently, this premium has started to be restored, consistent with what we’d expect at this point in a Consensus recovery asthe market anticipates above-average earnings growth in the 2013-2014 period.

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Figure 93: Relative Multiples – This CycleLate-Cycle Relative Premium/Discount to Early/Mid-Cycle Peers, FY2 P/E

Source: J.P. Morgan

Not All 2012 Earnings Are Created Equal

In looking at 2011 and 2012 EPS, it’s also important to maintain perspective around where the earnings fall in the context of each company’s cycle – the key considerations here are end markets (mix of early/late cycle) as well as overall cyclicality (how much EPS downside if/when a recession hits). On this basis, we like late cycle given that is closest to trough, while also offering upside throughout the cycle.

Still a wide discrepancy on revenues versus prior peak

As a start, we look at indexed organic revenues versus the prior peak, a measure of how quickly the company has grown off the bottom. Indeed, there is a wide gap here, with early-cycle companies like 3M nearly 10% above prior peak while revenues at SPW/TYC/IR are still 5-10% below. We acknowledge that some companies have stronger through-the-cycle growth rates, though we believe most of this discrepancy can be attributed to cycle timing, which will normalize through an upturn. This is one key to our preference for later-cycle stocks.

Figure 94: 2011E Indexed Organic Revenues versus Prior Peak


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Longer-term EPS risk/reward a good representation of both cyclicality and cycle timing

Later in our report, we outline a framework to think about peak earnings power in a normal cycle (which we assume is a 2015 event), the next trough in a typical recession (~2016), along with scenario analyses around 2012 recession risk. The chart below summarizes this analysis, showing how 2011E EPS compares to our expectations for (1) a severe 2012 recession, (2) cycle peak, and (3) next cycle trough. We then sort these by which companies have the most downside to trough (a simple average of a 2012 recession scenario and next cycle trough scenario). As expected, some of the traditional defensive like DHR/TYC/MMM screen relatively well, with manageable downside anticipated in recession scenarios. Interestingly, however, later-cycle companies like SPW or GE (Industrial only) also show relatively less downside in recession scenarios given 2011E earnings bases that are already near trough. In this framework, ROK and DOV screen as higher-risk stocks than others with similar cyclicality, as they are the earlier-cycle names in the group that have already made the biggest moves toward peak. IR also comes in with a higher earnings risk profile, but this is less about end markets (several of which are still near bottom) and more about its lower margin base that causes above-average EPS volatility.

Figure 95: Through-the-Cycle EPS Risk/Reward, JPM(E)% of 2011E EPS


Looked at differently, we can also screen the large caps by which companies appear to offer the greatest ratio of cycle EPS upside versus 2012 recession downside. Again, the results are more nuanced than would be suggested by simply looking at a company’s cyclicality or its early/late-cycle profile. Several of our Overweight-rated names show up toward the left side of this spectrum, offering nice upside potential to cycle peak earnings with manageable near-term risk, by our estimates.

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“Risk” should be evaluated not only by looking at overall

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Figure 96: EPS Upside (to ~2015E Cycle Peak) versus Downside (in Severe 2012E Recession)% EPS Upside/Downside versus 2011E EPS


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Valuation

Lastly, this brings us to valuation. In a world with unprecedented volatility/uncertainty, we continue to believe valuation requires a more robust framework than simply looking at historical multiples on near-term earnings. We begin with a discussion of our price targets (we think secularly impaired multiples may be here to stay) and then broaden the analysis by looking at 2012 recession scenarios as well as cycle upside/downside.

Price Targets: Sticking with Our Conservative Target Multiple

Historical absolute multiples remain less relevant, in our view

With uncharted waters come questions around what a “fair multiple” should be. The standard is typically to use an average of the last ~15 years, which shows a FY1/FY2 absolute multiple of ~18x/15x. Prior to the last few years since the peak, thosenumbers were closer to ~19x/16x. Still, through most of this upturn we have argued for a lower multiple given (1) a compressed market multiple, (2) more volatility, and (3) lower growth. On point one, the group still looked inexpensive last summer and this spring on an absolute basis, as even at recent peaks shares were still trading at a 5-10% discount to absolute historical multiples. However, in each case this represented a premium of ~15% to the S&P 500, close to an all-time high.

Table 23: Current Multiples Well Below 15-Year Averages

FY1 P/E FY2 P/EGroup 13.7x 12.3x

15-Year Average 18x 15x15-Year Average (Pre-2008) 18.5x 16x


Figure 97: Group Multiple Inexpensive vs. Historical Levels, but Expensive vs. the S&P 500Group FY2 P/E Multiple Relative to S&P 500


Group P/E looks like it’s been in a secular decline from peak in late ’90s

Indeed, looking at the chart over the past 33 years, we see a secular peak in valuation in 1998, which recovered somewhat last cycle (got to 19x), but has shown a noticeable tick down. We think this has to do with (1) lower growth versus the 1990s and (2) less predictable earnings, an issue exacerbated by the ’08/’09 downturn. In

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fact, the group has only briefly traded above its 25-year average over the last five years, evidence of this dynamic, in our view.

Figure 98: Multiples Grew Through the 1990s but Have Declined Steadily from Peak SinceGroup FY2 P/E

Source: Bloomberg.

GE and EMR show what type of premium can come with predictable, above-average growth…

As perspective, we believe the group multiple over the past 15-20 years includes exuberant multiples for names like GE (20x), MMM (17x), EMR (17x), and DHR (19x) during the late ’90s, in a market that had been remarkably predictable. Indeed, GE and EMR defined the decade, delivering a consecutive string of strong earnings growth quarters during this period. If we assume high multiples reflect predictably strong growth, these valuations were justified. In our view, this is also the reason why Machinery names trade at a discount, because they are inherently more volatile and less predictable.

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Figure 99: GE EPS, 1991-2000 (~15% CAGR)

Source: Company reports and Bloomberg.

Figure 100: EMR EPS, 1990-2000 (~10% CAGR)

Source: Company reports and Bloomberg.

Figure 101: GE FY2 P/E, 1990-2000 (~19x Average)


Figure 102: EMR FY2 P/E, 1990-2000 (~16.5x Average)


…while Tech multiples show what can happen when growth becomes more volatile and less predictable…

On the flip side is an industry like semiconductors. For most of the ’80s and ’90s, technology represented the highest-growth sector, with limited cyclicality. This has changed recently, with seven earnings cycles over the past ten years and a more cyclical, less predictable pattern – indeed, there have been multiple semiconductor cycles since 2001 versus only one EE/MI earnings downturn. As a result, multiples for the bellwether semi names have moved from a ~100% premium between 1995 and 2005 to parity with a depressed S&P 500 multiple today.

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Figure 103: Semiconductor Multiples Have Contracted Significantly on CyclicalityP/E NTM EPS – Includes INTC, TXN, ALTR, XLNX, MCHP LLTC, MXIM, and ADI


Figure 104: Global Semiconductor Sales – Three Cycles in 1990s vs. Seven During 2000-2010 Y/Y Change

Source: J.P. Morgan Semi Team.

…meaning recent volatility may add to uncertainty/volatility discount

Therefore, if there is another recession in 2012, we believe it will perpetuate the enhanced volatility discount, and we do not see “normal” multiples going back to the prior absolute levels. Even without a full recession, however, we think the uncertainty associated with recent macro volatility is unique versus recent history. Keep in mind that while the past two cycles took longer for earnings revisions to bottom, generally estimates increased steadily off the through – indeed, after the bottoming in 2003, last cycle saw no meaningful earnings cuts until 2008. This cycle, after a big upward revision, average estimates for the group have been cut by 8% since July, with downside of another ~5% if the Street moved to our below-Consensus estimates. This would represent an unprecedented degree of earnings volatility.

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Figure 105: Indexed EPS Revisions, 1990 (First Cut) to 1996Rolling Indexed Revisions to Forward Year (FY2) EPS, Group Avg.


Figure 106: Indexed EPS Revisions , 2001 (First Cut) to 2007Rolling Indexed Revisions to Forward Year (FY2) EPS, Group Avg.


Figure 107: Indexed EPS Revisions, Current CycleRolling Indexed Revisions to Forward Year (FY2) EPS, Group Avg.


There is precedent for lower multiples

Lastly, a look at the multiples in the 1970s and 1980s shows there is precedent for high-single-digit multiples. We don’t think the inflationary/interest rate environment is analogous, but certainly the demand and risk/volatility profile has some similarities. We do not see high-single-digit multiples as a likely outcome, but we believe this has to be in the calculus and balances out the excess of the late 1990s to justify a multiple that is lower than what’s been seen on even a 20-year average.

Figure 108: During the 1970s/80s, EE/MI Stocks Traded at High-Single-Digit MultiplesGroup FY2 P/E

Source: Bloomberg.

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Our PTs continue to use a 12.5x multiple on 2013E EPS

For this reason, our price targets continue to use a 12.5x target multiple on 2013EEPS, below the recent average of ~15x and directionally closer to a more depressed S&P 500 multiple. We acknowledge that if the macro clears, multiples have potentialto drift back toward more normal levels (perhaps ~14x); but, in a 2012 recession we’d expect pressure on multiples, even if 2013 is again expected to be a growth year. Thus, we’re comfortable with our 12.5x, which we believe strikes a balance between these two scenarios.

Figure 109: Group Target Multiple (on 2013E EPS) versus Historical FY1 and FY2 P/EP/E


Scenario Analyses Key to an Uncertain 2012

Given obvious uncertainty around the direction of the macro, we continue to believe that 2012 scenario analyses are an important way to look near-term dynamics. As we first introduced in our August sector report, we look at four scenarios including: (1) Consensus estimates; (2) our PTs, based on below-Consensus estimates; (3) a mild recession, with average 5% organic declines and 10% EPS declines; and (4) a severe recession similar to 2008/2009, with average 10% organic declines and ~25% EPS declines.

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Table 24: 2102 Scenario Analysis – Assumptions

Severe Recession Mild Recession JPM Ests/PTs ConsensusOrg Growth EPS EPS Y/Y Org Growth EPS EPS Y/Y Org Growth EPS EPS Y/Y EPS EPS Y/Y

DHR -12% 2.41 -14% -5% 2.83 0% 0% 3.15 12% 3.29 17%DOV -17% 3.20 -28% -8% 3.92 -12% 1% 4.75 6% 4.95 11%EMR -11% 2.62 -19% -5% 2.94 -9% 2% 3.40 5% 3.55 10%GE -8% 0.95 -30% -4% 1.18 -13% 1% 1.50 10% 1.57 15%

HON -12% 2.96 -26% -3% 3.74 -6% 1% 4.25 6% 4.44 11%MMM -8% 5.19 -12% -6% 5.40 -9% -1% 6.05 3% 6.31 7%MSI -5% 2.47 -4% -1% 2.67 4% 1% 2.70 5% 2.87 12%ROK -18% 2.62 -45% -9% 3.61 -25% 3% 5.10 6% 5.32 11%SPW -7% 3.71 -16% -3% 4.20 -4% 2% 4.80 9% 5.32 21%TXT -6% 0.73 -34% -3% 0.95 -14% 2% 1.40 27% 1.68 52%TYC -6% 2.79 -14% -3% 3.02 -7% 3% 3.50 8% 3.60 11%IR -11% 1.65 -39% -4% 2.35 -13% 2% 3.00 11% 3.14 16%

Lg Cap Avg -10% -23% -4% -9% 1% 9% 16%LII -5% 1.58 -23% -2% 1.89 -8% 3% 2.40 17% 2.42 18%

WSO -8% 2.29 -21% -5% 2.54 -12% 3% 3.45 19% 3.19 10%GNRC -17% 1.65 -15% -12% 1.74 -11% -4% 1.90 -3% 2.09 7%HUB/B -10% 3.58 -18% -3% 4.13 -5% 3% 4.70 8% 4.75 9%ROP -11% 3.59 -16% -3% 4.07 -4% 2% 4.50 6% 4.73 11%ST -14% 1.84 -6% -7% 1.95 0% 7% 2.15 10% 2.19 12%

WBC -25% 2.41 -49% -14% 3.40 -28% 4% 4.40 -6% 4.76 1%WTS -8% 1.81 -18% -6% 1.91 -14% -1% 2.30 4% 2.63 18%WCC -15% 2.27 -40% -5% 3.29 -13% 3% 4.35 14% 4.43 17%

Avg All -11% -23% -5% -10% 2% 8% 14%


Table 25: Target Group Multiples Under Different Scenarios

ScenarioGroup P/E

Target RationaleConsensus Scenario 15.0x In line with the ~20-year historical averageNew JPM Estimates 12.5x Below the historical average due to volatility/lower growth"Recession Lite" 11.5x More consistent with the milder 1991/2011 recessionsReturn to ’08/’09 Trough 10.0x In line with the group’s approximate trough multiple in 2009


We then take the implied stock upside/downside under these assumptions, and calculate a probability-weighted risk/reward. Our analysis below assumes a 10% weighting for Consensus, 50% for our estimates/price targets, 30% for a mild recession, and 10% for a severe recession. On this basis, we estimate the large-cap group has implied average downside of ~10%, suggesting the overall risk/reward isnot that attractive if there is a substantial risk of recession. Simplistically, if we remove the probability of a 2008/2009-like scenario, we think the market is pricing in about a 1-in-3 chance of a mild recession.

We think EE/MI stocks are

currently pricing in a roughly 1/3 chance of a mild 2012 recession.

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Table 26: 2102 Scenario Analysis – Summary Stock Upside/Downside

Severe Recession Mild Recession JPM Ests/PTs Consensus WeightedSharePrice

Upside/Downside

SharePrice

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SharePrice

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SharePrice

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Risk/Reward

DHR 30 -38% 40 -18% 51 5% 55 13% -5%DOV 32 -45% 42 -28% 55 -5% 60 2% -16%EMR 29 -40% 36 -24% 49 3% 53 11% -8%GE 10 -47% 15 -21% 20 6% 21 15% -6%

HON 28 -50% 42 -25% 59 7% 64 15% -8%MMM 57 -32% 65 -22% 80 -5% 86 3% -12%MSI 28 -39% 35 -24% 46 -1% 51 8% -11%ROK 29 -62% 45 -41% 74 -3% 79 4% -20%SPW 33 -49% 47 -27% 75 16% 86 33% -2%TXT 8 -58% 12 -37% 21 11% 26 37% -8%TYC 25 -48% 34 -30% 52 8% 55 14% -8%IR 13 -59% 23 -29% 41 26% 44 36% 2%

Lg Cap Avg -47% -27% 16% -8%LII 14 -60% 20 -44% 34 -5% 35 -1% -22%

WSO 32 -53% 39 -42% 60 -12% 57 -16% -26%GNRC 16 -43% 19 -31% 21 -25% 23 -15% -27%HUB/B 34 -50% 47 -30% 69 1% 72 6% -13%ROP 43 -52% 56 -37% 76 -15% 83 -7% -24%ST 17 -37% 21 -23% 30 14% 32 20% -1%

WBC 20 -56% 33 -28% 56 21% 62 35% 0%WTS 18 -50% 22 -40% 34 -7% 40 9% -20%WCC 18 -67% 32 -41% 56 3% 59 8% -17%

Avg All -49% -31% 2% 11% -12%


Cycle Peak? A Framework for 2015 Earnings Potential

Beyond the near-term volatility, we also step back and assess the potential upside/downside through the rest of the cycle. This is similar to the analysis that many investors did in 2009, looking to value stocks on “normalized” earnings (then typically considered a 2012 or 2013 event) rather than on near-term earnings that misrepresented through-the-cycle earnings power. Here, assuming a Consensus economy (i.e., no global recession in 2012), we provide a way to think about this cycle’s peak earnings potential as well as the following trough of the next recession. This is important, in our view, for a few reasons: (1) we acknowledge there is still likely upside for many stocks in a continued upturn, even if growth is below last cycle’s average; but (2) this upside potential is not equal across the stocks, in part due to timing around early/late-cycle exposures; and (3) such cycle upside must be considered in the context of risks when the next recession inevitably hits.

Overview of our approach

To begin, we take a view that the current upturn is likely to last six years in total, with the first year being 2010 and the cycle peak coming in 2015. This is a broadly similar profile to last cycle, when growth began in 2003-2004 and lasted through 2008. Although we have standing 2012 and 2013 estimates for all our companies, we do not try to predict the yearly pace of growth between 2012 and 2015, but rather assume a four-year CAGR over that period.

In early 2009, many analyses

centered on “normalized”

earnings in the 2012-2013period. We’re now rolling this

forward to think about potential

cycle peak earnings (~2015) as well as the next downturn’s

trough.

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Figure 110: EE/MI Average Organic Growth (Last Cycle)% Y/Y


Figure 111: We Assume a Similar Six-Year Upturn (2015 Peak)% Y/Y Average EE/MI Organic Growth


For purposes of our analysis, we are most interested in a point roughly three years from now, or late 2014, a time when the market will be putting a forward-year multiple on anticipated 2015 EPS. For this reason, our framework incorporates cash generated/deployed in the three years between 2012 and 2014, as this will have the biggest impact on expected 2015 earnings. To be sure, companies may engage in additional M&A or share repo throughout 2015, but the impact on that year’s earnings should be relatively small and therefore excluded from our analysis.

Figure 112: We Assume Tailwinds from Three Years of FCF Deployment in Our 2105 Peak EPS


As for the specific earnings drivers, below we briefly explain our approach:

Revenues & margins – We assume a four-year revenue CAGR for each segment or product area off the 2011E base, using past cycle peak as a check. Similarly, we forecast an average incremental margin over the 2012-2015 period, adjusting as appropriate for segment-level dynamics, and as a check compare the implied peak margins to last cycle peak.

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FCF generation/deployment – We generally assume FCF generation in line with historical conversion rates (% of net income), and then subtract out dividends (typically assumed to grow at the rate of earnings). Most remaining cash is deployed either to M&A, buybacks, or debt reduction. We assume companies deploy ~100% of their generated FCF in 2012-214, but for companies with net cash balances currently, we generally assume they outspend FCF to reach a zero debt position by 2015. We do not assume companies lever up torepurchase shares.

Share buybacks – We assume shares are bought back at the average of today’s price and our framework’s cycle peak share price. On average, this produces a weighted-average repurchase price ~15% above today’s levels.

M&A – For acquisitive companies, we assume a % pretax margin generated per dollar spent on M&A. This is ~10% on average across the group, but is adjusted by company to reflect historical M&A track record.

Debt reduction – For remaining cash, or companies with high debt levels, we assume debt reduction with an earnings tailwind at the relevant rate.

Other adjustments – Where appropriate, we adjust for any meaningful impact related to equity earnings, minority interest, or other visible non-fundamental items.

The macro environment we assume is one of slow but steady growth from 2011 levels, and does not assume a significant global 2012 recession. The assumptions for key end markets are generally consistent with our standing views, where late-cycle markets outgrow earlier-cycle, general industrial markets that have had the biggest bounce off the bottom (as perspective, we list assumed growth rates for some of the key company segments below). In other words, this is not meant to be an overtly “conservative” framework, but rather a likely outcome in a Consensus macro environment.

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Table 27: Overview of Assumed 2012-2015 CAGRs for Key EE/MI Segments

General Industrial/Capex Growth Assumed Resource/Project-related Growth AssumedUS Industrial Production 3.4% EMR Process 7.0%DHR T&M 3.5% ROK CP&S 6.0%DHR Industrial 4.0% GE Oil & Gas 7.0%DOV Printing & ID 4.0% GE Energy 7.0%EMR Industrial Automation 4.0% TYC Flow 7.0%3M Industrial & Transportation 5.5% SPW Flow 6.0%3M SS&P 5.0% DOV Energy 6.5%ROK A&S 7.0% HON Process Solutions 7.0%IR Industrial 3.0% HON UOP 6.5%HUB/B Industrial 3.5% ROP Industrial Products 5.0%WCC Industrial 4.0%HON ACS Products 5.0% T&D-related Growth AssumedHON Advanced Materials 4.0% HUB/B Power 8.0%

SPW Industrial 10.0%Auto related Growth Assumed WCC Utility 7.0%3M Industrial & Transportation 5.5%HON Turbos 10.0% Non-res related Growth AssumedST Sensors 10.5% US Non-Res Construction 6.4%TXT Industrial 3.0% HON Building Solutions 7.0%SPW T&M 2.5% IR Comm'l HVAC 6.5%

IR Security Technologies 4.5%Truck/Trailer Growth Assumed LII Commercial HVAC 5.0%WBC European T&B Production 1.2% WCC Construction 7.5%WBC Non-EU T&B Production 5.0% TYC Fire (non-recurring revs) 6.0%IR Thermoking 2.0%

Resi-related Growth AssumedAerospace Growth Assumed LII Resi 6.0%HON Comm'l OE 8.0% IR Resi Solutions 6.0%HON Comm'l Aftermarket 5.0% WSO HVAC equipment 7.0%GE Aviation 6.0% WSO HVAC products 6.0%TXT Cessna 8.0% HUB/B Resi 5.0%

EMR Climate 5.5%Defense-related Growth AssumedHON Defense -2.6% Refrigeration-related Growth AssumedTXT Systems -4.0% LII Refrigeration 3.0%

DOV Engineered Systems 3.0%Healthcare-related Growth AssumedMMM Healthcare 3.0% Tech-Related Growth AssumedDHR Life Sciences 4.0% MMM Electro & Comm 4.0%DHR Dental 3.0% EMR Network Power 5.0%GE Healthcare 2.0% DOV Printing & ID 4.0%ROP Medical 4.0%


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Summary by company

The table below summarizes our estimates for peak 2015 earnings generated by our framework. The peak earnings in our framework are, on average, ~75% above our 2011E EPS estimates. As expected, the biggest upside to peak come from the most cyclical names (i.e., SPW, WBC, ROK) or those with the most depressed revenue/margin base (i.e., IR, LII, TXT).

Table 28: Estimated 2015 Peak Earnings Framework Summary

2011E EPS 2015E Peak EPS UpsideDHR 2.82 4.41 56%DOV 4.47 7.64 71%EMR 3.24 4.96 53%GE 1.36 2.16 59%HON 4.00 6.41 60%MMM 5.90 8.63 46%MSI 2.56 5.28 106%ROK 4.79 8.39 75%SPW 4.40 9.07 106%TXT 1.10 2.44 122%TYC 3.24 5.30 64%IR 2.70 5.28 95%Lg Caps Avg 76%

LII 2.06 4.40 113%WSO 2.90 6.48 124%GNRC 1.95 2.54 30%HUB/B 4.35 7.23 66%ROP 4.26 6.89 62%ST 1.95 3.68 89%WBC 4.70 9.35 99%WTS 2.22 3.01 36%WCC 3.80 7.34 93%Avg All 77%


Understanding earnings drivers and assumptions

With any broad analysis of this nature, the details are key, so we take some time below to provide some context around our assumptions. We focus on the 12 large-cap companies as they are most representative of the overall sector. First, on revenues, note that we dial in the highest top-line growth rates at those with the greatest cyclical leverage (i.e., ROK, EMR) or at later-cycle companies for which revenues are just now inflecting off bottom (i.e., TYC, GE industrial). We assume 2012-2015 organic growth that is on average 300-400bps lower than was seen in the last four years of the last cycle (2005-2008). This is largely macro-related, but also reflects company-specific headwinds, such as more challenging defense/business jet markets.

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Figure 113: Assumed Average Organic Growth, 2012-2015E% Y/Y


Figure 114: Assumed 2012-2015 Organic Growth versus Last Cycle% Y/Y


Another way to look at this is by comparing both the (organic) 2011E base and our (organic) 2015E peak to prior cycle’s peak. In our view, this provides the best historical perspective on assumed growth, while also taking into account differences in 2010-2011 growth rates between the earlier/later-cycle EE/MI companies. Those companies on the right end of the spectrum represent those with the largest increase to our assumed 2015E peak from last cycle’s peak, indicating they are getting the most credit for positive structural dynamics. For example, we acknowledge that ROK/MMM/EMR have strong through-the-cycle growth dynamics, though we are already incorporating this in our framework, meaning these companies likely will need to deliver some secular growth characteristics to continue to outperform. On the flip side, companies like SPW/TXT are assumed to show the lowest growth versus prior peak, primarily due to specific end-market headwinds. Generally speaking, these stocks tend to be lower-expectations plays for which the thesis is more about simply returning to levels seen in prior cycles.

Figure 115: Indexed Organic Growth versus Prior-Cycle Peak, by CompanyIndexed Organic Growth, % of 2007-2008 Cycle Peak


On margins, we can do a similar analysis. We look not only at incremental margin gains from 2011E levels (which are similar for most), but also margin improvement from prior peak levels. For companies on the right, our framework dials in the greatest margin improvement versus last cycle, typically a function of restructuring, productivity, or acquisition integration. Big margin gains versus last cycle are positive if there are continued levers for improvement, but also can be a negative as

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<-- Structurally lower growth assumed Structurally higher growth assumed -->

Through-the-cycle growth rates

are not the same for all companies, but it’s important to

understand where we are baking

in the most upside versus prior-cycle peaks.

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incremental margin improvement often gets more difficult from higher levels. Of the companies on the right, we have the most conviction around margin expansion at DHR (visible levers from acquisition integration), while HON and TYC should have opportunities to improve businesses that did not achieve their full margin potential last cycle (likely achievable with continued execution). We are most concerned about further leverage at DOV and EMR, two plays on end-market leverage at which margins for key segments are already near the high end of management’s long-term targets – note, however, that our framework nonetheless gives them credit for margin leverage.

Figure 116: Margin Analysis – 2011E and 2015 Peak versus Prior-Cycle PeakChange in Margin versus Prior Cycle (2007/2008) Peak


All-in EPS growth weaker versus last cycle, despite capital allocation

How do these assumptions translate to EPS growth? Versus last cycle (2005-2008), we assume slower organic earnings contribution and M&A over the 2012-2015 period, mostly a function of lower organic growth (note that we combine the impact of organic growth and M&A last cycle, as the two are difficult to disaggregate). Our assumed contribution from share repurchase is roughly similar at ~7%, but spread more evenly across the sector as balance sheets are generally stronger. We acknowledge that there may be opportunities for companies to lever up and buy shares more aggressively this cycle; however, if share repurchase is imply offsetting lower organic growth, we think this would have implications for earnings quality and therefore multiples. For this reason, we are comfortable with the level of upside from share repo currently dialed into our framework.

Table 29: Annual EPS CAGRs, JPM 2012-2015 Framework

% Annual EPS CAGR

DHR DOV EMR GE Indu HON MMM MSI ROK SPW TXT TYC IR AVG

Organic Growth 10% 7% 9% 10% 10% 6% 6% 12% 16% 17% 9% 11% 10%M&A 6% 5% 1% 1% 1% 1% 0% 0% 0% 0% 1% 1% 1%Buybacks/Debt Paydown/Other 0% 2% 3% 4% 3% 4% 17% 6% 6% 8% 5% 10% 6%Total 14% 13% 11% 14% 13% 10% 21% 17% 20% 22% 13% 19% 15%


-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%

TXT MMM GE IR SPW ROK DOV HON TYC EMR DHR

2011E vs Prior Peak Next Peak Versus Prior Peak

<-- Less Margin Expansion vs. Last Cycle Structural Improvement in Margin -->

Some companies are counting

on margin improvement above

levels last cycle, while others are just trying to return to

profitability achieved in prior

peaks.

With balance sheets strong, we

recognize the upside potential from cash deployment – but this

is not that differentiated by

company, and not a replacement for organic growth.

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Table 30: Annual EPS CAGRs, 2005-2008 Actuals

% Annual EPS CAGR

DHR DOV EMR GE Indu HON MMM MSI* ROK SPW TXT TYC IR* AVGOrganic Growth and M&A 17% 18% 18% 2% 18% 6% n/a 23% 51% 33% 16% n/a 20%Share Count -1% 4% 3% 1% 7% 4% n/a 13% 30% 7% 6% n/a 7%Total CAGR 17% 20% 20% 3% 22% 10% n/a 31% 63% 38% 21% n/a 27%

Source: Company reports and J.P. Morgan. *MSI and IR are excluded given significant changes in the portfolio versus last cycle.

Valuation: Where should the group trade on peak earnings?

For purposes of valuation, we look back historically to see how multi-industry stocks have historically traded on actual peak earnings. The charts below show average EE/MI valuation not only on forward P/E, but also on the actual peak EPS of that cycle, taken in the 36 months leading up to each company’s cycle-high stock price. What we see is that in the middle of the cycle, the P/E on peak earnings was below that of the near-term FY2 earnings, as expected given the time horizon – in practice, average multiples on peak three years out have been ~35% below peak levels, a “discount rate” relatively close to the ~10% commonly used by investors. At the time of the stock peak, shares have tended to trade at a higher multiple of the ultimate peak earnings than they did on FY2 estimates, as Consensus tends not to anticipate the economic downturn and therefore has historically overestimated peak earnings by an average of ~10%.

Figure 117: EE/MI Sector Average P/E (2000/2001 Market Peak)Vertical Axis = P/E Ratio; Bottom Axis = # of Months Before Peak Stock Price


Figure 118: EE/MI Sector Average P/E (2007/2008 Market Peak)Vertical Axis = P/E Ratio; Bottom Axis = # of Months Before Peak Stock Price


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By comparison, shares today trade at an average of 8.5x the peak earnings implied by our framework. At face value, this looks inexpensive relative to similar points in the past two cycles, including (a) the group’s ~13x multiple on 2000-2001 peak in 1997 and (b) the group’s ~11.5x multiple on 2007-2008 peak EPS in 2004. It’s important to note, however, that the average multiple on forward-year (FY2) EPS so far this cycle has been only ~13x versus 16-18x in the past two cycles. Therefore, the valuation on peak earnings potential looks reasonable relative to today’s lower multiples, in our opinion.

Table 31: Group Valuation on Peak (2015E) Earnings Potential

P/E on Peak vs. Group

DHR 10.3 122%DOV 8.1 97%EMR 9.3 110%GE 8.3 99%HON 8.6 102%MMM 9.5 113%MSI 8.9 106%ROK 8.8 105%SPW 6.7 79%TXT 7.7 92%TYC 8.8 105%IR 5.9 70%Lg Caps Avg 8.4

LII 7.6 91%WSO 10.2 122%GNRC 11.2 133%HUB/B 9.1 108%ROP 12.7 151%ST 7.2 86%WBC 4.6 55%WTS 11.6 139%WCC 7.3 87%Avg All 8.7


Figure 119: Current Valuation on Peak Is Reasonable in the Context of Today’s Lower MultiplesEE/MI Group Average P/E


Looked at another way, if we discount this multiple on peak EPS back three years at 10%, the group would be trading at ~11.5x versus the current ~13x on standing 2012 estimates. Again, this is not expensive, but in our view somewhat to be expected in a market in which investors are discounting some probability that this is not a “normal” six-year upturn. In other words, we think the valuation looks fair in the context of macro uncertainty.

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Figure 120: If Discounted Back Three Years at 10%, the Group Currently Trades at ~11x PeakEE/MI Group Average P/E


In assessing longer-term stock upside potential, we assume the group eventually trades at 13x peak earnings. Although there is a high likelihood that shares peak above this level for a short period of time (investors putting a “normal” multiple on an expectation for higher earnings than actually delivered), there is timing risk at the top of the cycle and therefore we prefer to maintain a reasonably conservative target multiple to reflect this. On this basis, the group has an average ~55% stock upside potential to cycle peak.

Figure 121: Stock Upside Potential to Cycle Peak (End-2014)% Upside from Current Levels; Assumes 13x Average Multiple on 2015E Peak EPS


Thinking About Next Trough

Even in a “normal cycle” with earnings growth through 2015, the group will face a cyclical downturn at some point, meaning the next trough is something we need to consider in our analysis. Our aim is not to predict the magnitude of future recessions, but rather to look to past cycles as a guide. Note that earnings declines for the group tend to be severe, with operating profits down an average of 30% peak to trough, and EPS off ~40%. We acknowledge the severity of the 2008-2009 recessions, and recognize that cost structures have grown more flexible since 2001-2002; however, we think it’s prudent to assume that the next recession likely would show all-in EPS declines close to those in past recessions. Therefore, we assume a ~30% EPS decline on average in our framework, with greater declines for the more cyclical companies.

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Table 32: Peak-to-Trough Operating Profit and EPS Declines

% Decline (0% if No Decline)

Operating Profit Decline EPS Decline’01-’02 ’08-’09 ’01-’02 ’08-’09 Next Trough

DHR 0% -23% 0% -18% -20%DOV -58% -39% -59% -46% -35%EMR -25% -23% -27% -27% -25%GE -12% -2% -10% -57% -20%HON -31% -15% -45% -28% -30%MMM -16% -9% -15% -9% -15%MSI n/a -23% n/a n/a -25%ROK -53% -64% n/a -63% -55%SPW -30% -30% -66% -41% -45%TXT -50% -49% -31% -81% -45%TYC -49% -29% n/a -21% -20%IR -20% -26% -65% -58% -50%Lg Cap Avg -31% -28% -35% -41% -32%LII -35% -38% -75% -35% -30%WSO -6% -37% -6% -49% -25%HUB/B -39% -15% -45% -20% -30%WCC -43% -49% -43% -55% -50%WBC n/a -87% n/a -89% -50%WTS -14% -10% -13% -15% -15%ROP 0% -16% 0% -13% -25%ST n/a -27% n/a n/a -30%Avg All -31% -30% -37% -41% -33%


Table 33: Next Cycle Trough Estimates and Current Multiple on Next Trough

EPS, Except Where Noted

Next Peak Next TroughPeak-to-Trough

% DeclineMultiple on

Next TroughDHR 4.41 3.53 -20% 13.8DOV 7.64 4.20 -45% 14.0EMR 4.96 3.72 -25% 12.8GE 2.16 1.73 -20% 10.7HON 6.41 4.48 -30% 12.4MMM 8.63 7.34 -15% 11.4MSI 5.28 3.96 -25% 11.8ROK 8.39 3.78 -55% 20.1SPW 9.07 4.99 -45% 13.0TXT 2.44 1.34 -45% 14.2TYC 5.30 4.24 -20% 11.4IR 5.28 2.64 -50% 12.2Lg Caps Avg -33% 13.2

LII 4.40 3.08 -30% 11.5WSO 6.48 4.86 -25% 14.0GNRC 2.54 1.90 -25% 14.4HUB/B 7.23 5.06 -30% 13.4ROP 6.89 5.86 -15% 15.3ST 3.68 2.58 -30% 10.4WBC 9.35 4.67 -50% 9.9WTS 3.01 2.41 -20% 15.1WCC 7.34 3.67 -50% 14.8Avg All -32% 13.2


Therefore, we think the group is currently trading at an average of ~13x next cycle’s trough. If we assume that the group eventually bottoms at 11x next cycle’s trough estimates (somewhere between the “trough on trough” multiples of the past two recessions), this would imply that the group has ~10% average downside from today’s levels if an investor holds shares to the next cycle trough.

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Figure 122: Stock Downside Risk to Next Trough (from Current Levels)


All-In Framework

Lastly, we combine all of the above analyses/scenarios into a consolidated valuation framework. We calculate an overall risk/reward that is weighted equally between near-term scenarios (35% 2012 JPM price targets, 5% severe recession, 10% mild recession) as well as the longer-term potential (25% cycle peak, 25% next cycle trough). This, in our view, provides a balanced picture of upside/downside potential under a wide range of scenarios.

Table 34: Consolidated Risk/Reward FrameworkStock Price Upside/Downside (From Today)

CurrentPrice

2012EJPM

Severe Recession

Mild Recession Peak

Next Trough

2012EJPM

Severe Recession

Mild Recession Peak

Next Trough

WeightedRisk/Reward

DHR $48.59 51 30 44 69 48 5% -38% -9% 42% 0% 9%DOV $58.68 55 32 49 94 46 -5% -45% -16% 61% -21% 4%EMR $47.72 49 28 39 68 43 3% -42% -19% 42% -10% 5%GE $18.55 20 10 16 28 20 6% -47% -14% 53% 7% 14%

HON $55.59 59 30 47 83 49 7% -47% -16% 50% -11% 8%MMM $83.80 80 60 74 118 89 -5% -29% -11% 41% 6% 7%MSI $46.67 46 30 39 69 44 -1% -36% -16% 47% -7% 6%ROK $75.79 74 30 50 120 46 -3% -60% -35% 58% -40% -3%SPW $64.95 75 37 53 106 55 16% -43% -19% 63% -16% 14%TXT $19.11 21 8 13 29 13 11% -58% -32% 49% -30% 3%TYC $48.22 52 26 34 62 42 8% -45% -30% 29% -13% 1%IR $32.22 41 14 25 58 25 26% -57% -23% 81% -23% 18%

Lg Caps 6% -46% -20% 51% -13% 7%

LII $35.54 34 17 24 51 30 -5% -54% -34% 45% -14% 0%WSO $67.99 60 47 41 97 70 -12% -32% -39% 43% 2% 1%GNRC $27.46 21 27 16 25 16 -25% -2% -41% -10% -43% -26%HUB/B $68.00 69 19 52 94 56 1% -73% -23% 38% -17% 0%ROP $89.47 76 30 64 112 81 -15% -66% -29% 25% -10% -8%ST $26.67 30 17 23 45 27 14% -35% -13% 67% 1% 19%

WBC $46.20 56 20 37 97 45 21% -57% -20% 110% -3% 29%WTS $36.45 34 18 24 40 27 -7% -50% -34% 9% -26% -13%WCC $54.51 56 19 35 86 34 3% -65% -36% 58% -37% -1%

Avg All 3% -49% -23% 51% -13% 6%


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Table 35: Assumed Group Multiples and Relative Multiples Under Each Scenario

% of Group Multiple, Except Where Noted

2012EJPM PTs

Severe Recession

Mild Recession Peak

Next Trough

DHR 113% 125% 125% 120% 125%DOV 82% 100% 100% 95% 100%EMR 101% 105% 105% 105% 105%GE 86% 110% 111% 104% 111%

HON 92% 92% 92% 100% 92%MMM 92% 115% 110% 105% 110%MSI 119% 120% 119% 100% 100%ROK 101% 115% 110% 110% 110%SPW 110% 100% 100% 90% 100%TXT 106% 95% 95% 90% 90%TYC 104% 95% 90% 90% 90%IR 94% 85% 85% 85% 85%LII 99% 100% 100% 90% 90%

WSO 121% 130% 130% 115% 130%HUB/B 97% 97% 97% 100% 97%WCC 77% 85% 85% 90% 85%WBC 101% 101% 101% 80% 101%WTS 88%ROP 102%ST 58% 95% 95% 93% 95%

Group Multiple 14.3 10.0 12.5 13.0 11.0


Among large caps, IR, SPW, DHR, and GE screen best

The table below simplifies this analysis, and ranks each of the large caps under each of the scenarios. We also provide some color on our key conclusions:

IR and SPW best cyclical risk/reward – Among the higher-beta plays, we continue to believe these two names offer the most cycle upside potential with manageable risk. For SPW, this is largely about the heavy late-cycle slant, where earnings are close to trough with lowered expectations for key risk areas like Thermal. For IR, there is likely more risk in a downturn given the EPS sensitivity around the lower margin base, but the absolute upside even under conservative assumptions still appears dramatic (as a check, our 2015E peak of ~$5.30 is only modestly above the prior 2013 target, not unreasonable).

GE also screens well under most scenarios – GE is always a unique case given the Capital/Industrial split, but we think shares look attractive under most scenarios. There are three key drivers in our view: (1) the industrial portfolio is currently the closest to a cyclical trough, while the services component offersstability in a downturn; (2) GECS is currently getting only a modest multiple on tangible book value and little credit for its EPS contribution – at worst, this TBV likely will grow by 60%+ with earnings and add ~$3/share in value, which is what we assume in our framework; at best, GE could participate in any reflation of depressed financial services multiples; (3) the upstreamed cash from GE Capital is differentiated versus peers, allowing for significant capital allocation tailwinds in the out years.

DHR still better defensive play than MMM – DHR continues to screen well as a “relative safety” stock, helped by the visible accretion from BEC, while also offering reasonable through-the-cycle upside potential. MMM also looks better than it did several months ago, and we continue to see this as a strong franchise to

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own through a downturn. Our issue, however, is the likely lack of cycle upside from current normalized levels, which makes outperformance in an upturn harder, meaning relative performance here is more of a binary call on the macro.

ROK and DOV less attractive – Both screen in the bottom third of the group, primarily reflecting the earlier-cycle earnings profile that is already well off trough. In a continued upturn, ROK continues to offer among the better upside potential to anticipated peak; but, this comes at a cost of higher cyclicality which, at this point in the cycle, is now less attractive, in our view.

Table 36: EE/MI Large-Cap Stock Performance Rankings Under Various Scenarios

1 = Best, 12 = Worst

2012EJPM

Severe Recession

Mild Recession Peak Next Trough

WeightedRisk/Reward

IR 1 10 9 1 10 1GE 6 9 3 5 1 2SPW 2 5 8 2 8 3DHR 7 3 1 10 3 4HON 5 8 4 6 6 5MMM 11 1 2 11 2 6MSI 9 2 5 8 4 7EMR 8 4 7 9 5 8DOV 12 7 6 3 9 9TXT 3 11 11 7 11 10TYC 4 6 10 12 7 11ROK 10 12 12 4 12 12


Among mid-caps, WBC and ST offer best risk/reward

Among the mid-cap names, we highlight WBC and Sensata as offering the best cycle risk/reward, using our framework. This is largely due to the above-average growth potential from content gains, for which even in our framework we do not give full credit (6% at ST versus a long-term target of 7-9%, and 5% at WBC versus a long-term target of 8-10%).

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Table 37: EE/MI Stock Performance Ranking Under Various Scenarios (Including Mid Caps)

1 = Best, 21 = Worst

2012EJPM

Severe Recession

Mild Recession Peak Next Trough

Risk/Reward

WBC 2 16 10 1 6 1ST 4 4 3 3 4 2IR 1 15 11 2 16 3GE 8 12 4 8 1 4

SPW 3 8 9 4 13 5DHR 9 6 1 15 5 6HON 7 11 5 9 10 7MMM 15 2 2 16 2 8MSI 13 5 6 11 7 9EMR 11 7 8 14 9 10DOV 17 10 7 5 15 11TXT 5 17 15 10 18 12TYC 6 9 14 18 11 13WSO 19 3 20 13 3 14

LII 16 14 17 12 12 15HUB/B 12 21 12 17 14 16WCC 10 19 19 7 19 17ROK 14 18 18 6 20 18ROP 20 20 13 19 8 19WTS 18 13 16 20 17 20

GNRC 21 1 21 21 21 21


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Valuation and Price Target Methodology

We base our end-December 2012 price targets on a P/E basis using 2013 EPS estimates. Note that the EE/MI sector has historically traded at ~14-16x forward-year (FY2) EPS, though with significant variation to this multiple over time (from high-single digits in the 1980s to ~20x in the late 1990s). For a group target multiple, we use 12.5x, below the 20-year average, to account for lower growth and visibility this cycle versus last, as well as a lower S&P 500 multiple. For individual companies, we base our multiple on the historical premium/discount to this sector target of 12.5x, adjusting this occasionally for either (a) structural changes in a company versus its history, or (b) cycle timing, expanding multiples for companies that are later cycle and compressing for companies that are earlier cycle and have seen greater earnings increases off the trough.

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General Electric Co.

Investment Thesis

We see several attractive elements in the GE portfolio, including a strong and high-margin services business, solid emerging market positioning, and a strong R&D franchise. Still, we think the multiple has suffered from concerns around (a) structural changes in the financial services industry, (b) portfolio complexity, (c) capital allocation discipline, and (d) perceived lack of leverage relative to earlier-cycle industrial peers. Our Overweight thesis is based primarily on the potential for fundamental inflection in the later-cycle Industrial portfolio, particularly in Energy and the gas turbines business, leading to above-average earnings growth and eventual multiple expansion. Other positive factors include the potential for cash to be returned to shareholders through share repurchase, and a simplifying of the portfolio (e.g., NBCU divestiture, GECS reduction) that will allow investors to more easily focus on the Industrial fundamentals. GE Capital earnings are now less central to the thesis, but the potential for GECS to return excess cash to the parent via dividends remains a differentiated lever for value creation.

Valuation

Raising PT, reiterate Overweight. GE shares trade at 12.4x our 2012E EPS of $1.50, a ~10% discount to EE/MI peers. While GE has traditionally traded at a premium to the group, we think a ~5% discount is more appropriate going forward, with a discount from Capital (~1.5x tangible book or ~10x EPS) offsetting a premium for the Industrial assets (14x, or ~10% premium to the group target of 12.5x). We have increased the target multiple for GECS given the more visible potential for cash dividends over the next several years. On this basis, our December 2012 price target of $20 ($19 previously) is based on a 5% discount to the group target multiple of 12.5x 2013E EPS, also reconciled on a SOTP basis below.

Table 38: GE PT Detail

$ per share

’13E EPS Multiple Per Share

Industrial EPS 0.95 14.0 13.35 Tang BV/Sh Multiple Per Share

GECS Implied 4.39 1.5 6.65 GECS implied P/E 10.1

Price Target 20.00


Risks to Rating and Price Target

Downside risks at Industrial include: (1) prolonged weakness in global power markets that slows an earnings recovery; (2) weaker-than-expected commercial air traffic that hurts Aviation services; (3) a slowdown in hospital capital equipment spending; and (4) prolonged pricing weakness that negatively impacts industrial margins. Downside risks at GECS include: (1) a step-back in global unemployment and other credit drivers; (2) tail risk around unforeseen regulatory action; (3) higher-than-expected losses or impairments from real estate; and (4) unexpected pressure on the global financial system that limits GECS’s access to the wholesale funding markets.

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Overweight

Company DataPrice ($) 18.55Date Of Price 05 Jan 1252-week Range ($) 21.65 - 14.02Mkt Cap ($ mn) 203,010.40Fiscal Year End DecShares O/S (mn) 10,944Price Target ($) 20.00Price Target End Date 31 Dec 12

General Electric Co. (GE;GE US)

FYE Dec 2009A 2010A 2011E 2012E 2013EEPS - Recurring ($)Q1 (Mar) 0.26 0.20 0.33A - -Q2 (Jun) 0.26 0.29 0.34A - -Q3 (Sep) 0.22 0.28 0.31A - -Q4 (Dec) 0.28 0.35 0.38 - -FY 0.91 1.12 1.36 1.50 1.65P/E FY 20.4 16.5 13.6 12.4 11.3Bloomberg EPS FY ($) 1.00 1.12 1.37 1.57 1.81Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

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Hubbell Inc.

Investment Thesis

We view Hubbell as a solid, late-cycle play on end-market leverage, for which fundamentals have only just begun to turn in utility, non-res, and general construction markets. The company has strong brands and management, and plays in fragmented markets with opportunities to consolidate through further share gains and disciplined M&A. Strength in the balance sheet is another positive, with plenty of opportunity for capital deployment either through acquisitions or share repurchase. Our Overweight rating is based on a combination of the above factors, with late-cycle, end-market leverage the highlight.

Valuation

Raising estimates and PT. Shares trade ~14.5x our revised 2012E EPS of $4.7, a ~5% premium to the EE/MI group versus a 5% discount historically. Our end-December 2012 price target of $69 (up from $63) is based on a 13.1x multiple applied to our 2013E EPS of $5.25, a 5% premium to peers; we expand the relative multiple beyond HUB/B’s historical discount given (a) an end-market profile that is later cycle than the group average, and (b) above-average near-term visibility versus peers.


Downside risks include: 1) non-residential construction markets take longer than expected to recover; 2) commodity inflation causes price/cost headwinds; and 3) overpaying for an acquisition and/or integration risks.

Overweight

Company DataPrice ($) 68.00Date Of Price 05 Jan 1252-week Range ($) 73.05 - 46.81Mkt Cap ($ mn) 4,005.20Fiscal Year End DecShares O/S (mn) 59Price Target ($) 69.00Price Target End Date 31 Dec 12

Hubbell Incorporated (HUBB;HUB/B US)

FYE Dec 2011E(Prev)

2011E(Curr)

2012E(Prev)

2012E(Curr)

2013E(Prev)

2013E(Curr)

EPS Reported ($)Q1 (Mar) 0.82A 0.82A - - - -Q2 (Jun) 1.07A 1.07A - - - -Q3 (Sep) 1.37A 1.37A - - - -Q4 (Dec) 1.10 1.10 - - - -FY 4.35 4.35 4.55 4.70 5.05 5.25Bloomberg EPS FY ($) - 3.77 - 4.31 - 5.39Source: Company data, Bloomberg, J.P. Morgan estimates.

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Honeywell

Investment Thesis

We view Honeywell as a transformed franchise versus past cycles, as management has been successful in driving operational improvements while also investing in R&D (up materially versus last cycle as a percentage of revenues) and rationalizing the portfolio through divestitures and attractive M&A. Our Overweight thesis is based primarily on continued fundamental acceleration across the portfolio, as most businesses are entering attractive points of the cycle, including the later-cycle Process, Buildings Solutions, Business Jet, and UOP exposures. On this basis we see earnings growth at Honeywell outperforming most in the sector. Several businesses here, including the Turbo and UOP platforms, also have attractive secular elements to their growth stories.

Valuation

Raising PT, remain Overweight. Shares trade at 13.1x our 2012E EPS of $4.25, a ~5% discount to peers. While shares have historically traded at a ~7% discount, we think a parity multiple is more appropriate going forward, reflecting improved growth and margin performance versus past cycles. We also think shares will benefit from increased visibility near term, particularly in the commercial aerospace/process solutions businesses. On this basis, our $59 end-December 2012 PT (up from $56) assumes 12.5x 2013E EPS of $4.75, in line with the group target multiple.


Downside risks to our rating include: (1) a slowdown in the aerospace aftermarket recovery; (2) moves in discount rates leading to higher pension funding needs;(3) prolonged weakness in residential and non-residential construction markets; and (4) declines in global commodity prices, particularly oil, hurting related businesses at HPS and UOP.

Overweight


Honeywell (HON;HON US)

FYE Dec 2011E 2012E 2013EEPS - Recurring ($)Q1 (Mar) 0.88A - -Q2 (Jun) 1.00A - -Q3 (Sep) 1.10A - -Q4 (Dec) 1.05 - -FY 4.02 4.25 4.75P/E FY 13.8 13.1 11.7Bloomberg EPS FY ($) 4.03 4.44 5.01Source: Company data, Bloomberg, J.P. Morgan estimates.

83



Sensata

Investment Thesis

We view Sensata as a high-quality growth play, with several differentiating factors, including: (1) 7-9% annual content gains, leading to above-average growth and visibility; (2) industry-leading scale, helping sustain best-in-class margins; and (3) solid M&A competency, as the company can integrate adjacent technologies and generate attractive returns. Our OW rating is based primarily on these long-term dynamics, and the company’s ability to drive above-average EPS growth through the cycle, warranting a premium valuation to peers, in our view.

Valuation

Lowering estimates and PT, remain Overweight. While we believe Sensata should trade at a premium multiple to peers on business quality alone, we approach valuation differently owing to a couple of factors, including (1) a low tax rate of 4-6% of adjusted net income, which is sustainable near term but is likely to move to 20-25% in the long run; and (2) FCF conversion on adjusted net income that is below the group average, or ~85% versus the sector average of ~100%. To account for this, we base our price target on a multiple of FCF (versus EPS for the group) and haircut the premium to reflect the lower tax rate. Thus, our $30 end-December 2012 PT (down from $33) is based on 13.8x our 2013E FCF/share estimate of $2.22, a 10% premium to the group P/E target of 12.5x. On a P/E basis, our PT implies 11.5x 2013E adjusted EPS, a 10% discount to the group.


Downside risks include: (1) high expectations around growth rates could lead tomultiple contraction if content slows; (2) a slowing in growth rates in emerging markets, which represent ~20% of sales; and (3) concentrated ownership position from the financial sponsor parent.

Overweight


Sensata Technologies (ST;ST US)

FYE Dec 2011E(Prev)

2011E(Curr)

2012E(Prev)

2012E(Curr)

2013E(Prev)

2013E(Curr)

EPS Reported ($)Q1 (Mar) 0.50A 0.50A - - - -Q2 (Jun) 0.51A 0.51A - - - -Q3 (Sep) 0.50A 0.50A - - - -Q4 (Dec) 0.47 0.44 - - - -FY 1.98 1.95 2.30 2.15 2.85 2.65Bloomberg EPS FY ($) - 1.95 - 2.19 - 2.66Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

84



Wesco

Investment Thesis

We view WCC as an attractive combination of late-cycle, end-market leverage andcompany-specific growth drivers. With a strong franchise in the fragmentedelectrical distribution space, we see reasons why this cycle can be better than last onexecution of organic growth initiatives and accretive M&A. WCC’s financial profileis also improved compared to its history, with debt/EBITDA lower, arguing for animproved multiple. Our OW thesis is based on our view that company growthinitiatives magnify late-cycle, end-market leverage, putting upward pressure on thenear-term multiple and leading to stock outperformance.

Valuation

Raising estimates and PT, reiterate Overweight. WCC shares trade at 12.5x our 2012E EPS of $4.35, a 9% discount to the group average of ~12.4x. WCC shareshave historically traded at an average of ~11x or a ~20% discount to EE/MI peers, though with significant volatility around this average, which we think is mostlyattributable to balance sheet leverage and cycle timing. We note that WCC traded atparity with the EE/MI sector between mid-2004 and mid-2006, a time when late-cycle end markets were recovering and leverage was at similar levels to today. Weare raising our December 2012 PT to $56 ($50 previously), reflecting our higher estimates and a 10% discount to the group. This is below WCC’s historical discount to the EE/MI group owing to lower leverage and the later-cycle power/non-res exposure.


Downside risks to our OW rating include: (1) continued weakness in commercialconstruction end markets; (2) a tougher pricing environment and price/cost matchingrisks; (3) M&A execution risk; and (4) organic growth investments leading to added SG&A costs, limiting margin pull-through.

Overweight


Wesco (WCC;WCC US)

FYE Dec 2010A 2011E(Prev)

2011E(Curr)

2012E(Prev)

2012E(Curr)

2013E(Prev)

2013E(Curr)

EPS - Recurring ($)Q1 (Mar) 0.44 0.74A 0.74A - - - -Q2 (Jun) 0.60 1.00A 1.00A - - - -Q3 (Sep) 0.74 1.11A 1.11A - - - -Q4 (Dec) 0.72 0.95 0.96 - - - -FY 2.50 3.80 3.81 4.05 4.35 4.75 5.00P/E FY 21.7 14.4 14.3 13.5 12.5 11.5 10.9Bloomberg EPS FY ($) 2.50 - 3.83 - 4.43 - 5.14Source: Company data, Bloomberg, and J.P. Morgan estimates. "Bloomberg" above denotes Bloomberg consensus estimates.

85



Danaher

Investment Thesis

We view DHR as one of the highest-quality names in our coverage universe, built around the Danaher Business System (DBS), which provides a playbook and set of tools for continuous operational improvement across the portfolio (both acquired and existing businesses). Management’s investing competency is another important aspect of the story, as the M&A track record is among the best in the sector, a key to driving above-average earnings growth, in our view. Our Overweight thesis is based primarily on (a) the ability to drive improved organic growth this cycle versus last, led by increased R&D investment; (b) a bullish outlook on the BEC integration potential; and (c) DHR’s ability to participate in upside to an improving economy while also benefiting from a “relative safety bid” in a tougher market, a function of its M&A competency and less cyclical healthcare exposures.

Valuation

Maintain Overweight, $51 price target. DHR shares now trade at ~15x our 2012E EPS estimate of $3.15, a ~12% premium to peers versus its ten-year historicalaverage of a 25% premium. Given the earlier-cycle orientation of many of DHR’s cyclical businesses, where revenues have recovered more quickly, we assume a premium on 2013E EPS of 20% versus 25% historically. Thus, our $51 December 2012 price target is based on ~15x our 2013E EPS of $3.40 versus a group target of 12.5x.


The primary downside risks relate to (1) longer-term organic growth concerns, (2) execution risk on past and future acquisitions, as well as (3) higher expectations on this stock versus the group.

86



Dover

Investment Thesis

While Dover has executed well on acquisitions and its energy/tech earnings momentum has surpassed expectations, we think risk around earnings is now higher, as the bar has been raised along with a string of recent earnings beats. Additionally, now that management has shifted the focus somewhat from supply chain/restructuring saves to organic growth, we now think the 7-9% three-year target will drive sentiment, with any top-line slowing being punished. We see 2012 as a year in which growth may be more challenging, a year around which we think risks and growth opportunities are more balanced than most assume. As a result, we maintain our Underweight rating.

Valuation

Maintain Underweight, $56 price target. Our end-December 2012 price target is based on ~11x our 2013 EPS estimate of $5.15. We value DOV at a 10% discount to our group multiple of 12.5x, as shares have traded at a 10-15% discount to the group previously when tech/energy weaken, components for our 2012 forecast.


Upside risks to our rating and price target include: (1) sales and/or margins hold up better than expected in oil & gas; (2) tech capital spending cycle rebounds more quickly than expected; (3) solid free cash flow generation leads to additional share buybacks or accretive acquisitions.

87



Emerson Electric

Investment Thesis

We view Emerson as one of the highest-quality franchises on our coverage list, as it has built a reputation on a differentiated technology offering and a history of execution. With a later-cycle end market slant, we think the company has historically created the most value in its Process, Climate, and Industrial Automation segments, a trend we expect to continue in this cycle. However, our Neutral rating is based on concerns around near-term performance and competitive issues in the Network Power segment, where ~70% of acquisition capital has been spent over the past ten years. Current expectations are also high for 2012/2013 earnings growth, and there could be risks to the forecast as near-term growth questions in key segments are sorted out.

Valuation

Maintain Neutral, $49 target. EMR is among the higher-quality names in our group, and has historically traded at a ~10% premium to the EE/MI sector. Given what we think will be an evaluation period for the historical premium, we value shares at a 5% premium to peers (12.5x) on 2013E, maintaining our target of $49. Thus, our $49 December 2012 price target is based on ~13x our 2013E EPS estimate of $3.70. Shares currently trade at a 5% premium to the group on our 2012E EPS of $3.30.


Downside risks to our rating and price target include: (1) slower-than-expected recovery in late-cycle end markets like Network Power or Process; (2) execution risk around recent acquisitions; and (3) a pullback in commodity prices hurts spending in resource-related markets. Upside risks include: (1) faster-than-expected recovery in late-cycle end markets like Process; (2) execution on Network Power restructuringand subsequent margin improvement; and (3) better-than-expected margin leverage in Climate.

88



Generac

Investment Thesis

We view Generac as a unique play on increasing awareness around backup residential and commercial power sources, where the company is a leading providerof standby solutions in North America. The company’s operations, including low-cost sourcing/manufacturing, increasing automation, and dealer channel initiatives have helped it better penetrate the market, increase product awareness, and grab a majority share in residential standby. We believe the penetration opportunity here is substantial as consumer spending/household investment rebounds, but timing around such an improvement remains uncertain. For now it looks like end market challenges, including weak residential investment, high unemployment, and subsequently low spending on high-ticket consumer discretionary goods, will more than outweigh an otherwise solid growth story.

Valuation

Maintain Neutral, $21 price target. GNRC shares trade ~15x our 2012E adjusted EPS (23x our GAAP EPS), a ~5% premium to the EE/MI sector. Our $21 December 2012 price target is based on 11.9x our 2013E free cash flow per share estimate of $1.78, an appropriate multiple in our view.


Upside risks include: (1) increased storm activity could lead to higher near-term conversion rates; (2) lower-priced, entry-model product could lead to higher volume growth; and (3) commercial markets could recover faster than expected. Downside risks include: (1) consumer spending on durable goods could remain under pressure;(2) loss of share in key residential standby market; and (3) lower-priced, entry-model product could weigh on margins.

89



Ingersoll Rand

Investment Thesis

We view IR as a solid portfolio of attractive, long-term businesses. While execution and margins are far from best in class, we see opportunities to drive continued operational improvement in a portfolio that has seen significant dislocation from M&A over the last two cycles. Our Overweight rating is based on a view that, even without execution on productivity targets, the company can see nice margin improvement on a tailwind from late-cycle end markets, most notably non-residential construction. With recent questions around execution, the thesis has shifted somewhat more toward pure end-market leverage.

Valuation

Maintain Overweight, $41 price target. Shares trade at ~11x our 2012E EPS, a ~20% discount to the group on 2012E, versus its historical average of 10% (adjustingfor IR’s current, higher tax rate). Our target multiple assumes a 10% discount, as we think with stabilization in fundamentals IR can trade more in line with its historical average discount (adjusting for tax items). Thus, our $41 December 2012 price target assumes 11.3x our 2013E EPS of $3.60 versus a group target multiple of 12.5x.


Downside risks include: (1) slower-than-expected rebound in commercial construction; (2) failure to deliver on productivity targets; (3) inability to pass through price increases to offset inflation; and (4) continued weakness in residential HVAC replacement rates.

90



Lennox International

Investment Thesis

We view LII as an attractive way to play a recovery in HVAC markets, both near term and over a multi-year period as pent-up demand unwinds. We believe current management has taken steps to improve the franchise through the downturn by investing in R&D, cutting costs, broadening sourcing, and streamlining the distribution strategy – all of these could lead to outsized margin improvement as revenues recover. Finally, we note LII’s strong brands and captive distribution footprint, important in the context of a favorable industry structure with limited access from foreign competitors. Our Overweight rating is based on a combination of these factors.

Valuation

Maintain Overweight, $34 price target. Shares trade at ~15x our 2012E EPS of $2.35, a premium of ~8% to the EE/MI group on 2012E. Our $34 end-December 2012 price target assumes 11.5x 2013E EPS of $2.95, an 8% discount the EE/MI group target of 12.5x. This is roughly in line with LII’s historical ~10% discount to peers, but expanded modestly given that the company’s key HVAC end markets remain close to a cyclical trough.


Downside risks include: (1) slower-than-expected recovery in residential HVAC replacement market; (2) new housing starts remain a drag on residential HVAC; (3) commercial HVAC recovery stalls; (4) incremental risks around price/cost; and (5) execution on supply chain and distribution initiatives.

91



3M

Investment Thesis

We view 3M as a high-quality, durable franchise, with a strong R&D competency and best-in-class margins/ROIC. Our Neutral rating is based primarily on limited upside to margins from current levels, meaning 3M needs above-average top-line performance to drive earning growth in line with peers. While we recognize management’s strategic efforts to drive higher growth versus last cycle, we think sustained outperformance on the top line will be challenging at this point in the cycle, in part because of 3M’s earlier-cycle end market profile versus peers, and thus think shares’ historical premium multiple could continue to be compressed.

Valuation

Maintain Neutral, $80 price target. Shares currently trade about in line with the group on our 2012E EPS of $6.05 (a 5% premium on consensus). Historically, shares have traded at an average 10% premium to peers, which we believe reflects franchise quality; however, given an earlier-cycle revenue profile, and margins that are closer to peak than peers’, we think this premium could compress as investors view 3M as closer to “normalized” earnings than others. On this basis, to value shares, we use an in-line multiple versus its historical 10% premium. Thus, our $80 end-December 2012 PT is based on 12.5x our 2013E EPS of $6.40.


Upside risks to our rating include: (1) stronger-than-expected organic growth, particularly in emerging markets; (2) sustained strength in consumer electronics markets leading to upside at D&G and E&C; and (3) accretion from cash deployment, including share buybacks or M&A. Downside risks to our rating and price target include: (1) healthcare volumes and margins continue to degrade;(2) volatility in the D&G segment relating to LCD TVs negatively impacts earnings;and (3) margins fail to improve despite higher sales, limiting earnings leverage.

92



Motorola Solutions

Investment Thesis

We view Motorola Solutions as a strong franchise with dominant share of the North American public safety market, a position reinforced by strong intellectual property, deep customer relationships, and a valuable installed base. The Enterprise segment also offers solid growth, albeit with more cyclicality. While operating metrics (gross margins, capex requirements, cash conversion) compare favorably to EE/MI peers, growth is likely to lag on the back of an uncertain longer-term outlook for the government business. Our Neutral rating is based on a view this lower fundamental growth profile outweighs potential positives from capital allocation as the company returns excess cash to shareholders.

Valuation

Maintain Neutral, $46 price target. On our 2012E EPS, MSI trades at ~17.3x, or a ~30% premium to EE/MI peers, while shares trade at a 10% premium on EV/EBITDA (5% premium excluding underfunded pension). We like the company’s strong market share and operating metrics, and think the balance sheet optionality will drive a premium to our EE/MI sector on P/E, but we struggle to justify much beyond a parity multiple on EV/EBITDA given lower long-term growth prospects. Therefore, our $46 end-2012 PT assumes ~14.5x our 2013E EPS, a 15% premium to the group on P/E, which implies a 2012E EV/EBITDA in line with EE/MI peers.


Upside risks to our rating include: (1) government revenue holds in better than expected, in line with historical growth rates, driving upside to our estimates; (2) tailwinds from growth initiatives like public safety LTE; (3) continued strength in retail capital spending; and (4) accretive action from capital deployment, such as share repurchase. Downside risks to our rating and price target include: (1) budget cuts at government agencies negatively impacts growth rates; (2) a downturn in retail sales; and (3) failure to hit longer-term growth targets results in multiple compression.

93



Rockwell Automation

Investment Thesis

We view ROK as a high-quality franchise, built around the trend toward technology-driven productivity investments, and supported by a defendable installed base and a strong distribution network. Our Neutral rating is based on the likely deceleration in growth and incremental margins as the cycle matures – while ROK has plenty of later-cycle capital spending exposure, we believe its best relative performance comes early in the cycle as the high-margin MRO products ramp up with factory utilization globally. With the cycle’s greatest earnings revision and upside surprise likely in the rearview, we prefer to wait for an opportunity with lower expectations and a lower valuation.

Valuation

Maintain Neutral, $74 price target. Share trades at 14.9x our FY12E EPS of $5.10, an 8% premium to the group. Our $74 end-December 2012 price target is based on 13.1x our 2013E EPS, versus a 12.5x target multiple for the group, roughly in line with the historical 5% premium.


Upside risks include: (1) continued acceleration in global growth and capex spend leads to further upward earnings revisions; (2) better-than-expected traction in emerging markets; and (3) cash flow leads to additional stock buybacks. Downside risks include: (1) deterioration in macroeconomic fundamentals such as industrial production and capacity utilization; (2) slowing in the growth trajectory in the key Logix product; (3) a step back in emerging markets, including Asia and later-cycle process industries; and (4) slower-than-expected development of high-margin software business.

94



Roper Industries

Investment Thesis

We view Roper as one of the highest-quality acquisition stories in the multi-industryspace. The company has built a track record of expanding sales, margins, and cash flow in multiple “asset-light” deals, which have benefited earnings through the cycle. While acquisitions are a core part of the story, the company also has supplemental growth from strong end-market tailwinds in the Industrial and Energy segments, which appear set to continue at least through 2H11. Our Neutral rating is founded on current valuation, which at around a 30% premium to peers, we think prices in acquisition potential and recent execution. Also, this cycle’s dynamics, which include Energy as an early-cycle market, make ROP more of beneficiary early on, showing less fundamental acceleration after 2012, in our view.

Valuation

Maintain Neutral, $76 target. Shares trade at ~20x our 2012E EPS of $4.50, a 45% premium to peers, which compares to 20% historically. We are maintaining our end-Dec 2012 price target of $76, which is based on ~15x our 2013E EPS of $5.05 versus a 12.5x target for the group, a slight premium to the company’s historical average.


Upside risks to our rating and price target include: (1) better-than-expected organic growth, particularly in key cyclical Energy and Industrial end markets; (2) better-than-expected incremental margins; and (3) upside accretion from recently completed and new acquisitions. Downside risks to our rating and price target include: (1) a pullback in industrial end markets; (2) margin pressure from pricing or raw materials; and (3) dilutive acquisitions and/or execution risk around existing deals.

95



SPX Corp.

Investment Thesis

We remain positive on SPX, and while we believe investors began to discount late-cycle upside last year, uncertainty in the macro picture and a later-cycle mix has pressured shares recently. After recent cuts, Street expectations are now lower, and we see upside potential in out-year estimates as a key driver to outperformance as later-cycle markets turn. To be clear, this remains an end-market-leverage play, in our view, and we acknowledge the concern that the cycle timeline continues to be stretched out, but we currently see less EPS/multiple downside at SPX compared to the group at these levels.

Valuation

Maintain Overweight, $75 price target. Shares trade 13.5x our 2012E EPS of $4.80, about in line with the group, despite a much later-cycle business mix displaying improving order trends. Our end-December 2012 PT of $75 is based on ~13.1x our 2013E EPS, a 5% premium to the group multiple of 12.5x, versus a ~10% discount to the group historically, to account for a later-cycle business mix.


Downside risks to our rating and price target include: (1) a prolonged recovery in the global infrastructure story, hurt by lack of decisions around US energy policy, negatively impacting the Thermal segment; (2) muted recovery in short-cycle businesses like Flow, which is just beginning to turn; and (3) weak electricity demand leading a muted spending recovery on power transformers by utility customers.

96



Textron

Investment Thesis

We view TXT as an attractive way to play later-cycle cyclical leverage, particularly through Cessna, which we view as the dominant driver of earnings and sentiment. The Textron portfolio has strong brands, including Bell and Cessna, despite strong competitors in each market. Still, our Overweight thesis is based on a view that an end-market recovery should benefit all players in the market, of which TXT can win its fair share, on which earnings growth should outpace other industrial peers over the next 2-3 years. We think TXT’s near-term multiples can expand upon better visibility of this recovery, mostly in the form of Cessna orders.

Valuation

Maintain Overweight, $21 price target. On our 2012E EPS of $1.40, TXT trades at ~13.7x, about in line with the group. Our $21 end-December 2012 price target is based on 12.5x our 2013E EPS of $1.70, in line with the group target multiple – this is above TXT’s historical average discount of ~10%, adjusted to reflect the later-cycle leverage at Cessna versus the peer group.


Downside risks to our rating and price target relate to: (1) execution risks around V-22; (2) a slower-than-expected ramp at Cessna and/or weakness in the aftermarket business; (3) greater-than-expected losses and/or a need for further capital infusions at TFC; (4) further share losses at Bell; and (5) defense budget cuts hurt Systems revenues beyond what we already assume.

97



Tyco International

Investment Thesis

We view Tyco as a good vehicle to get exposure to later-cycle (60% of sales)commercial security, valve, and fire protection end markets, which have all yet to truly improve off the bottom of the cycle. ADT Resi, while conventionally associated with the early cycle, has been underappreciated in terms of 35%+ core incremental leverage, a burgeoning new product line in PULSE, and industry acquisitions at high multiples relative to historical standards. There is also a cost improvement story starting to develop from streamlining the company’s past acquisitions, which could provide more leverage through 2013.

Valuation

Maintain Overweight, $52 price target. Shares trade 13.8x our 2012E EPS of $3.50, about in line with peers, and above its historical ~10% average discount. Our $52 December 2012 target is based on 13.2x, a 5% premium to the group, our F2013 EPS estimate of $3.95.


Downside risks to our rating and price target include: (1) execution around the Broadview integration and failure to meet cost synergy targets; (2) continued weakness in non-residential construction markets delays a recovery for non-recurring revenues at ADT/Fire; and (3) large project activity fails to pick up for Flow, impacting trajectory of the recovery.

98



WABCO

Investment Thesis

We view WBC as a high-quality cyclical with (a) an attractive content growth story, (b) a favorable competitive structure, and (c) a strong management team that has managed well through the past downturn. We also see a positive from the 2010 resolution of the EU fine, which increases financial flexibility going forward. Our Overweight thesis is based on a view that valuation now sufficiently prices in risks associated with their key European truck market, without discounting the longer-term earnings power. When markets stabilize, we also see the opportunity for a higher relative multiple, reflecting the long-term growth potential from content gains.

Valuation

Maintain Overweight, $56 price target. On our 2012E EPS of $4.40, WBC shares trade at 10.5x, a ~25% discount to EE/MI peers versus an average 15% discount since WBC became a standalone public company in 2007. Our December 2012 price target of $56 assumes 10.6x our 2013E EPS of $5.25 versus the group target of 12.5x, a 15% discount to the EE/MI sector, in line with its historical discount.


Downside risks to our rating and price target include: (1) a deeper-than-expected downturn in the European truck recovery; (2) greater-than-expected slowdown in emerging markets; (3) dependence on a few key customers; and (4) higher commodity costs such as steel and aluminum.

99



Watsco

Investment Thesis

We view Watsco as offering an attractive combination of end-market leverage and company-specific drivers. First, WSO has the most exposure in our group to residential HVAC, an end market that remains near trough and where we see a strong multi-year growth profile when pent-up demand is eventually unwound. Second, WSO holds a market-leading position in the North American HVACR distribution industry, multiple times the size of its nearest peers, but still represents ~10% of the overall industry, offering significant opportunities for consolidation, in our view. Finally, we believe cash remains a bright spot, with low capital needs and FCF conversion well in excess of net income, helping to drive (a) M&A activity and (b) return of cash to shareholders, including an attractive dividend yield.

Valuation

Maintain Overweight, $60 price target. On our 2013E EPS of $4.15, shares trade at ~16.4x, a ~30% premium to peers. Our price target assumes a 15% premium to the group, modestly above the ~10% historical average premium, but reflecting support from the dividend yield that has moved higher in recent years. Thus, our $60 December 2012 price target is based on 14.4x our 2013E EPS, versus a group target of 12.5x, which implies a ~4.2% dividend yield that we view as conservative relative to its recent trading history.


Downside risks to our rating and price target include: (1) continued replacement system deferrals; (2) weakness in new housing starts; (3) weakness in commodity costs negatively impacting other HVAC product sales; and (4) execution risks around the Carrier Enterprises integration.

100



Watts Water Technologies

Investment Thesis

We view Watts as a solid end-market-leverage play on developed market construction, which should start to benefit from recovery prospects in 2012/2013. Acquisitions have become a bigger part of the story near term, one that should help EPS grow in 2012, even if challenging underlying dynamics persist. Shares had been more attractively valued on 2012E, but expectations have been reset higher for 2012, and limited visibility and uncertainties around the timing of a recovery in construction keep us Neutral.

Valuation

Maintain Neutral, $34 price target. WTS trades ~16x our 2012E EPS of $2.30, a 15% premium to the group multiple, which compares to an in-line multiple historically. We think valuation is fair given concerns around price/cost, acquisition integration, and ongoing European restructuring. Our Dec-2012 price target of $34 is based on 12.5x our 2013E EPS estimate of $2.70, in line with the group target multiple.


Downside risks to our rating and price target include: (1) further weakness in US Commercial and European markets; (2) execution on acquisition integration; and (3) worse-than-expected price/cost. Upside risks include: (1) a faster-than-expected macroeconomic recovery, particularly in US non-residential construction; (2) better-than-expected price/cost; and (3) better execution on restructuring initiative.

101



Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for General Electric Co., Hubbell Inc., Honeywell, Sensata, Wesco within the past 12 months.

Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of Honeywell.

Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Wesco.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: General Electric Co., Hubbell Inc., Honeywell, Sensata, Wesco.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: General Electric Co., Hubbell Inc., Honeywell, Sensata, Wesco.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: General Electric Co., Hubbell Inc., Honeywell, Wesco.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: General Electric Co., Hubbell Inc., Honeywell, Wesco.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking General Electric Co., Hubbell Inc., Honeywell, Sensata, Wesco.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from General Electric Co., Hubbell Inc., Honeywell, Sensata, Wesco.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from General Electric Co., Hubbell Inc., Honeywell, Wesco.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Date Rating Share Price ($)

Price Target ($)

16-Jun-08 N 28.97 --

09-Dec-08 N 18.88 13.00

06-Feb-09 N 10.85 9.00

10-Mar-09 N 8.87 8.00

12-May-09 N 14.19 12.00

08-Sep-09 OW 14.50 17.00

19-Oct-09 OW 15.84 17.00

16-Dec-09 OW 15.75 20.00

07-Jan-10 OW 15.45 22.00

19-Apr-10 OW 18.97 23.00

17-Aug-10 OW 15.58 21.00

23-Mar-11 OW 19.53 22.00

12-Aug-11 OW 15.88 19.00

0

15

30

45

60

75

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Jan12

General Electric Co. (GE) Price Chart

N $8 OW $20

N $9 OW $17

N N $13 N $12OW $17OW $22OW $23OW $21 OW $22OW $19

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Break in coverage Jun 16, 2008 - Dec 09, 2008.

mailto:[email protected]

https://mm.jpmorgan.com/disclosures/company

102




Price Target ($)

15-Mar-10 N 50.15 50.00

07-May-10 OW 43.56 55.00

17-Aug-10 OW 46.32 59.00

22-Oct-10 OW 54.60 63.00

23-Mar-11 OW 68.62 75.00

12-Aug-11 OW 53.42 61.00

21-Oct-11 OW 58.67 63.00


Price Target ($)

11-Jan-08 N 57.82 --

09-Dec-08 N 27.21 22.00

10-Mar-09 N 25.43 21.00

12-May-09 N 33.64 26.00

08-Sep-09 N 37.82 31.00

03-Dec-09 N 39.60 36.00

07-Jan-10 N 40.43 38.00

31-Mar-10 N 45.27 45.00

17-Aug-10 OW 42.39 53.00

17-Nov-10 OW 48.82 56.00

31-Jan-11 OW 56.01 57.00

10-Mar-11 OW 55.79 58.00

23-Mar-11 OW 57.10 62.00

25-Apr-11 OW 60.32 65.00

12-Aug-11 OW 46.88 53.00

24-Oct-11 OW 51.77 55.00

19-Dec-11 OW 52.29 56.00

0

21

42

63

84

105

126

Price($)

Mar07

Dec07

Sep08

Jun09

Mar10

Dec10

Sep11

Hubbell Inc. (HUBB) Price Chart

OW $55 OW $63 OW $63

N $50 OW $59 OW $75 OW $61


Initiated coverage Mar 15, 2010.

0

18

36

54

72

90

108

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Jan12

Honeywell (HON) Price Chart

N $26 N $38 OW $57OW $65 OW $56

N $21 N $36 OW $56OW $62 OW $55

N N $22 N $31 N $45 OW $53 OW $58 OW $53


Break in coverage Jan 11, 2008 - Dec 09, 2008.

103




Price Target ($)

20-Apr-10 OW 19.07 22.00

21-Apr-10 OW 20.50 24.00

26-May-10 OW 16.47 22.00

17-Aug-10 OW 17.42 21.00

21-Oct-10 OW 21.49 24.00

24-Jan-11 OW 29.79 31.00

23-Mar-11 OW 32.31 34.00

15-Jun-11 OW 33.47 37.00

21-Jul-11 OW 37.24 39.00

12-Aug-11 OW 31.95 34.00

21-Oct-11 OW 29.90 33.00


Price Target ($)

20-Apr-07 OW 61.11 81.00

08-Aug-07 OW 47.52 --

24-Oct-08 OW 17.00 26.00

18-Feb-09 OW 19.25 18.00

10-Mar-09 OW 13.70 16.00

12-May-09 OW 26.20 24.00

08-Sep-09 OW 24.59 27.00

07-Jan-10 OW 28.75 29.00

26-Apr-10 OW 42.10 45.00

22-Oct-10 OW 43.72 48.00

31-Jan-11 OW 56.05 58.00

23-Mar-11 OW 60.62 66.00

12-Aug-11 OW 41.91 50.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com.

Coverage Universe: Tusa, Jr, Stephen: 3M (MMM), Danaher (DHR), Dover (DOV), Emerson Electric Co. (EMR), Generac (GNRC), General Electric Co. (GE), Honeywell (HON), Hubbell Inc. (HUBB), ITT Corp. (ITT), Ingersoll Rand (IR), Lennox International (LII),

0

12

24

36

48

60

Price($)

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Sensata (ST) Price Chart

OW $22 OW $31 OW $39

OW $24 OW $24 OW $37 OW $33

OW $22 OW $21 OW $34 OW $34


Initiated coverage Apr 20, 2010.

0

22

44

66

88

110

Price($)

Oct06

Jul07

Apr08

Jan09

Oct09

Jul10

Apr11

Jan12

Wesco (WCC) Price Chart

OW $24

OW $16 OW $66

OW $81OW OW $26OW $18 OW $27OW $29OW $45 OW $48OW $58 OW $50


Break in coverage Aug 08, 2007 - Oct 24, 2008.

104



Motorola Solutions (MSI), Rockwell Automation (ROK), Roper Industries (ROP), SPX Corp. (SPW), Sensata (ST), Textron (TXT), Tyco International (TYC), WABCO (WBC), Watsco (WSO), Watts Water Technologies (WTS), Wesco (WCC)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 12%IB clients* 52% 45% 36%

JPMS Equity Research Coverage 45% 47% 8%IB clients* 72% 62% 58%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

http://www.optionsclearing.com/publications/risks/riskstoc.pdf

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105



Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures sectionabove. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised September 30, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

JPM EE & MI 2012 Outlook_2012-01-06

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