The economy is wobbling in response to higher interest rates, making it harder than usual to find attractive stocks in industries such as manufacturing.
Looking for rising earnings estimates, however, is a reliable way to identify potential winners no matter what the economy is doing. Those stocks are even more appealing if they can be bought at a good price.
Barron’s tried that approach, looking for industrial stocks in the
Russell 1000
with price-to-earnings ratios at a discount to the
S&P 500
that also had increasing 2024 earnings estimates. Shares of 33 companies made the cut, so we narrowed the list by looking at which of those stocks Wall Street analysts liked the best.
Fifteen had Buy-rating ratios at or above the average of about 55%.
The stocks in no particular order are: the automation company
Emerson Electric
(EMR); valve maker
Flowserve
(FLS); building product distributor
TopBuild
(BLD);
FedEx
(FDX), industrial component makers
Parker Hannifin
(PH) and
ITT
(ITT); plumbing distributor
Ferguson
(FERG),
Deere
(DE);
Textron
(TXT), electrical component suppliers
nVent Electric
(NVT) and
Hubbell
(HUBB); machinery rental company
United Rentals
(URI); filter maker
Pentair
(
PNR
); the engineering services company
Jacobs Solutions
(J); and the gasoline pump and transportation infrastructure provider
Vontier
(VNT).
It is an eclectic group that touches many industrial end markets. On the list are nonresidential and residential construction, machinery, automotive, agriculture, and water, among others.
The stocks trade for roughly 14.5 times estimated 2024 earnings, while the
S&P 500
trades for closer to 18.5 times, but the shares aren’t trading at a discount because they have been weak performers. The stocks are up an average of about 27% over the past 12 months, while the S&P 500 is up about 12%. Only Emerson and Deere stocks are down over that span.
| Company / Ticker | Market Value (bil) | PE / NTM* | 2024* Change | Buy Rating Ratio | Recent Price | Analyst Target | Upside |
|---|---|---|---|---|---|---|---|
| Emerson Electric / EMR | $49.4 | 16.5 | 7.4% | 76.9% | $86.50 | $107.00 | 24.2% |
| Flowserve / FLS | 4.9 | 15.2 | 6.2 | 66.7 | 37.67 | 47.00 | 25.3 |
| Topbuild / BLD | 8.6 | 13.1 | 4.6 | 63.6 | 271.36 | 316.00 | 16.3 |
| FedEx / FDX | 61.9 | 12.1 | 3.8 | 57.1 | 246.03 | 289.00 | 17.6 |
| Parker Hannifin / PH | 53.9 | 17.5 | 3.7 | 76.2 | 419.45 | 459.00 | 9.5 |
| Ferguson / FERG | 32.6 | 16.3 | 3.1 | 60.0 | 159.94 | 172.00 | 7.4 |
| Deere / DE | 107.7 | 11.2 | 2.9 | 57.1 | 373.99 | 438.00 | 17.2 |
| ITT / ITT | 8.4 | 17.9 | 2.7 | 84.6 | 102.81 | 116.00 | 12.9 |
| Textron / TXT | 14.9 | 12.9 | 2.4 | 57.9 | 76.12 | 88.00 | 15.3 |
| nVent / NVT | 8.5 | 15.9 | 2.0 | 70.0 | 51.28 | 61.00 | 18.0 |
| Hubbell / Hubb | 15.5 | 17.8 | 1.7 | 54.5 | 289.52 | 328.00 | 13.2 |
| United Rentals / URI | 30.9 | 10.7 | 0.9 | 54.5 | 456.53 | 489.00 | 7.0 |
| Pentair / PNR | 10.1 | 14.8 | 0.8 | 57.9 | 61.40 | 73.00 | 19.1 |
| Jacobs / J | 16.9 | 15.6 | 0.1 | 90.0 | 133.94 | 158.00 | 17.6 |
| Vontier / VNT | 5.0 | 10.7 | 0.1 | 54.5 | 32.30 | 36.00 | 12.8 |
*Estimate. **3-month change to 2024 estimate for earnings per share.
Source: Bloomberg
One key to the discount is that the industrial economy is shrinking. The Institute for Supply Management Purchasing Manager Index, or PMI, has been below 50 for 12 consecutive months. Levels above 50 indicate a sector is growing, while figures of less than 50 mean it is contracting.
It has been a long period of contraction as rising interest rates have affected demand and made businesses less willing to carry inventories. That has investors nervous.
The fact that the 15 have managed to outperform with that as the economic backdrop is a hint that the stocks can rise when the manufacturing economy starts growing again. Analysts are more upbeat about their prospects than the outlook for other industrial stocks.
The average bump to 2024 estimates over the past three months has been 3%. That compares with an average cut of 4% for all of the industrial companies in the Russell 1000.
Something is going right at those companies. That is a good thing for investors, although the fact that they passed the screen doesn’t mean the stocks are worth buying.
As always, a screen is only a starting point for investing. The real work begins with researching companies, their strategies, competitive positions, industries, and management teams.
Write to Al Root at [email protected]
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