Lost in all of the noise of a slumping, rebounding and
is a remarkable success story. A wide range of U.S. manufacturers
have been sharpening their game, and are now retaining or even
from tough competitors such as Germany, Japan, China, Brazil and
Indeed, the rising tide of exports from U.S. factories to foreign
markets has been one of the most under-reported stories of recent
years. It's the single biggest factor behind a long string of
surprises coming out of America's heartland, and I think it's where
there are significant gains for investors.
, American manufacturers are now dominating their industries and
poised for better days ahead.
Sadly, the recent
meltdown has rendered this great story moot. Industrial stocks are
being sold off aggressively, as if they were simply broken
businesses. Sure, the slower global economy will hurt a bit, but
these industrial stocks don't deserve the pummeling they've taken.
A quick glance through various earnings forecasts makes you wonder
why investors think these businesses are broken. In many instances,
analysts expect these companies to actually boost profits over the
next few years as they continue to take market share and boost
their internal manufacturing efficiencies.
Maybe the analysts are wrong. Perhaps these companies won't deliver
growth expected of them and will simply generate flat profits until
the rest of the world gets back on its feet. We'll get a better
read in a month or so when second quarter results start to roll in.
For now, we can only see how these industrial stocks are trading in
relation to current analyst forecasts. And boy are they cheap. I've
compiled a list of 13 industrial stocks (or companies that serve
the nation's industrial base of manufacturers), focusing on
companies that are expected to keep boosting profits at a healthy
clip. Each one trades for less than nine times projected 2013
profits (and less than 7.5 times projected 2014 profits). Every
stock has moved down more than 30% from its
, putting them back in the "on sale" bin.
Solid value at this price
To be sure, these will never be high-multiple stocks, simply due to
the cyclical nature of their annual operating results. For most
industrial stocks, the forward multiple can typically move into the
teens when earnings are depressed, as investors start to value them
against better expected results down the road. And when earnings
hit a cyclical peak,
starts to fall -- and they will rarely be valued at more than 10
times earnings. The fact that many of these stocks trade for much
less than that on somewhat-depressed 2013 results highlights the
have plenty of room to rise as earnings forecasts start to build
A good company can make money even in a slump
We can look at
United Rentals (
as an example of how investors may be misreading where we stand in
the current industrial cycle. The company rents a wide range of
construction equipment, and has seen results being constrained by a
still-weak construction market.
Still, ahead of any
in construction activity, management is doing a solid job of
focusing on the
is expected to roughly double this year to $1.8 billion, aided in
part by an
. Once the synergies have been fully derived from that acquisition,
EBITDA is expected to rise another 30% to $2.4 billion in 2013,
according to Goldman Sachs. That should set the stage for EPS of
nearly $5 in 2013, and this figure is likely to approach $6 by 2014
when construction activity builds higher. Shares have fallen from
$45 earlier this spring to a recent $32, well below Goldman Sachs'
This company's transformation unlocks profits
Even as the economy stumbles on its path to firmer growth, many
industrial companies have been streamlining processes and
developing new products to boost sales and profits.
Allegheny Technologies (
is a clear-cut example, as the company has moved away from its
steel-making roots and pursued valued-added niche markets such as
specialty metals that are used in aerospace, medical and energy
industry applications. For example, the company's titanium products
help jet engines burn hotter, which improves combustion.
After $2 billion worth of investments in the business, its
transformation is now largely complete and Allegheny looks poised
for solid secular growth, regardless of whether the economy grows
at a tepid or moderate pace. The company's EBITDA should exceed
$750 million this year, and analysts see that figure surpassing $1
billion in 2013.
A falling level of capital spending should eventually convert much
of that EBITDA into rising
free cash flow
. Free cash flow is likely to be break-even this year, before
approaching $2 a share in 2013 and perhaps more than $4 a share in
2014, according to consensus forecasts. Shares, which have slumped
from $65 a year ago to a recent $30, don't begin to reflect that
kind of free cash flow strength.
Risks to Consider:
Many of these industrial firms rely on exports and the EPS
forecasts in the above-noted table may need to be trimmed a bit.
Action to Take -->
This is a good time to research these industrial stocks ahead of
second-quarter results. If these companies can support the
analysts' views that sales and profits can hold up -- and possibly
grow -- in this tough environment, then investors will start to
take note of these very cheap stock prices. But if you wait too
long, your chance to grab a good stock at a bargain price may be
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, AA, in one or more if its "real money" portfolios.
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