J.P. Morgan: Time to Turn Bullish on These 3 Industrials

We call our time the digital age, but heavy industry has hardly gone the way of the dinosaurs. Even if the digital economy is driving growth, there remains – and will always remain – a hardcore need for physical stuff. Manufacturing, construction, agriculture – these are vital industries, and they will always find ready demand.

That’s the key fact behind JPMorgan analyst Ann Duignan’s look at industrial stocks. She finds industrials generally in a holding pattern right now – supply and distribution chains have still not recovered from the COVID crisis, and transportation networks remain troubled (the shipping backup on the US West Coast is a good example). But, Duignan believes that industry is primed for gains going forward, as the economy continues to normalize.

What this means for investors, in Duignan’s view, is that now is the time to buy in to some promising names. She’s upgraded three stocks – one each in the construction, trucking, and agriculture segments – to Buy ratings. We’ve pulled up the details on her picks via the TipRanks platform, to find out what drew those companies to her attention. Turns out all are Buy-rated and offer strong upside potential; here are the details, along with Duignan’s commentary.

Terex (TEX)

We’ll start in manufacturing and construction, where Terex is a global company involved in the production of aerial work platforms, construction cranes, and materials processing machinery. The company handles the full range of the production line, from design and construction to support and maintenance. Terex’s products find use in construction projects, as well as the quarrying, recycling, mining, energy, and transport industries, and the company has a worldwide presence, in both manufacturing and sales.

Earlier this year, Terex released its 1Q21 financial results. The company showed $864.2 million at the top line, the best revenue result of the past 5 quarters. In addition, Terex reported $39.7 million in ‘income from continuing operations,’ which came out to 56 cents per share. This result was the highest since the third quarter of 2019.

Solid operational execution, along with an improving sales outlook, led Terex to adjust its full-year outlook for 2021. The company predicts $3.7 billion in total revenue this year, along with EPS in the $2.35 to $2.55 range. Meeting that revenue target will make for a 23% yoy gain.

In addition to solid earnings, Terex declared its quarterly dividend in May of this year. The payment, at 12 cents per common share, annualizes to 48 cents and gives a modest yield of just 0.5%. But the key here is not a high or low yield; rather, it’s the 8-year history of reliable dividend payments and growth. Terex has raised its dividend three times in the past three years – and that includes during the COVID period.

JPM’s Duignan sees Terex holding a firm foundation for future growth, writing of the company and its work environment, “While US residential construction has been strong and talk of an infrastructure bill a potential positive catalyst, we think investors may be missing the positive leading indicators in the non-residential sector which typically lags the residential cycle by at least a year. As a result, we believe that the stock should trade at a higher multiple given the potential for a prolonged upcycle in its core end market.”

She puts an Overweight (i.e., Buy) rating on this construction/manufacturing stock, and her $61 price target implies an upside of 33% for the year ahead. (To watch Duignan’s track record, click here.)

This mid-cap industrial company has attracted a total of 10 analyst reviews recently, including 7 Buys and 3 Holds for a Moderate Buy consensus rating from the Street. Terex shares are priced at $45.68 and have an average price target of $56.70, giving the stock a 24% upside on the one-year time frame. (See Terex’s stock analysis at TipRanks.)

Paccar, Inc. (PCAR)

Now we’ll shift gears and head into the transportation industry. Paccar is a manufacturer of high-end premium trucks – the builder behind the Kenworth, Peterbilt, and DAF nameplates. These names are well-known on North American highways, and are synonymous with quality. Paccar builds trucks of all types, in the light, medium, and heavy-duty lines, and also designs and builds advanced diesel engines and powertrains. The company stands behind its trucks and components, providing replacement parts, information tech, and financial services to support its customers.

Over these past 12 months, the company has had to deal with numerous headwinds: the COVID crisis, a driver shortage leading to reduced demand for vehicles, supply chain disruptions putting a crimp on the manufacturing process.

Even with these difficulties, Paccar showed a turnaround in revenues following the ‘COVID trough’ in 2Q20. In the first quarter of 2021, revenues came in at $5.85 billion, the highest since Q419, and the third quarterly sequential revenue gain in a row. EPS, at $1.35, showed an identical pattern – and beat the estimates by 7 cents. Company management described the quarterly results as ‘very good.’

Along with those general results, Paccar announced new lines of Kenworth and Peterbilt medium-duty trucks, and an electric truck production line under the DAF name. The company boasted $4.65 billion in cash available to support manufacturing activity.

In her review of PCAR shares, JPM’s Duignan is particularly impressed by the new electric line’s reception, writing, “[We] view PCAR as a high-quality cyclical with a favorable competitive position and experienced management team. Its DAF (Paccar’s European brand) has already received over 1,000 customer orders for its New Generation XF, XG and XG⁺ trucks, the fastest 1,000 order milestone achieved in its history, setting it up for significant market share gains in the region… We believe the long-term risks are skewed to the upside at current valuation.”

Looking ahead, Duignan rates PCAR shares as Overweight (Buy), and her $112 price target shows her confidence in an upside of 27% this year.

The JPM view represents the bulls here – but this stock has mixed reviews from Wall Street. The 8 on record are evenly split, with 4 Buys and 4 Holds, for a Moderate Buy consensus. The average price target here is $104.5, suggestive of a 19% one-year upside. (See Paccar’s stock analysis at TipRanks.)

AGCO Corporation (AGCO)

We’ll wrap up our look at JPM’s industrial calls with AGCO Corporation. This company, headquartered in Duluth, Georgia, is a leading producer of agricultural equipment. AGCO’s brands include Challenger, Fendt, and Massey Ferguson, and the range of products runs from tractors to harvesters to tillage gear to storage silos. In short, AGCO’s products make it possible for farmers – at all scales – to work their land from start of the planting season to the final shipment of the produce.

AGCO shares have been climbing steadily from their deep trough during the peak of the corona crisis, and the stock is up an impressive 114% in the last 12 months. While it has slipped from its peak share price, reached in May, AGCO is still near its all-time high level.

In the first quarter of this year, AGCO beat the market expectations on both revenues and earnings. The top line was predicted at $2.215 billion, but hit $2.38 billion, beating the forecast by 7.4%. The Q1 figure was up 23% year-over-year. On EPS, the company reported $1.99 in profit; the Street had expected $1.11. The first quarter earnings were also more than double the year-ago value.

The strong quarter was supported by gains in sales across segments. The increase in North America was modest, at 10%, but that was made up for in South America, which saw sales climb 56% yoy, Europe, which saw a 41% yoy sales gain, and in the Asia/Pacific region, where sales grew 83%.

This is the third stock that Duignan has upgraded, and in her comments on it she takes care to note the strength of the company’s European and South American business, writing, “Europe is AGCO’s biggest regional exposure (67% of 2020 segment OP); we expect earnings to continue to recover quickly in 2021 in a more normal production environment (EU hit hardest by COVID-19 lockdowns in 2020), supported by decent fundamentals and improving sentiment. Its South America business stands to benefit from improved farmer economics, driving broad-based equipment demand including grain storage and Precision Planting.”

Duignan’s comments back up her new Overweight rating here, and her price target of $164 implies an upside of 27% in the next 12 months.

Of the stocks we’ve looked at, this one carries a Strong Buy analyst consensus rating, based on 8 reviews with a 7 to 1 breakdown of Buy versus Hold. AGCO is currently selling for $126.31 with an average price target of $162.88; this gives the shares an upside outlook of 29%. (See AGCO’s stock analysis at TipRanks.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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