I met Mark Douglass of Longbow Research several years ago. He is one of the few investment analysts that specifically follows industries that I cover–especially industrial automation. He recently released his Third Calendar Quarter (C3Q13) reports. One thing I find interesting is that we are technically still in recovery from the “Great Recession” of 2009, yet consistently people just do not feel the recovery.

Here are his “Key Takeaways” regarding the automation sector:

• What’s New: The survey indicates that C3Q13 was a decent quarter for automation and roughly in line with expectations, however contacts just do not seem comfortable that a recovery is in the making and there is still a lot of caution. Both discrete and process demand in the U.S. has weakened slightly since 2Q and international demand remains mixed. In addition, prices for many increased in the quarter.

• U.S. demand is up low to mid single digits y/y (vs. up mid single digits y/y in 2Q), with slightly more strength on the discrete side than in process markets. Most seem to be experiencing a slight spending pause, though food & bev and consumer markets were robust and auto, oil & gas and chemical steady. International demand is flat to slightly higher, as China was up slightly and Germany improved though demand is still down y/y.

• Pricing is slightly higher (vs. flat in 2Q), and inventories are slightly higher as well, with no problems reported with lead times.

• The domestic outlook is for y/y growth of low to mid single digits y/y(vs. mid single digits in 2Q13) for both discrete and process, while International respondents were largely positive, helped by an improving German outlook.

Investment Thesis

“We think Emerson (EMR) is one of our more interesting NEUTRAL-rated stocks as there appears to be less negativity surrounding the company as it adjusts its Network Power business, there is potential for margin expansion in FY14 as it reaps restructuring actions from FY13 and gets some volume leverage, and it has substantial resources for share repurchases and M&A, especially after it completes the sale of Embedded Computing and Power. While we think shares of EMR can outperform many of its peers over the coming year, we do not see enough upside to recommend the shares and remain NEUTRAL. We maintain our BUY ratings on Danaher (DHR), Eaton (ETN), WCC, and NEUTRAL on Ametek (AME), NDSN, National Instruments (NATI), Rockwell Automation (ROK), and Roper (ROP).

Industrial Pumps: Demand Largely Flat, Expected to Improve in Coming Months

Key Takeaways quoting directly from the report.

With this report we are instituting our U.S. industrial pumps survey in which we call distributors across the U.S. for information on trends and expectations for a variety of industrial pumps.

Business appears roughly flat y/y plus or minus a few percent: 36% cited positive growth, 36% were flat and 28% were down vs. last year. Most are roughly in line with their expectations entering the quarter, and business seems to be plodding along. Food processing, pulp & paper, and oil & gas are healthy, chemical stable, water mixed and mining is soft.

Pricing is flat y/y, with most price increases having occurred at the beginning of the year (~mid single digits). Inventories are mostly stable as well, with those reporting a decrease in inventory indicating it is due to slow demand. Outlook is mostly optimistic, and aggregate expectations are for a slight y/y increase, in the low-single-digits with some contacts hopeful that they will benefit from some year-end budget flushing.

Investment Thesis

We maintain our NEUTRAL ratings on IEX and Roper (ROP). Both are high-quality diversified industrials trading relatively rich, though relative to the S&P IEX is trading above its normal premium and we think has greater risk associated with it. We expect improving organic growth in 2H13 and into 2014 for both as well as margin expansion, leading to double-digit EPS growth, with strong FCF to support acquisitions. However, given that we think much of the expected recovery is on fragile footing, we are hesitant to recommend buying on these expectations given the relatively steep stock valuations.

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