The Capex Cycle Nobody Is Underwriting Yet
Order books across industrials have compounded for seven quarters while the market still prices these businesses on trough-cycle multiples. We size the gap.
Order inflows across our industrials coverage have compounded for seven consecutive quarters, yet the group still trades on multiples consistent with a trough in the cycle. We think the market is pricing a mean reversion that the order books do not support, and we size the gap between the two.
- Coverage names
- 9
- Book-to-bill
- 1.4×
- Quarters positive
- 7
- Implied growth gap
- ≈600bps
Key findings
- Order books are longer than the multiple implies
Book-to-bill across our nine-name coverage sits well above one and has held there for seven quarters. Multiples have not re-rated to match, which is the anomaly this note is about.
- Execution, not demand, is the binding constraint
Channel work points to skilled-labour availability and land clearance as the limiting factors on revenue conversion. Demand is not in question; the timing of recognition is.
- Margin mix is improving quietly
The service and annuity component of the order mix has grown faster than the equipment component. That shifts the earnings profile in a way trailing margins have not yet shown.
Indexed to 100 at the start of the period. Sample data.
What the market appears to be assuming
Running a reverse-DCF on the coverage group at current prices returns an implied medium-term growth rate meaningfully below what the disclosed order books would deliver even on conservative execution assumptions. In other words, the market is underwriting a sharp slowdown that has not yet appeared in any leading indicator we track.
That assumption is not unreasonable on its face. Capex cycles in this market have historically been short, policy-dependent and prone to abrupt reversal. The question is whether this cycle shares the characteristics that made previous ones fragile.
Why we think this cycle is differently shaped
Three features distinguish the current expansion from the 2010–2013 episode: the funding mix is less leveraged, order origination is more diversified across end-markets, and the annuity component of revenue is materially larger. Each of those reduces the amplitude of the eventual downturn.
None of them prevents a downturn. The claim here is narrower — that the shape of the cycle has changed enough to make the multiple currently applied to these businesses too punitive.
What would prove us wrong
A single quarter of negative book-to-bill across three or more coverage names would materially weaken the argument. So would evidence that order additions are being won at declining margins, which we would detect first in the gap between order value and expected execution margin disclosed at the segment level.
We would also revisit the view if the funding mix deteriorated — specifically, if net debt to EBITDA across the coverage group moved above the threshold documented in the model.
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Head of Research · SkyGrowthWealth Research
Maintains the model behind this note and publishes every revision to it.
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