US Industrials

Equity preferences

Chief Investment Office GWM | 12 March 2021 2:07 pm EST Adam Scheiner, CFA, Industrial and Materials Analyst Americas, [email protected] Name Ticker Price Sector view: Moderately preferred Most Preferred In this report Boeing Co. BA 252.00 • Global manufacturing should continue to improve as we CSX Corp. CSX 93.82 move through 2021. Additional stimulus and effective vac- Delta Air Lines Inc. DAL 48.32 cines are critical factors in our outlook. Emerson Electric Co. EMR 91.31 Fortive Corp FTV 68.18 • We favor the aerospace and railroad industries along with Honeywell International Inc. HON 212.50 special situations within capital goods. Kansas City Southern KSU 214.86 • Railroads should see powerful earnings leverage from a Lockheed Martin Corp. LMT 339.73 return to growth. Parker-Hannifin PH 308.27 • Valuations for defense companies are attractive again, but Raytheon Technologies RTX 77.05 await direction from Washington. Stanley Black & Decker SWK 191.98 • Aerospace seeing a rebound that should accelerate with Union Pacific UNP 214.52 more vaccines available. United Airlines UAL 54.06 • Raw materials prices are a concern, but are being offset so United Parcel Service Inc. UPS 167.24 far. Bellwether List 3M Co. MMM 184.57 Strategy: Optimism surrounding the rollout of coronavirus (COV- Caterpillar Inc. CAT 219.76 ID-19) vaccines and a potential global economic rebound have Crane Co. CR 91.78 caused the industrials sector index to outperform the market year Cummins CMI 269.80 to date in 2021. The industrials index has posted a total return of Deere & Co. DE 364.46 7.8% versus 5.2% for the S&P 500 for the year to date through FedEx Corp. FDX 268.49 11 March 2021. General Dynamics Corp. GD 172.67 General Electric Co. GE 12.27 Our equity strategy team currently has a moderately preferred view Huntington Ingalls HII 189.91 on industrials. As economic activity begins to improve, we expect Johnson Controls JCI 61.09 to see a pickup in the manufacturing sentiment, which tends to Lennox International LII 292.62 be a positive driver for the sector. Overall we expect the industrial Norfolk Southern NSC 260.75 recovery to continue into 2021, but it should take some time before Republic Services Inc. RSG 95.20 we get activity back to pre-COVID 19 levels. Areas of potential con- Rockwell Automation, Inc ROK 264.25 cern are any delay in COVID-19 vaccines, higher raw materials, and Southwest Airlines LUV 58.47 global economic weakness. Trane Technologies TT 162.94 Source: Bloomberg, UBS as of 11 March 2021 Our positioning within the sector Our most preferred stocks reflect companies with a combination of Sector Benchmark: S&P Industrials exposure to improving end markets as well as favorable company- specific catalysts such as restructurings, acquisitions and new products.

This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures begin on page 46. UBS 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. US Industrials | Equity preferences

Our subsector preferences are currently Transportation at Most Pre- Fig 1: Industrial stocks have not followed the ferred with Capital Goods and Commercial & Professional Services at rebound in new orders Neutral. Our main industrial themes are e-commerce, energy efficiency, automation and restructuring/M&A.

Capital Goods: Neutral Within capital goods, we favor select companies with favorable end markets and specific catalysts. We are more selective in the multi-industry and machinery groups due to valuation, but see some attractive company-specific stories that should benefit from restructuring, M&A and superior product portfolio. We believe the aerospace industry still has positive long-term drivers, but will first have to deal Source: Bloomberg, UBS as of 1 March 2021 with the overhang of demand destruction in the wake of COVID-19.

Transportation: Most Preferred Improving economic growth combined with renewed cost and profit discipline make this subsector attractive. Both the railroads and airlines are focusing on price versus market share, which should enhance underlying profitability. Precision railroading is having a major positive impact on margins and service efficiencies for the railroad group. Airlines should see a move towards normalization, but only after a successful COVID-19 vaccine is rollout globally. Freight transportation is likely to benefit from economic growth, but will have to manage the disruption in their business caused by the surge in e-commerce activity.

Commercial and Professional Services: Neutral This small subsector includes a diverse set of mostly US-centric companies such as waste management, employment and data services. As a large number of companies in the sector are US focused they received a large benefit from corporate tax reform. The environmental waste companies are attractive stories longer term, in our view, that should benefit from increased industrial activity as well as higher inflation. However, being still relatively early in the economic recovery may cause these stocks to be more market performers in the near term. The group would be more defensive in any economic pullback. Industrials environment should continue to improve with stimulus and successful vaccine

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

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The new order reading of the PMI has remained strong at 64.8 and Fig 2: Low inventories could trigger a restocking should lead to increased revenues in the months to come and is a good indicator of industrial stock performance in the near term. Any movement on an infrastructure stimulus bill would also be a boost for sector performance. Business inventories also now seem below normal relative to sales (Fig 2). This could set up a restocking impact to benefit industrial revenues if demand continues to improve in the months ahead.

Further stimulus should help keep US PMIs in expansion territory. PMIs in the major economies still remain in healthy expansion Source: UBS, Bloomberg and ISM territory after their rebound last year from the COVID-19 pandemic. The US in particular remains at strong levels of over 60 on the ISM Index (Fig. 3). The high level of the US PMI is causing some peak Fig 3: Global Activity remains at growth levels fears of a near term pullback possible from high levels, but we believe reopening and stimulus should keep the economy firmly in expansion We remain optimistic on moderate outperformance for industrials given the stocks have lagged and already did not reflect the recent PMI surge as being sustainable. The Biden administration is making further stimulus a high priority with a USD 1.9 trillion dollar package just passing the House and Senate. Stimulus is vital as a bridge to a wide rollout of vaccines.

As the economic conditions get back to more normal during 2021 we would expect price to earnings multiples to compress some- Source: Federal Reserve Board, Caixin Global, Factset and UBS what as is usually the case when moving later into a recovery. This should be offset though by continued strong earnings growth that we believe is likely to exceed expectations given accelerating revenues Fig 4: Sales growth should turn positive in 4Q and increased leverage from cost containment is an offset that should allow the group to moderately outperform in 2021. With sales and orders still having not yet turned to positive growth, we believe it is still early to call for a peak in the sector.

We expect sales growth to turn positive for most of the sector in 1Q and accelerate thereafter on easy comps with last year's pandemic (Fig 4). Most companies noted that December was the strongest month of the year for orders with continued momentum into Janu- ary. We continue to prefer the transports and aerospace industries that have pulled back recently and select machinery companies that Source: UBS and company reports should rebound once we get better visibility on stimulus and vaccine roll-out in the months to come. This In the capital goods area we remain focused on companies with more self help In the capital goods area we remain focused on companies with more to aid growth. In this vein we like Parker self help to aid growth. In this vein we like Fortive (M&A), Stan- Hannifin (margin growth), Fortive ley Black and Decker (margins and M&A) and Emerson Electric (M&A), Stanley Black and Decker (margins and M&A) and Emerson Electric (restructuring and energy rebound). (restructuring and energy rebound).

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But interest rates and raw material costs are watch items. An Fig 5. Raw material prices have increased mate- inflationary environment can be good for the industrials sector as it rially denotes very strong end demand. However, a rapid rise in raw mate- 90 rials and interest rates can potentially short-circuit a rally in the sec- 80 tor. The recent PMI reading has shown a material spike in prices paid 70 intentions from managements (Fig 5). Feedback so far from compa- 60 nies exposed to rising metal and petrochemical prices is that it is being 50 offset through price increases and productivity improvements. This 40 is good news and is a function of the strong demand environment 30 allowing the pass through of higher prices versus a price shock like 2011 2013 2015 2017 2019 2021 ISM Manufacturing Business Prices Index higher tariffs. Source: Bloomberg, UBS Raw materials prices increases have been a function of the rapid increase in demand, but also supply led issues which were compound- Fig 6. Higher rates are typically a tailwind for ed by the recent freeze in the southern US. We have recently seen cyclicals a very strong rise in base metals of copper, steel and aluminum that Correlation between relative sector performance and have now surpassed pre-COVID levels. Steel prices are now the high- changes in 10 year Treasury yields est since the last peak in 2018 and could begin to crimp margins for Financials machinery companies. Higher metal prices are an increasing concern Energy for auto, HVAC and tools exposed areas. Rising petrochemical prices Industrials Materials are also a headwind for plastic packager and paint companies. Info. Tech. Cons. Disc. Interest rates are also a watch item, in our opinion, given the recent Comm Services move in commodity prices and faster economic growth. The initial rise Health Care Cons. Staples in interest rates is usually a positive for cyclical sectors such as indus- Utilities trials as it is also a signal of faster growth (Fig 6). We have recently Real Estate seen industrials outperform the market as higher interest rates and -50% -30% -10% 10% 30% faster growth have caused a rotation away from growth to more value Source: Factset and UBS oriented sectors. With the pandemic winding down and more stimulus on the way, it is hard to see the recent move upward in interest rates choking off near term economic growth. However, a continued rapid material move up in interest rates could turn into a negative as it would could begin to pressure overall stock valuation multiples.

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

Within the aerospace industry, we prefer the airlines and aftermarket as the best ways to play the recovery, as these industries should be on the front line of the benefit from a recovery. New plane demand should also benefit, but that will likely come with a lag after we get more of an established travel recovery. We have already seen a pickup in bookings from the airlines as infection rates and hospitaliza- tions have receded from their winter spike (Fig. 7). Although it could take years for flying activity to return to normal, stocks usual discount improvement well ahead of time.

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

Source: TSA

We believe further progress in the rollout of a vaccine could make aerospace stocks some of the best performers in 2021 given how they have still markedly underperformed the market. In this area, we favor the aftermarket and airline stocks with strong balance sheets that should benefit from improved activity more directly. We remain Most Preferred view on Raytheon Technology and Honeywell on aftermarket exposure, and United Airlines and Delta within the airlines. Boeing's stock should also respond positively to any improvements in air travel; likely well ahead of a material turn in demand for new planes. Original equipment should normally take much longer to fully rebound as airlines, but the recent increase in oil prices could spur increased replacement demand for new and more fuel efficient planes

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

Rough weather should negatively impact rails in 1Q, but cost control is more important. Severe winter weather has hampered activities in the southern portion of the US recently which will likely take a toll on 1Q earnings; albeit temporarily. This is most pronounced in the railroad industry as the polar vortex in the Midwest and South has materially disrupted volumes. 1Q rail earnings estimates will likely have to reduced, but structural costs continue to come down as well which believe is more longer lasting and should be the focus for investors going forward. The good news is that with the economy expanding we do not see the weak volumes in 1Q as indicative of a demand issue. We expect the recent volume shortfall to be made up in future quarters as the backlog of volume is delivered.

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

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

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

The shipping surge has also been heightened by the pandemic-led shift in consumer spending from services to goods as many consumers have been stuck at home. As all parts of the loading and warehouse chains are stretched, it could take several months for conditions to get back to fully normal. Another main issue for the supply chain is an overall lack of empty shipping containers with which to ship items. This may cause companies to increasingly use air freight, which is much more expensive.

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

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

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Key themes • Automation/Digitalization: Companies that can harness the integrated opportunity between these two areas of transforma- tional technologies should over time realize superior company performance and earnings growth. Automation is frequently cit- ed as the next industrial revolution and has been evolving from improving production cost and efficiencies to the collecting of data and connectivity. Digitalization is the collecting and analyz- ing of this data which is then used as a tool to develop solutions that optimize system performance. This data collection is aid- ed by the increased connectivity between devices which is often referred to as the "Internet of Things" (IOT). While most firms are working hard on developing digital technology and solutions for their customers, it is still unclear how these companies will specifically monetize this investment. We would expect successful industrial firms in this area to likely partner with key technology providers to further assist in developing data solutions.

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

• Restructuring/M&A: In the slow global growth environment we have encountered since the Great Recession companies have increasingly looked towards restructuring and transforma- tive M&A to help boost growth and returns. Restructuring can often help profitability by exiting underperforming businesses or making current operations run more profitably and effectively. M&A can add a business or technology that is missing and can be instrumental towards future growth. Activist investors have been playing an increasing role in this theme by placing pressure on company managements to deliver results. In this environment there is little tolerance for continued underperformance and managements must adapt or will likely find change put upon them.

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

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cost improvement and productivity. Thus, we do not expect any change in this trend due to potential environmental regulatory changes from the Trump Administration. As companies and consumers demand more efficient and less costly alternatives it will drive growth opportunities for many industrial applications such as truck and power engines, building automation, and heating, ventilation and air conditioning systems.

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We have Boeing shares on our Most Preferred list as we believe current 0.00 169,545 152,136.0 133,250 valuation is attractive considering the rollout of vaccines to address Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 58,158.00 81,400.32 87,589.27 COVID-19 over the next 12 months. A vaccine and the resulting low- Net Income ($M) (11,873.0) 609.4 3,960.0 er infection rates should lead to improved flying activity and better EV/EBITDA (x) 455.6 30.5 18.0 demand for Boeing airplanes over time. The certification of the 737 EPS ($) (23.25) 0.04 5.37 Max is a positive that will allow Boeing to resume deliveries, gain P/E (x) NM NM 42.5 orders and improve cash flow, in our view. The backlog of Boeing Consensus Rating Distribution Buy Hold Sell planes is still sizable and stands at over 4,500 planes. The downside 10 11 3 risks to our view are continued depressed air traffic, no improvement Source: Factset, UBS as of 11 March 2021 in the pandemic and future issues with the 737 Max.

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

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

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view CSX as Most Preferred as we see continued operating 1.18 81,519 39,793.0 67,660 improvements through 2021. The company has seen a substantial Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 10,536.40 11,459.25 12,001.04 change in operations since adopting precision scheduled railroading Net Income ($M) 2,765.0 3,224.2 3,478.7 (PSR) that is materially lowering the cost structure of the company. The EV/EBITDA (x) 13.7 12.4 11.8 lower costs should provide significant earnings leverage as volumes EPS ($) 3.65 4.37 4.90 rebound this year. The current management team is targeting further P/E (x) 24.2 20.3 18.1 improvement in operating margins through PSR that should lead to Consensus Rating Distribution Buy Hold Sell superior earnings and cash flow growth. Downside risks to our view 13 8 1 include lack of operating performance improvement, weaker volumes Source: Factset, UBS as of 11 March 2021 and pricing, and any disruption of its management team.

CSX has greatly improved operations over the past several years through cost-cutting and instituting precision railroading that was pioneered by former CEO Hunter Harrison. This led to over 500 basis points in margin improvement as its operating cost ratio fell to under 60% in 2019. CSX had one of the worst operating ratios among its peers a few years ago at above 65%. 2020 was more of a transition year as the company cycles through lower coal pricing and profitability, but their focus on costs should lead to material earnings leverage as volumes rebound into 2021.

The company should be aggressive at returning cash to shareholders after the COVID-19 impacts dissipate and has further room on its balance sheet to increase buybacks over time. Service metrics for CSX have also improved dramatically over the past year, which should enable the company to begin winning back customers lost during their restructuring. Recent evidence shows improvement with customers as volumes are outperforming their peers.

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

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Delta Air Lines Inc.: Most Preferred Delta is one of the largest airlines in the world involved in providing air transportation for passengers and cargo. Its major hubs include Atlanta, Detroit, New York, Salt Lake City, and Seattle in the US and Amsterdam, Paris, and Tokyo abroad. The company is a member of the SkyTeam Alliance and partners with many airlines around the world. Delta operates over 15,000 daily flights with a mainline fleet of over 800 airplanes.

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Delta as Most Preferred as we believe its current valuation is 0.00 51,546 71,996.0 30,389 attractive considering the increased probability of a vaccine to address Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 17,095.00 25,698.82 37,609.23 COVID-19 over the near term. A vaccine and the resulting lower infec- Net Income ($M) (8,996.0) (1,570.6) 2,385.0 tion rates should lead to improved flying activity over time and mate- EV/EBITDA (x) 3.9 25.8 7.4 rially improve DAL's cash flow. The company's recent capital raises EPS ($) (10.76) (2.62) 3.80 gives them liquidity and should carry for several years without having P/E (x) NM NM 12.5 to raise additional capital. This puts them in a good position to emerge Consensus Rating Distribution Buy Hold Sell stronger than peers once the current crisis passes. The downside risks 10 10 1 to our view are continued depressed air traffic, no improvement in Source: Factset, UBS as of 11 March 2021 the pandemic and further economic weakness.

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

We see Delta as one of the strongest players in the airline industry with best in class margins and liquidity. The company expects to reduce its cash burn to USD 12 mn a day by the end of 1Q, which was better than expected and ranks at the top of peers. Given their lower cost structure, we expect their current liquidity of over USD 18bn to last the company several years without improvement in air travel from current depressed levels. They also were one of the few airlines to avoid issuing equity during the crisis.

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

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We see Emerson as Most Preferred as we expect an acceleration in 2.33 57,709 22,882.0 51,543 company revenues over the next year with a valuation at a discount to Consensus Forecasts (FY end) Sep 2020 Sep 2021E Sep 2022E Revenues ($M) 16,785.00 17,623.46 18,583.57 peers. The company has a large exposure to process automation that Net Income ($M) 2,098.8 2,212.3 2,394.9 should see benefits from improving spending from oil & gas. EMR's EV/EBITDA (x) 15.2 14.2 13.1 stock has lagged peers over the past year mainly due to weaker oil EPS ($) 3.46 3.68 4.09 prices. However, with oil prices off their bottom and likely heading P/E (x) 24.8 23.3 21.0 higher on an improved economy, the outlook for spending should Consensus Rating Distribution Buy Hold Sell improve. Longer-term, we see the company as favorably exposed to 13 11 0 the secular trends of automation and technology evolution in man- Source: Factset, UBS as of 11 March 2021 ufacturing. The risks to our view are low energy prices, and weaker global growth and capital spending.

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

However, we believe the increased activity the company is seeing in their business pipeline should begin to accelerate orders and revenue in the second half of the year. EMR's valuation is also attractive versus industrial peers and is about a 15%-20% discount to closest peer Rockwell Automation (Bellwether).

Emerson's commercial and residential solutions division has also been hurt by weak China markets for heating and air conditioning products, but should pick up with increased emphasis on efficiencies and environmental issues. In fact, sales for this unit has seen a nice rebound in sales with reopening of businesses over the last few months. The long-time CEO of the company announced his retire- ment recently, which could be a catalyst for further value-added moves.

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Fortive as Most Preferred as we believe the stock does not 0.41 25,994 16,051.5 23,058 reflect the potential for improving sales trends post COVID-19. Fortive Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 4,634.40 5,037.90 5,308.03 recently split off its transportation technologies businesses that we Net Income ($M) 751.9 903.4 985.3 believe should unlock value. The stock has underperformed this past EV/EBITDA (x) 23.0 18.9 16.9 year despite growing earnings faster than the sector and valuation is EPS ($) 2.09 2.49 2.77 at a discount to its peers. We also believe the stock does not reflect the P/E (x) 32.7 27.4 24.6 potential of accretive M&A. It has added value since its spinoff from Consensus Rating Distribution Buy Hold Sell Danaher by buying faster growing and less cyclical businesses. The 8 11 0 risks to our view are further weakness in its more cyclical businesses, Source: Factset, UBS, as of 11 March 2021 escalation of trade frictions and lack of M&A catalysts.

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

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

Fortive also recently completed the spin off of its transportation technologies and franchise distribution segments into a new company this year. This leaves the remaining company exposed to the higher growth industrial technology and health care markets with less cyclicality. The spinoff also resulted in a much better balance sheet that is likely to enable an increased focus on M&A to drive shareholder value.

CIO GWM 12 March 2021 13 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We have Honeywell on our Most Preferred list as we see it favorably 1.80 150,848 64,586.0 141,755 exposed to the major growth themes of automation, environmental, Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 32,637.00 34,281.74 36,625.02 and energy solutions. Honeywell's CEO is putting a renewed focus on Net Income ($M) 4,779.0 5,537.7 6,151.0 driving top-line growth. The company's balance sheet is less levered EV/EBITDA (x) 19.5 17.9 16.3 than peers, which gives them increased optionality regarding acqui- EPS ($) 7.10 7.87 8.85 sitions or returning cash to shareholders. The weakness in the aero- P/E (x) 28.5 25.7 22.8 space division should weigh on earnings in the near term, but we Consensus Rating Distribution Buy Hold Sell believe the recent vaccine news will alleviate concerns in this area. 12 10 0 The largest risks to our view is a slowdown in global GDP growth Source: Factset, UBS as of 11 March 2021. and industrial capital spending, weaker aerospace demand, or lower commodity prices.

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

Honeywell has also been involved in many of the key themes within the industrials sector. It has been at the forefront of connectivity solutions through its building and aerospace businesses. The acquired fast-growing supply chain and warehouse automation business of Intelligrated should be a beneficiary from the growth in e-commerce. Energy efficiency has also been a major theme at Honeywell through its Building and Materials Technology segments. These areas have led to sector-leading earnings growth over the last cycle.

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

CIO GWM 12 March 2021 14 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We have shares of KSU on our Most Preferred list as we see its imple- 0.81 23,128 10,087.5 18,440 mentation of precision scheduled railroading (PSR) as improving over- Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 2,632.60 2,965.28 3,179.50 all service issues that have plagued the company and should lead to Net Income ($M) 656.6 798.8 899.0 improved profitability. KSU's should see continued improvements in EV/EBITDA (x) 15.9 13.7 12.6 operating ratios that should exceed peers with higher volume growth EPS ($) 6.96 9.02 10.64 due to expanding trade in the US-Mexico corridor. The company is P/E (x) 29.2 22.5 19.1 also less exposed to potential higher US tax rates than peers. The risks Consensus Rating Distribution Buy Hold Sell to our view are unfavorable trade policy between the US and Mexico, 10 10 0 a weaker peso, political risks from the new Mexican government, and Source: Factset, UBS as of 11 March 2021 any failure to implement precision railroading.

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

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

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

CIO GWM 12 March 2021 15 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Lockheed Martin as Most Preferred due to its attractive val- 2.83 107,591 50,710.0 97,064 uation along with accelerating sales growth and cash flow. Recent Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 65,398.00 68,055.61 70,518.70 guidance for 3% sales growth for 2021 gives good visibility for strong Net Income ($M) 6,888.0 7,366.0 7,808.9 earnings growth and possible estimate upgrades into the next year EV/EBITDA (x) 10.5 9.7 9.0 from a company that normally guides very conservatively. Further- EPS ($) 24.50 26.34 28.15 more, we believe expectations for a cut in the fiscal 2021 defense P/E (x) 14.1 13.2 12.3 budget are likely overdone. Annual free cash flow of over USD 6bn Consensus Rating Distribution Buy Hold Sell gives the stock an attractive free cash flow yield, in our view. The 11 9 0 downside risks to our view are cuts in defense spending or disappoint- Source: Factset, UBS as of 11 March 2021 ments in the F-35 program's pricing or production.

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

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

Lockheed's growing exposure to international markets is also a positive as demand is accelerating due to increasing geopolitical threats overseas. International sales are likely to grow to over 30% of its revenues as F-35 production continues to increase.

CIO GWM 12 March 2021 16 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We have a favorable view on the shares of Parker Hannifin for the 1.18 45,560 19,738.2 38,346 following reasons: expanding margins, radical change in manage- Consensus Forecasts (FY end) Jun 2020 Jun 2021E Jun 2022E Revenues ($M) 13,695.52 13,970.44 15,138.25 ment culture, and accretive acquisitions. These factors make Parker an Net Income ($M) 1,206.3 1,826.8 2,064.0 attractive self-help story that should allow it to outperform peers with- EV/EBITDA (x) 17.3 15.2 13.5 out relying solely on a better economic environment. Margin improve- EPS ($) 10.79 14.01 15.86 ment combined with increased cash flow and capital return should P/E (x) 27.5 21.2 18.7 result in earnings growth above industry peers over the cycle. Acqui- Consensus Rating Distribution Buy Hold Sell sitions should help improve margins and the growth profile of the 14 4 1 company. The risks to our view are weakness in industrial activity, inte- Source: Factset, UBS, as of 11 March 2021 gration problems with recent acquisitions, and failure to achieve cost realignment goals.

The elevation of Tom Williams to CEO in early 2015 has resulted in a significant culture change by making the company more performance- and profit-focused. The previous Parker Hannifin had too much in redundant costs and excess manufacturing operations due to prior acquisitions, in our view. The new management culture is making progress in the multi-year plan to shrink the extended footprint of Parker’s manufacturing base and expand margins, and appears on its way to exceeding its longer-term margin goals. The goals do not seem aggressive to us in that its margins have been consistently below peers. Earnings growth should also be supplemented by increased cash flow and acquisitions as operational results improve. This should lead to peer-leading earnings growth over the medium term.

The Clarcor deal is forecast to add to earnings and cash flow and diversifies the company further into the attractive filtration area. The recent headwind to margins from the integration has dissipated and the company has posted very strong incremental margins which we expect to continue. The company has recently announced two additional acquisitions that should add to sales and margin growth in the longer term.

CIO GWM 12 March 2021 17 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view RTX as Most Preferred as we see the merger of Raytheon NA 159,700 162,153.0 113,703 and United Technologies as creating a stronger company with an Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 57,148.00 65,407.51 71,076.63 improved balance sheet and strong recurring cash flow. Revenues are Net Income ($M) 4,906.0 5,420.7 7,380.3 split almost evenly between commercial aerospace and the defense EV/EBITDA (x) 14.7 13.2 11.0 businesses. While the near-term is negative for commercial aerospace EPS ($) 2.73 3.68 5.07 due to the impact of COVID-19, we expect a sharp bounceback in P/E (x) 27.4 20.4 14.8 activity after the crisis is over. The defense business should continue to Source: Factset, UBS as of 11 March 2021 grow in 2021 and acts like a buffer to the current aerospace downturn. The downside risks are further weakness in air travel, failure to integrate the merger and any reduction in the US defense budget.

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

The defense division should be a prime beneficiary from a larger US defense budget and increasing demand for defense services around the globe. We expect increased defense sales growth into 2020-21 led by their missile and missile defense programs. This has been an area that traditionally has seen more lackluster growth, but is now seeing outsized growth. Increased global tension from Russia, ISIS, and North Korea has boosted demand for these programs. This demand led to strong growth in backlog last year. Nearly a third of Raytheon's revenues are coming from international customers where demand has accelerated due to threats overseas.

CIO GWM 12 March 2021 18 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view SWK as Most Preferred as we see an improvement in organ- 1.58 30,239 23,566.3 28,132 ic sales coupled with lower headwinds from the higher costs that Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 14,534.60 15,564.70 16,847.59 hurt earnings growth in 2018-19. Earnings going forward should be Net Income ($M) 1,409.6 1,617.9 1,792.6 helped from last year's turnaround primarily from improved sales and EV/EBITDA (x) 12.5 10.6 9.4 cost initiatives. One likely growth avenue is exercising their option to EPS ($) 9.04 10.10 11.20 buy the remaining 80% stake in outdoor tools maker MTD. Tariffs P/E (x) 19.4 17.4 15.7 have been a big drag on margins due to trade tensions with China, Consensus Rating Distribution Buy Hold Sell so any further de-escalation on trade frictions would be a positive. 10 7 0 The risks to our view are increased US-China trade tensions, failure to Source: Factset, UBS as of 11 March 2021 achieve planned sales increases and margin targets and overall housing weakness.

We see further catalysts to grow earnings post COVID-19 through new sales initiatives and cost cutting programs. The company has rolled out a cost reduction margin plan that should result in USD 200 million in savings to offset the additional 2019 tariffs. This is in addi- tion to the previously announced USD 300-500 margin improvement program to be realized by 2022. Lapping the increased tariffs and currency headwinds should also be a positive for margins. Tariffs, however, continue to remain a wildcard as SWK sources significantly (near 40%) from China.

Sales growth on its tools and storage unit should be helped longer term by the continued distribution rollout of the Craftsman brand that was acquired from Sears Holdings. The Craftsman brand had suffered years of market share losses due to poor execution from prior management.

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

CIO GWM 12 March 2021 19 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We expect Union Pacific to benefit from an improvement in margins 1.84 169,859 63,466.0 142,287 from better rail pricing and cost improvements. Their hiring of Jim Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 19,533.00 21,016.85 22,142.31 Vena in 2019 to implement precision scheduled railroading (PSR) has Net Income ($M) 5,558.0 6,291.1 6,820.4 had a material improvement on its cost structure. Its move to aggres- EV/EBITDA (x) 16.1 14.8 13.9 sively improve costs is in response to the dramatic improvements in EPS ($) 8.19 9.54 10.69 margins at other rails. UNP's strong balance sheet and cash flow is also P/E (x) 25.8 22.1 19.8 being used for dividends and a material increase in its share repur- Consensus Rating Distribution Buy Hold Sell chase program. The major risks to our recommendation are any pro- 16 7 0 nounced economic weakness that leads to weaker volume and pric- Source: Factset, UBS as of 11 March 2021 ing or a rollback in its recent plan to cut costs and improve network operations.

Our longer-term outlook for Union Pacific is based on a lessening of the negative factors behind weaker rail volumes and pricing, along with an increased focus on reducing costs. Reducing costs have received increased attention by management after disappointing flat margins in 2018. UNP has moved aggressively to adopt precision railroading, which if successful could materially improve margins, as was done at peer company CSX. We expect weaker volumes to persist in the near term from COVID-19, but shouldn't be an impediment to implementing PSR and reducing the long-term cost structure of the company. Volumes have recently begun to bottom and should be positive in 2021

Pricing should also benefit over time from less pressure from its western competitor of Burlington Northern and tighter truck markets in 2020. Burlington Northern made significant increases to its capacity to improve service levels and we believe led them to use price to fill its network. As current plans are to reduce capital spending and its network is closer to being full, we see Burlington as being less aggressive on pricing going forward. UNP also has a strong balance sheet, in our view, which led to its announcement to repurchase USD 20 billion of stock by 2021.

CIO GWM 12 March 2021 20 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view UAL as Most Preferred considering the potential benefit of 0.00 31,427 59,548.0 17,139 several vaccines to address COVID-19 over the near term. UAL's stock Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 15,355.00 22,853.55 34,392.50 performance has been the worst among peers, but we believe valu- Net Income ($M) (7,703.0) (3,047.8) 981.6 ation does not reflect the improvements management has made in EV/EBITDA (x) NM 120.3 8.0 profitability over the last several years. A vaccine and the resulting EPS ($) (27.57) (10.31) 2.97 lower infection rates should lead to improved flying activity over time P/E (x) (2.0) (5.3) 18.5 and materially improve the company's cash flow. Previous pandemics Consensus Rating Distribution Buy Hold Sell such as Ebola and SARS resulted in a strong bounce back in air travel 8 7 4 once the peak of the damage had passed. The downside risks to our Source: Factset, UBS as of 11 March 2021 view are depressed air traffic, no improvement in the pandemic and economic weakness.

While UAL's recovery will likely lag other airlines due to its international long haul and corporate exposure, we believe that is reflected in the stock as its performance has materially lagged peers such as Southwest and Delta. We believe the stock's valuation is more reflective of the current depressed environment, but does not fully discount the potential positives of a COVID-19 vaccine and faster than expected return to normal of air travel in the US and internationally. The road back to normal could take years, but stocks tend to discount improvements well ahead of time. While near-term volatility could persist with infections surging, continued vaccine progress should be a positive offset over the year.

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

CIO GWM 12 March 2021 21 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view UPS as Most Preferred as we believe the new management is 2.42 166,837 62,492.0 143,921 likely to make changes to significantly improve the pricing and prof- Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 84,591.00 87,538.43 90,867.50 itability of its businesses. While UPS will be impacted by weaker glob- Net Income ($M) 7,166.0 7,837.6 8,434.9 al markets in the near term, the surge in e-commerce activity should EV/EBITDA (x) 14.3 12.8 11.6 also provide a positive offset versus the sector. We still see UPS's earn- EPS ($) 8.23 8.95 9.67 ings growth pressured by lower margins from e-commerce coupled P/E (x) 20.3 18.6 17.3 by higher than normal capital spending, but a lot of these pressures Consensus Rating Distribution Buy Hold Sell should be reaching peak currently. The downside risk to our thesis 12 7 4 is further erosion of margins and increased spending on operations Source: Factset, UBS as of 11 March 2021. along with any loss of their Amazon business.

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

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

The risk of Amazon becoming a shipping competitor is still a longer- term threat, but its likely the threat has been pushed out for years given their surge in orders is straining their capacity. Another positive catalyst for the parcels could be the new head of the Postal Service making moves to reduce service and potentially increase prices. These changes could boost volume and prices for the parcel carriers as a result.

CIO GWM 12 March 2021 22 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) 3M was a company which traditionally expanded margins with very 3.25 120,144 47,344.0 104,782 strong free cash flow conversion. However, headwinds have held back Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 32,184.00 34,372.33 35,724.64 sales and margin growth in recent years, which has been below peers. Net Income ($M) 5,088.0 5,593.3 6,062.2 The major areas of disappointment have been weaker auto, consumer EV/EBITDA (x) 13.6 12.5 11.6 and healthcare sales. Under-absorption of overhead has also been a EPS ($) 8.74 9.61 10.46 recurring issue for margins. Given their growth challenges and poten- P/E (x) 20.7 18.8 17.3 tial environmental liabilities, we see the risk/reward in the stock as cur- Consensus Rating Distribution Buy Hold Sell rently balanced. Upside risks to our view are a stronger global econ- 4 11 2 omy and sales and margin outperformance; the downside risk is a Source: Factset, UBS as of 11 March 2021 weaker global economy and margins than we expect.

3M has had disappointing sales and earnings growth versus peers over the last few years. Most of the issues are company specific with challenges continuing in their auto, consumer and healthcare division. The company's recent reorganization and streamlining could help improve returns, but will likely take time. Sales should get a boost near term due to its exposure to safety areas, but this isn't likely to be significant change to earnings growth.

3M is using levers such as portfolio management of their businesses, R&D investing, and overall segment transformation to boost margins. However, weaker sales have hurt margins. Environmental liabilities are another risk to its valuation given increased lawsuits recently, although this should not be material enough to impair the overall balance sheet of the company. Increased environmental liabilities and payouts is more a risk to its valuation going forward.

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

CIO GWM 12 March 2021 23 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We see Caterpillar benefiting from a resurgence in mining and resi- 1.85 150,511 78,324.0 121,314 dential construction capital expenditures over 2021-22. However, we Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 41,748.00 45,859.07 50,809.59 believe much of this positive news is already reflected in the stock's Net Income ($M) 3,153.5 4,218.3 5,338.2 recent share price outperformance. Thus, we see the risk/reward as EV/EBITDA (x) 18.5 15.2 12.7 fairly balanced currently. Spending in nonresidential construction and EPS ($) 6.56 8.15 10.64 energy markets should also still be a headwind to a full recovery at P/E (x) 33.9 27.3 20.9 CAT. The downside risk to our view is any material weakness in China's Consensus Rating Distribution Buy Hold Sell economy, increased trade tensions, and lower oil prices. The upside is 9 10 2 better demand in mining and energy, a large infrastructure spending Source: Factset, UBS as of 11 March 2021 bill and any material improvement in China's economy.

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

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

CIO GWM 12 March 2021 24 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Crane Co. as Bellwether as we see headwinds impacting 1.96 5,931 4,588.9 5,095 earnings growth for 2020-21 that should limit near-term stock out- Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 2,936.90 3,071.68 3,279.51 performance. Headwinds from its payment and fluid divisions from Net Income ($M) 181.0 297.8 360.7 COVID-19 could last into 2021 as businesses activity remains muted. EV/EBITDA (x) 12.6 9.8 8.2 Furthermore, a headwind from the slowdown in 737 Max production EPS ($) 3.84 5.05 6.09 should drag on near term growth in Crane's aerospace division. How- P/E (x) 22.3 16.9 14.0 ever, its currency division growth should rebound strongly this year. Consensus Rating Distribution Buy Hold Sell Downside risks to our view are weaker industrial activity and ener- 4 3 0 gy prices, and further inventory destocking issues in currency. Upside Source: Factset, UBS as of 11 March 2021 risks are a rebound in currency orders, improved industrial activity and any material share repurchase.

We believe the expected accretion from its Crane Currency acquisition is likely to be delayed due to a near-term excess inventory of US currency notes. Growth is expected to resume in 2021, but will likely only go back to prior year levels. Furthermore, the company's aerospace division could have more muted growth near term due to its exposure to the 737 Max production and slower growth there. Crane's revenues are also somewhat more exposed to the impacts from COVID-19 across its businesses. However, as these drags should be temporary and valuation is already at a substantial discount, we do not see the stock as an underperformer to the sector. Longer term, we expect Crane to return to double-digit growth in 2021-23. Any sizable return of capital would be a positive offset to the slower earnings growth now expected.

The payment technologies group should remain a standout business for Crane longer-term and should continue to be boosted by the adoption of retail self-checkout systems. These systems have shown a significant reduction in labor costs and increased consumer preference.

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

CIO GWM 12 March 2021 25 US Industrials | Equity preferences

Cummins: Bellwether Cummins, Inc. designs, manufactures, and distributes engines, filtration and power generation products. Cummins also services engines and related equipment, including filtration, after treatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. Customers are served through a network of approximately 600 wholly-owned and independent distributor locations and over 7,400 dealer locations in more than 190 countries and territories.

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view the risk/reward on CMI shares as balanced given the stock's 2.04 40,291 22,624.0 38,352 strong performance recently reflects an expected rebound in US truck Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 19,811.00 22,186.82 23,654.53 demand. Truck industry orders have begun to bounce back strongly Net Income ($M) 1,789.0 2,042.6 2,341.9 in recent months after a downturn over the past year. Furthermore, EV/EBITDA (x) 12.4 11.1 9.9 the company's warranty issues on older engines are still a risk that EPS ($) 12.18 14.02 16.41 had depressed margins in 2017-18 and could impact margins going P/E (x) 21.3 18.5 15.8 forward. Longer term we see CMI as a major innovator and brand Consensus Rating Distribution Buy Hold Sell leader in the market. The risks to our view are a loss in market share 6 16 0 or weakness in the truck market and continued warranty issue on the Source: Factset, UBS as of 11 March 2021 downside, and better earnings and sustainable truck engine demand on the upside.

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

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

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

CIO GWM 12 March 2021 26 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Deere as Bellwether as we believe its stock valuation is 0.88 147,602 75,091.0 108,316 now more reflective of the favorable trade resolution with China Consensus Forecasts (FY end) Oct 2020 Oct 2021E Oct 2022E Revenues ($M) 31,272.00 38,008.72 41,469.73 and improved crop markets. Increased buying of crops from China Net Income ($M) 2,751.0 5,033.0 5,657.2 and weather disruptions has led to materially higher crop prices. This EV/EBITDA (x) 23.7 15.3 13.4 should lead to an improved crop machinery market in 2021 that is EPS ($) 8.69 15.84 18.19 balanced by less government support and potentially increased crop P/E (x) 39.8 21.8 19.0 supply. The replacement cycle should also continue to provide support Consensus Rating Distribution Buy Hold Sell for agricultural equipment as used inventory remains low. The risks 14 4 2 to our view are stronger crop prices and construction markets on the Source: Factset, UBS as of 11 March 2021 upside; with weaker crop prices and any further trade conflicts with China as the downside.

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

Increased demand and accelerated cost cuts should help Deere's margins get to their 15% target somewhat ahead of schedule. Precision agriculture has been a major focus of Deere recently and has lead to increased market share over the past year. Deere expects precision ag sales to reach $2 billion in the near term.

Another positive for ag equipment is that we are still early in the replacement demand cycle, that should help offset any major decline in sales. While we expect Deere's earnings should benefit from improved demand, we believe a lot of the recent positive news is now reflected in the stocks premium valuation.

CIO GWM 12 March 2021 27 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We see the risk/reward for FDX shares as currently balanced given the 0.88 109,197 73,537.0 78,000 run-up in the shares in response to recent pricing announcements. We Consensus Forecasts (FY end) May 2020 May 2021E May 2022E Revenues ($M) 69,200.00 76,751.13 80,529.84 are also concerned that further economic weakness in Europe could Net Income ($M) 2,490.0 4,206.9 4,626.5 pose additional challenges in the integration of its TNT business near EV/EBITDA (x) 14.4 10.5 9.4 term. TNT targets were already lowered last year. Furthermore, the EPS ($) 16.21 16.21 17.71 departures last year of the COO and head of Express could hamper P/E (x) 18.3 18.3 16.8 a quick turnaround of operations. Risks to our view are economic Consensus Rating Distribution Buy Hold Sell weakness, margin pressure and potential competitive threats on the 17 7 0 downside; while upside risks are better global growth, pricing and a Source: Factset, UBS as of 11 March 2021 rebound in TNT operations.

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

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

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

CIO GWM 12 March 2021 28 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We expect continued challenges in its Gulfstream aerospace business 2.62 60,295 51,308.0 48,110 to weigh on earnings growth and see GD's stock performing in line Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 37,925.00 38,779.27 40,425.54 with the sector. Business jet buying sentiment has continued to be Net Income ($M) 3,167.0 3,168.9 3,421.1 weak which could also get added focus given COVID-19 headwinds. EV/EBITDA (x) 11.5 11.4 10.6 Thus, we believe it is less likely for the stock to rerate in the near EPS ($) 11.00 11.09 12.23 term. GD's defense business is positioned well for growth, but it is P/E (x) 15.3 15.2 13.7 not enough to offset sluggishness at Gulfstream. Risks to the down- Consensus Rating Distribution Buy Hold Sell side are weakness in domestic or international defense budgets and 11 7 2 a renewed downturn in the business jet market. Upside risks are a Source: Factset, UBS as of 11 March 2021 better demand environment for business jets and higher US defense budget.

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

GD's defense businesses should remain strong on the back of increasing defense spending in the US and abroad and still enable the company to grow earnings in that division. The combat units should see mid to high single digit revenue growth based on some large wins from Saudi Arabia and the UK. The marine business has been steady and should see growth from the Ohio class replacement program that should start to ramp up over the next few years. The balance sheet for GD is strong and can be used to return cash to shareholders through stock buybacks or acquisitions.

CIO GWM 12 March 2021 29 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view GE as performing in line with the sector due to concerns 0.30 151,430 255,050.0 115,035 over their weak free cash flow conversion balanced by the potential Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 79,619.00 80,840.10 85,098.55 improvement in their balance sheet. GE's cash conversion has lagged Net Income ($M) 109.0 2,268.8 4,620.5 its competitors due to recurring gains and accounting recognition EV/EBITDA (x) 20.5 16.8 12.5 methods, making its true earnings power somewhat lower than it EPS ($) 0.01 0.25 0.47 appears. New management has stabilized operations and improved P/E (x) 1,312.0 51.9 28.0 its balance sheet, but future growth appears muted. Cash flow is likely Consensus Rating Distribution Buy Hold Sell to improve as aviation rebounds, but we believe this is reflected in the 14 7 0 stock's current valuation. The downside risks to our view are weaker Source: Factset, UBS as of 11 March 2021 aerospace and power markets; upside risks are better than expected earnings and cash flow.

GE's earnings have been under significant pressure over the past several years due to weakness in its power, oil and gas and transportation segments. The power business is suffering from a combination of weak demand and overcapacity in the industry. GE's oil and gas businesses was also more focused on deep water and subsea areas that were materially impacted by lower oil prices. Management reset expectations in 2019, which led to a material reduction in earnings and cash flow guidance. The outlook for 2020 was for improvement, but the impact from COVID-19 likely continues to keep any recovery on hold in the near term. Its major profitable segment of aviation has weakened significantly with the recent decline in air traffic.

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

CIO GWM 12 March 2021 30 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) Although we find HII's position in the shipbuilding segment of the 2.25 9,006 8,741.0 7,584 defense market to be attractive, this is currently balanced by near- Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 9,361.00 9,256.53 9,572.17 term revenue and cash flow growth that we believe could likely lag Net Income ($M) 696.0 482.3 564.2 peers. Thus, we see the risk/reward as fairly balanced. Company guid- EV/EBITDA (x) 8.0 11.1 10.0 ance has been somewhat disappointing with limited near-term mar- EPS ($) 17.14 12.28 14.63 gin growth which again was lowered in 2020. Faster growth in rev- P/E (x) 11.0 15.3 12.9 enues or margins is the upside risk in the stock at this point and could Consensus Rating Distribution Buy Hold Sell make us more favorable on the HII story. Downside risk is a lower US 5 8 1 defense budget, execution issues on new programs and weaker than Source: Factset, UBS as of 11 March 2021 expected margins.

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

While HII trades at a discount to its defense peers, we believe this is deserved due to its lower sales growth and overall lack of project diversification. The company should also have a larger drag from lower pension income than peers in the near term. Execution for the company has still been spotty and is a risk given the current ramp up in development work. We could become more favorable on the stock if we were to see a better sales ramp and rebound in margins. The company has a relatively unlevered balance sheet that could also provide upside if the company decides to be more aggressive with capital deployment to boost growth. Its smaller size could also make it attractive to a larger firm seeking to gain exposure to this segment.

CIO GWM 12 March 2021 31 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view the risk/reward on JCI shares as balanced as we believe the 1.85 49,311 40,815.0 40,407 current stock valuation reflects recent improvements in their business- Consensus Forecasts (FY end) Sep 2020 Sep 2021E Sep 2022E Revenues ($M) 22,317.00 23,257.90 24,308.75 es. The sale of their battery power division greatly helped improve Net Income ($M) 1,688.0 1,843.3 2,069.8 cash flow and reduced the cyclicality of their business. This has led EV/EBITDA (x) 15.0 13.6 12.3 to an overall revaluation of the stock. JCI's operates in the attractive EPS ($) 2.24 2.55 2.92 HVAC market that has seen very strong demand in light of stay at P/E (x) 25.0 22.0 19.2 home activity with COVID-19. While positive, there is an increased Consensus Rating Distribution Buy Hold Sell risk that this could borrow from 2021 earnings. The upside risk to our 9 9 0 view is better organic growth, and cash flow; downside risk includes Source: Factset, UBS as of 11 March 2021 market share loss, weak cash flow and a decline in nonresidential construction.

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

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

With an increased focus by JCI on its HVAC business, any consolidation in the industry would likely be seen as positive. Furthermore, any further acceleration in cash flow and organic sales from a large infrastructure bill could also make us more favorable on the stock in the near term.

CIO GWM 12 March 2021 32 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) While we have a high regard for management and its growth 1.08 12,043 2,032.5 10,906 prospects, we believe these positives are currently reflected in the Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 3,634.10 3,846.55 4,021.94 valuation premium afforded the stock. Thus, we see the current Net Income ($M) 383.1 420.5 455.4 risk/reward on the shares as balanced currently. Lennox is a leading EV/EBITDA (x) 20.4 18.6 17.4 provider of climate controls for the heating, ventilation and air con- EPS ($) 9.94 11.09 12.34 ditioning markets (HVAC). Its US focus could be seen as a relative P/E (x) 28.7 25.7 23.1 near-term positive given the recent trade war with China and slowing Consensus Rating Distribution Buy Hold Sell global economy. Upside risks to our view are increased market share, 1 12 4 industry consolidation and improved US construction markets. Down- Source: Factset, UBS as of 11 March 2021 side risks are weaker pricing and market share loss and any downturn in US construction.

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

Lennox has been a proven share gainer in the HVAC markets that has led to above-average earnings growth over the last cycle. It has achieved these market share gains through superior quality and service while controlling their distribution network through the build out of its PartsPlus network of stores. Through the cycle, the HVAC market has also been strong due to rebounding residential and non-residential construction markets along with a strong replacement cycle due to increased energy efficiency demands. Continued improvement in efficiency standards should further increase the demand for new HVAC units, which makes this industry one of the more attractive ones in the industrial sector, in our opinion.

CIO GWM 12 March 2021 33 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We have a Bellwether view on the shares of Norfolk Southern as we 1.53 75,610 38,414.0 61,925 see the stock's recent performance reflecting its operational improve- Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 9,800.00 10,746.61 11,310.29 ments. The company has greatly improved service metrics across its Net Income ($M) 2,375.0 2,802.0 3,072.5 railroad which should help lower costs over time. However, NSC is EV/EBITDA (x) 16.0 13.7 12.7 relying more on future price increases for margin improvement versus EPS ($) 9.25 11.26 12.76 costs cuts, which we think is a tougher formula for earnings growth. P/E (x) 26.6 21.8 19.3 Peers appear more aggressive on the cost side. Thus we see the risk/ Consensus Rating Distribution Buy Hold Sell reward in NSC shares as currently balanced. The major risks to our 15 7 2 view are weaker volume and pricing and any rollback in their cost Source: Factset, UBS as of 11 March 2021. cutting programs on the downside; with better costs, volumes and pricing on the upside.

NSC stock has outperformed in the past year on improved service metrics and higher margins. However, the company is planning on relying more on future price increases for operational margin improvements which could be tough to attain in the slower freight market that we have seen recently. Thus, we expect their margin improvements to lag peers in the near-term and see the stock as performing in line with the sector. Other rails are being more aggressive on adopting precision scheduled railroading which should drive even faster margin improvements.

NSC has also gained market share from competitor CSX in the past year as CSX works to cull lower margin business. With CSX service metrics now among the best in the industry we believe they could begin to win back some of the lost business from NSC and put pressure on their volumes.

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

CIO GWM 12 March 2021 34 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We see the risk/reward on RSG shares as balanced as we believe its 1.85 37,795 23,434.0 28,570 valuation currently reflects its improving growth prospects. Earnings Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 10,153.60 10,791.86 11,255.41 for the company should continue to benefit from the reopening of Net Income ($M) 1,137.8 1,179.5 1,285.3 the economy, but should have less upside from the cyclical recovery EPS ($) 3.56 3.69 4.09 we expect to continue in 2021. Furthermore, RSG is more exposed to P/E (x) 25.2 24.3 21.9 any increase in corporate tax rates under the incoming Biden Admin- Consensus Rating Distribution Buy Hold Sell istration. We still expect better pricing and volume from a growing 7 8 0 economy, coupled with cash deployment, to result in a 9-10% earn- Source: Factset, UBS as of 11 March 2021 ings growth rate for RSG over time. The risks to our view are weaker waste volume and pricing on the downside, with improved volumes and pricing on the upside.

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

However, the waste stocks are less cyclical than the economy overall and any acceleration in the US economy and will likely see earnings growth to lag the sector. Thus, we view the risk/reward on the shares as balanced at its current valuation versus the sector. As the company's operations are mostly in the US, their earnings would also be more negatively impacted than peers by potentially higher corporate taxes if the Democrats are successful in raising rates. These two factors will likely keep the stock from outperforming the sector in the near term, in our opinion.

CIO GWM 12 March 2021 35 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) Rockwell operates in the sweet spot of industrial capital spending, 1.68 30,560 7,367.3 28,479 which is the long-term industrial automation growth cycle. Its posi- Consensus Forecasts (FY end) Sep 2020 Sep 2021E Sep 2022E Revenues ($M) 6,329.80 6,783.64 7,177.19 tioning should lead to organic growth in excess of the industry, but Net Income ($M) 1,023.4 979.7 1,066.0 at an over 15% premium to its peers we believe the stock reflects EV/EBITDA (x) 22.6 20.8 18.9 this positive outlook and will likely perform in line with the sector. EPS ($) 7.68 8.67 9.48 Its valuation also reflects a premium due to its attractiveness as a P/E (x) 31.9 28.3 25.9 strategic asset for a larger player wanting to get exposure to this seg- Consensus Rating Distribution Buy Hold Sell ment. Upside risks to our view are an acceleration of industrial capital 7 12 6 expenditures leading to improved sales, and downside risks are over- Source: Factset, UBS as of 11 March 2021 all weakness in the global economy and lower energy prices.

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

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

We believe Rockwell should trade at a premium to its peers to reflect its superior long-term organic growth rate, attractive balance sheet and M&A potential; highlighted by the prior takeover attempt by Emerson Electric. However, with the stock trading at a P/E of over 28 times 2021 consensus EPS estimates, we believe current valuation fairly reflects these strengths.

CIO GWM 12 March 2021 36 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) We view Southwest as a Bellwether mainly due to its outperformance 0.00 31,533 36,573.0 34,153 over last six months. We still see it benefiting from a rebound in air Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 9,048.00 13,874.65 19,748.94 traffic with one of the best cost structures and balance sheet in the Net Income ($M) (3,512.0) (1,066.9) 1,753.9 industry. The company's recent capital raises and relatively unlevered EV/EBITDA (x) 21.2 81.4 8.3 balance sheet gives them very strong liquidity and puts them in a good EPS ($) (6.22) (1.92) 2.81 position to emerge stronger than peers once the current crisis passes. P/E (x) NM NM 20.6 However, with the stock now back near pre-COVID price levels we Consensus Rating Distribution Buy Hold Sell see the risk/reward as more balanced in the near term. The downside 14 6 1 risk to our view is continued weak air travel demand with the upside Source: Factset, UBS as of 11 March 2021 a faster return to normal travel activity.

We see Southwest as one of the strongest players in the airline industry that should benefit from a gradual return to normal levels in air travel activity. The company reduced its cash burn under USD 15m a day by the end of last year, which was better than expected, and ranks at the top of peers. Given their lower cost structure, we expect their current liquidity of over USD 15bn to last the company well past 2021 without any improvement in air travel from currently depressed levels. The lower cost base means that air travel at only 50%-60% of normal would get Southwest close to breakeven cash flow; faster than peers.

However, with the stock rebounding to near pre-COVID level we see less room for near-term outperformance as the rebound should begin to benefit more stressed players. The risks of a further infection spike are still substantial and is the largest risk for the stock. Any continued significant concerns over the virus would likely keep air travel below levels for the company to become profitable again. However, we believe the company's strong balance sheet and liquidity helps mitigate these near-term concerns.

CIO GWM 12 March 2021 37 US Industrials | Equity preferences

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

Dividend Enterprise Total Market Key Metrics What drives our opinion Yield (%) Value ($M) Assets ($M) Value ($M) Trane is the climate control business that was spun out of Inger- 1.36 40,182 18,156.7 37,040 soll-Rand last year. Management of Trane has greatly improved its Consensus Forecasts (FY end) Dec 2020 Dec 2021E Dec 2022E Revenues ($M) 12,454.70 13,471.31 14,101.95 product, culture, and capital allocation over the last five years, which Net Income ($M) 1,083.4 1,320.1 1,449.7 has resulted in industry leading earnings growth. However, we see EV/EBITDA (x) 19.7 17.4 16.2 much of the improvement reflected in the current valuation and see EPS ($) 4.46 5.42 6.11 the risk/reward as fairly balanced currently. Residential sales growth P/E (x) 34.8 28.7 25.4 likely moderates as it is likely approaching a peak given the upgrade Consensus Rating Distribution Buy Hold Sell cycle over the last several years from the housing bubble in the early 8 14 0 2000's. The downside risks to our view are weaker sales and margins, Source: Factset, UBS as of 11 March 2021 while the upside case is higher sales than we expected.

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

The heating, ventilation and cooling (HVAC) sales of Trane have been helped by continued growth in non-residential and residential construction, despite fears of a near-term peak. Price increases continue to be pushed through in line with improvements in product features and quality. Growth in non-residential market should improve after the COVID-19 crisis, but the pace is likely to moderate going forward considering the age of the cycle. However, a majority of Trane's exposure is for replacement sales which shouldn't be impacted by any weakness in new construction.

The residential replacement market is likely to moderate as it cycles off some strong years impacted by higher than normal replacement demand. Their transportation refrigeration truck orders have recently improved from depressed levels and could benefit from vaccine transportation demand in 2021.

CIO GWM 12 March 2021 38 US Industrials | Equity preferences Sector financial highlights - Industrials

Name Ticker Price Industry 52 Week Market P/E 1 yr Group High Low cap* forward 3M Company MMM Bellwether 184.57 Capital Goods 187.27 114.04 Large 18.9 Acuity Brands, Inc. AYI Not Rated 135.01 Capital Goods 136.90 67.46 Mid 16.0 Allegion PLC ALLE Not Rated 115.00 Capital Goods 121.33 77.37 Large 23.8 AMETEK, Inc. AME Not Rated 121.91 Capital Goods 125.81 54.82 Large 27.6 Arconic,Inc. ARNC Not Rated 31.05 Capital Goods 31.59 5.80 Mid 14.5 Boeing Co BA Most Preferred 252.00 Capital Goods 256.65 89.00 Large 242.5 Caterpillar Inc. CAT Bellwether 219.76 Capital Goods 226.67 87.50 Large 26.0 Crane Co CR Bellwether 91.78 Capital Goods 92.61 36.77 Mid 17.4 Cummins Inc. CMI Bellwether 269.80 Capital Goods 274.06 101.03 Large 18.6 Deere & Co DE Bellwether 364.46 Capital Goods 366.82 106.14 Large 21.9 Dover Corporation DOV Not Rated 133.86 Capital Goods 134.88 62.95 Large 20.8 Eaton Corp. Plc ETN Not Rated 139.21 Capital Goods 141.37 56.42 Large 24.0 Emerson Electric Co. EMR Not Rated 91.31 Capital Goods 93.38 37.75 Large 23.3 Fastenal Company FAST Not Rated 46.37 Capital Goods 51.89 26.72 Large 29.6 Flowserve Corporation FLS Not Rated 40.81 Capital Goods 42.14 18.98 Mid 25.7 Fluor Corp FLR Not Rated 20.94 Capital Goods 21.50 2.85 Mid 23.7 Fortive Corp. FTV Most Preferred 68.18 Capital Goods 82.12 37.31 Large 26.4 Fortune Brands Home & Security FBHS Not Rated 89.45 Capital Goods 93.40 33.90 Large 17.6 General Dynamics Corp GD Bellwether 172.67 Capital Goods 175.27 100.55 Large 15.5 General Electric Co GE Bellwether 12.27 Capital Goods 14.42 5.48 Large 41.5 Honeywell International Inc. HON Most Preferred 212.50 Capital Goods 216.70 101.08 Large 26.5 Illinois Tool Works Inc. ITW Not Rated 213.05 Capital Goods 224.69 115.94 Large 26.7 Ingersoll-Rand Plc IR Not Rated 49.02 Capital Goods 51.61 17.01 Large 25.3 Jacobs Engineering Group Inc. JEC Not Rated 125.06 Capital Goods 127.00 59.29 Large 20.3 Johnson Controls Intl plc JCI Bellwether 61.09 Capital Goods 61.41 22.78 Large 22.5 Lockheed Martin Corp LMT Most Preferred 339.73 Capital Goods 417.62 266.11 Large 12.8 Masco Corp MAS Not Rated 57.05 Capital Goods 60.16 27.04 Large 16.6 Northrop Grumman Corp NOC Not Rated 299.41 Capital Goods 357.12 263.31 Large 12.6 PACCAR Inc PCAR Not Rated 97.75 Capital Goods 103.19 49.11 Large 16.2 Parker-Hannifin Corp PH Most Preferred 308.27 Capital Goods 313.79 93.00 Large 20.3 Pentair plc PNR Not Rated 60.12 Capital Goods 61.00 22.01 Mid 21.6 Quanta Services, Inc. PWR Not Rated 87.41 Capital Goods 88.25 23.77 Large 20.1 Rockwell Automation, Inc. ROK Bellwether 264.25 Capital Goods 268.91 115.38 Large 28.7 Roper Technologies, Inc. ROP Not Rated 387.44 Capital Goods 455.72 240.00 Large 26.0 Snap-on Incorporated SNA Not Rated 214.80 Capital Goods 221.59 90.72 Large 17.2 Stanley Black & Decker, Inc. SWK Most Preferred 191.98 Capital Goods 195.00 70.00 Large 18.4 Textron Inc. TXT Not Rated 53.22 Capital Goods 54.16 20.26 Large 18.5 TransDigm Group TDG Not Rated 597.29 Capital Goods 625.05 200.06 Large 43.9 United Rentals, Inc. URI Not Rated 310.78 Capital Goods 321.94 58.85 Large 16.5 United Technologies Corp UTX Not Rated 77.05 Capital Goods 110.77 48.05 Large 19.9 W.W. Grainger, Inc. GWW Not Rated 386.67 Capital Goods 427.90 200.61 Large 20.5 Xylem Inc. XYL Not Rated 101.06 Capital Goods 108.84 54.62 Large 38.0 Cintas Corporation CTAS Not Rated 360.04 Commercial & Pro Svcs 369.20 154.33 Large 36.1 Equifax Inc. EFX Not Rated 170.72 Commercial & Pro Svcs 196.47 103.01 Large 25.5 Health Services Group HCSG Not Rated 29.48 Commercial & Pro Svcs 35.80 15.80 Mid 25.7 Nielsen Holdings Plc NLSN Not Rated 26.06 Commercial & Pro Svcs 26.54 11.62 Mid 16.4 Republic Services, Inc. RSG Bellwether 95.20 Commercial & Pro Svcs 103.79 65.37 Large 25.3 Robert Half International Inc. RHI Not Rated 77.34 Commercial & Pro Svcs 83.50 32.38 Mid 22.3 Stericycle, Inc. SRCL Not Rated 68.67 Commercial & Pro Svcs 79.50 38.45 Mid 27.0 Verisk Analytics Inc VRSK Not Rated 173.21 Commercial & Pro Svcs 210.66 116.61 Large 31.3 Waste Management, Inc. WM Not Rated 120.00 Commercial & Pro Svcs 125.56 85.34 Large 25.0

CIO GWM 12 March 2021 39 US Industrials | Equity preferences Sector financial highlights - Industrials

Name Ticker Price Industry 52 Week Market P/E 1 yr Group High Low cap* forward Alaska Air Group, Inc. ALK Not Rated 65.69 Transportation 69.17 20.02 Mid NA American Airlines Group, Inc. AAL Not Rated 22.15 Transportation 22.80 8.25 Large NA C.H. Robinson Worldwide, Inc. CHRW Not Rated 94.53 Transportation 106.75 56.94 Large 21.6 CSX Corp CSX Most Preferred 93.82 Transportation 97.54 46.81 Large 21.0 Delta Air Lines, Inc. DAL Most Preferred 48.32 Transportation 50.20 17.51 Large NA Expeditors Intl of Washington, Inc. EXPD Not Rated 99.04 Transportation 99.36 52.55 Large 23.5 FedEx Corporation FDX Bellwether 268.49 Transportation 305.66 88.69 Large 14.4 J.B. Hunt Transport Services, Inc. JBHT Not Rated 159.29 Transportation 164.30 75.29 Large 25.5 Kansas City Southern KSU Most Preferred 214.86 Transportation 223.59 92.86 Large 23.0 Norfolk Southern Corp NSC Bellwether 260.75 Transportation 264.86 112.62 Large 22.8 Ryder System, Inc. R Not Rated 78.94 Transportation 79.15 22.62 Mid NA Southwest Airlines Co. LUV Bellwether 58.47 Transportation 60.70 22.47 Large NA Union Pacific Corp UNP Most Preferred 214.52 Transportation 221.28 105.08 Large 22.0 United Continental Holdings, Inc. UAL Not Rated 54.06 Transportation 55.93 17.80 Large NA United Parcel Service, Inc. Class B UPS Most Preferred 167.24 Transportation 178.01 82.00 Large 18.4 *Small (USD 10bn) Source: Factset, UBS as of 11 Mar 2021

CIO GWM 12 March 2021 40 US Industrials | Equity preferences

Sector Snapshot - Industrials Commercial and Capital Goods Transportation Sector Professional Services Weighting Neutral Neutral Most Preferred

Key Themes Automation/digitalization e-commerce N America energy independence Restructuring/M&A Restructruing/M&A

Performance (%) Absolute 1 month 7.2% 1.0% 6.5% 6.52% 3 months 9.6% 0.9% 6.4% 8.08% 6 months 28.2% 10.5% 17.9% 24.16% 12 months 47.5% 29.5% 68.1% 49.98%

Relative 1 month 0.7% -5.5% 0.0% 3 months 1.5% -7.2% -1.7% 6 months 4.1% -13.6% -6.2% 12 months -2.5% -20.5% 18.1%

No of companies in subsector 47 12 15 74 Subsector Market Cap (USD m) 1,954,051.11 259,719.66 654,935.95 2,868,706.72 Subsector weightings 68.12% 9.05% 22.83% 100.00%

Top subsector weights (%) HON 7.6% WM 18.0% UNP 22.1% HON 5.2% CAT 6.1% CTAS 12.2% CSX 11.0% BA 4.7% RTX 6.0% VRSK 10.8% NSC 10.1% UPS 4.2% DE 5.8% CPRT 8.8% FDX 9.9% CAT 4.2% GE 5.5% EFX 8.0% LUV 5.3% RTX 4.1% MMM 5.4% RSG 7.7% DAL 4.7% DE 4.0% LMT 4.3% J 6.2% ODFL 3.4% GE 3.7% ITW 3.1% LDOS 4.9% KSU 3.1% MMM 3.7% ETN 2.8% EXPD 2.6% LMT 2.9% Weighting definitions--Most Preferred: The subsector is expected to outperform the sector benchmark in the next 12 months. Neutral: The subsector is expected to perform broadly in line with the sector benchmark in the next 12 months. Least Preferred: The subsector is expected to underperform the sector benchmark in Source: Factset, UBS as of 11 Mar 2021

CIO GWM 12 March 2021 41 US Industrials | Equity preferences

Recent recommendations Company Change Comment Healthcare Services Group Not Rated We are dropping coverage of HCSG. We no longer see the stock as a Bellwether given the continued pressure on its revenues and margins that are likely to persist for the forseeeable future. Ingersoll-Rand Not Rated The Ingersoll-Rand company is now a product of the merger of its industrial businesses with peer company of Gardner Denver. As the majority business of the old Ingersoll Rand will be spun out in a separate company of Trane (TT), rated Bellwether, we are dropping coverage on Ingersoll-Rand. All previous ratings and estimates should not be relied on. Raytheon Co. Not Rated We are dropping coverage of Raytheon as they are merging with United Technologies and will no longer trade. Our prior estimates and ratings should no longer be relied upon. United Technologies Corp. Not Rated We are removing United Technologies from the Most Preferred the list and discontinuing coverage as they are merging with Raytheon and the stock will no longer trade. Our prior estimates and ratings should no longer be relied upon. Boeing Co. Most Preferred We believe the stock's valuation is now more reflective of the current depressed environment, but does not discount the potential positives of a COVID-19 vaccine and gradual return to normal of air travel. Longer term, we still see air travel in a secular upturn, which should benefit Boeing once the environment normalizes. CSX Corp. Most Preferred CSX has greatly improved operations over the past year through cost- cutting and instituting precision railroading that was pioneered by former CEO Hunter Harrison. 2020 was more of a transition year as the company cycles through lower coal pricing and profitability, but their focus on costs should lead to material cost leverage when volumes rebound this year. Delta Air Lines Inc. Most Preferred We see Delta as Most Preferred list as we believe its current valuation is attractive considering the increased probability of a vaccine to address COVID-19 in the near term. A vaccine and the resulting lower infection rates should lead to improved flying activity over time. The company's recent capital raises gives them liquidity and should carry them for several years without raising additional capital. Emerson Electric Co. Most Preferred We see Emerson as Most Preferred as we expect an acceleration in company revenues over the next year with a valuation at a discount to peers. The company has a large exposure to process automation that should see benefits from improving spending from oil & gas. Fortive Corp Most Preferred We view Fortive as Most Preferred as we believe the stock does not reflect the potential for improving sales trends post COVID-19. Fortive recently split off its transportatiion technologies businesses that we believe should unlock value. Management of the company is primarily from Danaher with a strong background in cost control and M&A which has added faster growth and increased recurring revenue to the portfolio. Honeywell International Inc. Most Preferred We see Honeywell as favorably exposed to the major growth themes of automation, environmental, and energy solutions. Management is expected to have a renewed focus on top-line growth and valued- added business portfolio changes. An underleveraged balance sheet provides a future catalyst from M&A and capital return.

CIO GWM 12 March 2021 42 US Industrials | Equity preferences

Kansas City Southern Most Preferred We view KSU as Most Preferred as we see its implementation of precision scheduled railroading (PSR) as improving overall service issues that have plagued the company and should lead to improved profitability. KSU's should see continued improvements in operating ratios that should exceed peers with higher volume growth due to expanding trade in the US-Mexico corridor. Lockheed Martin Corp. Most Preferred Lockheed is favorably exposed toward areas of increasing global demand within defense such as aeronautics, missile, and missile defense. The company's F-35 program should drive earnings growth through the end of this decade. We believe annual free cash flow of over USD 6bn gives the stock an attractive free cash flow yield. Parker-Hannifin Most Preferred We expect Parker Hannifin to benefit from an improved economic climate, a radical change in management culture, and the acquisition of Clarcor Inc., which we regard as a strategic positive fit. These factors make Parker an attractive self-help story that should allow it to outperform peers, in our view. Raytheon Technologies Most Preferred The combination of the UTX aerospace division with Raytheon should create a more formidable competitor with a superior balance sheet. The Collins aerospace division acquisition in 2018 was very accretive to earnings and enhanced UTX's competitive profile. The defense division should be a prime beneficiary from a larger US defense budget and increasing demand for defense services around the globe. Stanley Black & Decker Most Preferred We view SWK as Most Preferred as we see an improvement in organic sales coupled with less headwinds from higher costs that hurt earnings growth in 2018-19. Earnings going forward should be helped from last year's turnaround primarily from improved sales and cost initiatives. One likely growth avenue is exercising their option in 2021 to buy the remaining 80% stake in outdoor tools maker MTD. Union Pacific Most Preferred We expect Union Pacific to benefit from an improvement in margins from better rail pricing and cost improvements. UNP recently announced a move to adopt precision railroading which if successful could materially improve margins; as was done at peer company CSX. We believe its superior balance sheet should lead to solid capital return to shareholders. United Airlines Most Preferred We view UAL as Most Preferred considering the potential benefit of several vaccines to address COVID-19 over the near term. A vaccine and the resulting lower infection rates should lead to improved flying activity over time and materially improve the company's cash flow. United Parcel Service Inc. Most Preferred We view UPS as Most Preferred as we believe the new management is likely to make changes to significantly improve the pricing and profitability of its businesses. This is evident from recent price increases for the industry which are more significant than we have seen previously. Future opportunity for UPS is improving profitability through a focus on costs and a better not bigger philosophy. 3M Co. Bellwether Over the last few years management has made successful moves to remake 3M as a better run and leaner company. However, we are concerned that continued pressure on sales growth could serve to erode some the stock's valuation versus peers. Environmental liability is another risk to its valuation given increased lawsuits recently, although this should not be material enough to impair the overall balance sheet of the company.

CIO GWM 12 March 2021 43 US Industrials | Equity preferences

Caterpillar Inc. Bellwether We expect strong growth in construction and mining to support a rebound in earnings over the 2021-22 time period. However, with the stock near 27 times this year's earnings we believe this rebound is expected by shareholders and reflected in its current stock price. Crane Co. Bellwether We see the risk/reward for Crane as balanced as we see headwinds impacting earnings growth for 2020 that should limit near term stock outperformance over the next 6-12 months. Longer-term, we expect Crane to return to double digit growth in 2021-23. Cummins Bellwether We view the risk/reward on CMI shares as balanced given the stock's strong performance this year likely reflects an expected rebound in US truck demand. Higher than expected profit margins or a longer truck cycle could make us more positive on the stock. Deere & Co. Bellwether We view Deere as Bellwether as we believe its stock valuation is now more reflective of the favorable trade resolution with China and improved crop markets. Increased buying of crops from China and weather disruptions has led to materially higher crop prices and should continue to boost demand for ag machinery. FedEx Corp. Bellwether We see the risk/reward for FDX shares as currently balanced given the recent run-up in the shares in response to recent pricing announcements. We are also concerned that further economic weakness in Europe could pose additional challenges in the integration of its TNT business near term. General Dynamics Corp. Bellwether We see General Dynamics shares as a market performer as we expect continued challenges in its Gulfstream aerospace business to weigh on earnings growth. The segment is undergoing a product transition into new models that’s likely to pressure margins and income growth. GD's defense businesses, however, should remain strong on the back of increasing defense spending in the US and abroad. General Electric Co. Bellwether We view GE as performing in line with the sector due to concerns over their weak free cash flow conversion. New management has stabilized operations and improved its balance sheet, but growth appears muted. We believe the restructuring moves by the company can result in a more interesting stock, but any turnaround will likely take time. Huntington Ingalls Bellwether While we find HII's position in the shipbuilding portion of the defense market to be favorable, that is currently balanced by near-term revenue and cash flow growth that lag peers. Thus, we see the risk/reward as fairly balanced. Johnson Controls Bellwether The recent stabilization and improvement in organic growth is a positive, but we believe this is currently reflected in the stocks recent outperformance and current valuation. Any further acceleration in cash flow and organic sales could make us more favorable on the stock in the near term. Lennox International Bellwether While we have a high regard for management and the company's growth prospects, we believe these positives are currently reflected in the valuation premium afforded the stock. Thus, we see the current risk/reward on the shares as balanced currently. Norfolk Southern Bellwether We believe Norfolk Southern is well positioned for continued improvement in its rail volumes and costs that should drive strong growth in earnings. However, we believe the stock's valuation reflects much of the improved outlook. As a result, we see the risk/reward in NSC shares as currently balanced.

CIO GWM 12 March 2021 44 US Industrials | Equity preferences

Republic Services Inc. Bellwether The waste stocks are less cyclical than the economy overall and any acceleration in the US economy will likely cause earnings growth to lag the sector. Thus, we see the risk/reward on the shares as balanced at their current valuation versus the sector. As the company's operations are mostly in the US, their earnings also should be more negatively impacted than peers by any higher corporate taxes Rockwell Automation, Inc Bellwether Rockwell operates in the sweet spot of industrial capital spending being the long-term industrial automation growth cycle. The company's positioning should lead to organic growth in excess of the industry, but at an over 15% premium to its peers we believe the stock fairly reflects this positive outlook and see it as a sector performer. Southwest Airlines Bellwether We still see Southwest benefiting from a rebound in air traffic with one of the best cost structures and balance sheet in the industry. However, with the stock now back near pre-COVID price levels we see the risk/ reward as more balanced in the near term. Trane Technologies Bellwether Management of Trane has greatly improved its product, culture, and capital allocation over the last five years, which has resulted in industry leading earnings growth. However, we see much of the improvement reflected in the current valuation and see the risk/reward as fairly balanced currently.

CIO GWM 12 March 2021 45 US Industrials | Equity preferences

Appendix

Sector Allocation

Tactical preferences from benchmark

Consumer discretionary Energy Financials Healthcare Industrials Communication services Materials Technology Real estate Consumer staples Utilities

------n + ++ +++ Least preferred Most preferred new - moderately less preferred + moderately preferred n = neutral old - - less preferred + + preferred - - - least preferred + + + most preferred

Note: Scale represents degree of preference relative to the S&P 500 benchmark allocation. Source: UBS, as of 11 February 2021

Disclosures (12 March 2021) 3M Co. 1, 2, 3, Boeing Co. 1, 2, 3, 5, 12, Caterpillar Inc. 1, 2, 3, 6, Crane Co. 1, 4, 11, CSX Corp. 1, 2, 3, 6, 7, 10, Cummins 1, Deere & Co. 1, 2, 3, Delta Air Lines Inc. 1, 5, 6, 7, 11, 12, Emerson Electric Co. 1, FedEx Corp. 1, 5, Fortive Corp 1, General Dynamics Corp. 1, 2, 3, General Electric Co. 1, 2, 3, 5, 6, 7, 9, 13, Honeywell International Inc. 1, 2, 3, 4, Huntington Ingalls 1, 5, Johnson Controls 1, 2, 3, Kansas City Southern 1, 2, 3, Lennox International 1, Lockheed Martin Corp. 1, 2, 3, 4, 5, 8, 9, Norfolk Southern 1, 2, 3, Parker-Hannifin 1, 2, 3, 11, 14; Raytheon Technologies 1, 2, 3, 5, Republic Services Inc. 1, 4, Rockwell Automation, Inc 1, 4, 11, Southwest Airlines 1, 2, 3, 12, Stanley Black & Decker 1, 2, 3, Trane Technologies 1, 2, 3, Union Pacific 1, 2, 3, 5, United Airlines 1, 12, United Parcel Service Inc. 1, 2, 3, 5, 6, 7, 8, 9, 1. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non- investment banking securities-related services are being, or have been, provided. 3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company. 4. UBS Financial Services Inc., its affiliates or subsidiaries owns a net long position exceeding 0.5% of the total issued share capital of this company. 5. Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products and services other than investment banking services from this company/entity. 6. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. 7. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

CIO GWM 12 March 2021 46 US Industrials | Equity preferences

Appendix

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

Required Disclosures

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

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

Analyst certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Statement of Risk Equities - Stock market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables.

CIO GWM 12 March 2021 47 US Industrials | Equity preferences

Appendix

Required Disclosures

CIO Americas, Wealth Management equity selection system Equity sector strategists provide three equity selections: Most Preferred (MP), Least Preferred (LP) and Bellwether designation. Rating Definitions Most Preferred*: The equity sector strategist expects the stock to outperform the relevant benchmark in the next 12 months. Least Preferred*: The equity sector strategist expects the stock to underperform the relevant benchmark in the next 12 months. Bellwether: Stocks that are of high importance or relevance to the sector and which the equity sector strategist expects the stock to perform broadly in line with the sector benchmark in the next 12 months. *A stock cannot be selected as Most Preferred if UBS Investment Research rates it a Sell, while a UBS Investment Research Buy rated stock cannot be selected as Least Preferred. Restricted: Issuing of research on a company by CIO Americas, WM can be restricted due to legal, regulatory, contractual or best business practice obligations which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in regard to the concerned company. Equity selection: An assessment relative to a benchmark Equity selections in Equity Preferences lists (EPLs) are relative assessments versus a sector/industry, country/regional or thematic benchmark. The chosen benchmark is disclosed on the front page of each EPL. Stocks can be selected for several EPLs. To keep consistency, a stock can only be selected as either Most Preferred or Least Preferred, but not both simultaneously. As benchmarks differ between lists, stocks need not be included on every list to which they could theoretically be added.

CIO GWM 12 March 2021 48 US Industrials | Equity preferences

Appendix

Disclaimer UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland AG (regulated by FINMA in Switzerland) or its affiliates ("UBS"). The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. Instrument/issuer-specific investment research – Risk information: This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. 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Tax treatment depends on the individual circumstances and may be subject to change in the future. UBS does not provide legal or tax advice and makes no representations as to the tax treatment of assets or the investment returns

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For information on the ways in which CIO manages conflicts and maintains independence of its investment views and publication offering, and research and rating methodologies, please visit www.ubs.com/research.Additional information on the relevant authors of this publication and other CIO publication(s) referenced in this report; and copies of any past reports on this topic; are available upon request from your client advisor. Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "Characteristics and Risks of Standardized Options". You may read the document at https://www.theocc.com/about/publications/character-risks.jsp or ask your financial advisor for a copy. Investing in structured investments involves significant risks. For a detailed discussion of the risks involved in investing in any particular structured investment, you must read the relevant offering materials for that investment. Structured investments are unsecured obligations of a particular issuer with returns linked to the performance of an underlying asset. Depending on the terms of the investment, investors could lose all or a substantial portion of their investment based on the performance of the underlying asset. Investors could also lose their entire investment if the issuer becomes insolvent. UBS Financial Services Inc. does not guarantee in any way the obligations or the financial condition of any issuer or the accuracy of any financial information provided by any issuer. Structured investments are not traditional investments and investing in a structured investment is not equivalent to investing directly in the underlying asset. 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Important Information About Sustainable Investing Strategies: Sustainable investing strategies aim to consider and incorporate environmental, social and governance (ESG) factors into investment process and portfolio construction. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment opportunities available to such portfolios may differ. Companies may not necessarily meet high performance standards on all aspects of ESG or sustainable investing issues; there is also no guarantee that any company will meet expectations in connection with corporate responsibility, sustainability, and/or impact performance. External Asset Managers / External Financial Consultants: In case this research or publication is provided to an External Asset Manager or an External Financial Consultant, UBS expressly prohibits that it is redistributed by the External Asset Manager or the External Financial Consultant and is made available to their clients and/or third parties. USA: Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Europe SE, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores México, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate

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Disclaimer when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. For country information, please visit ubs.com/cio-country-disclaimer-sr or ask your client advisor for the full disclaimer. Version C/2020. CIO82652744 © UBS 2021. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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