5 Best Industrial Stocks for 2021
A difficult 2020 for industrial stocks is expected to give way to a much more accommodative 2021. Here are five of the best picks in the space.
Industrial stocks are expected to receive a shot in the arm in 2021, say analysts who specialize in the sector.
Industrials were hammered when the U.S. economy was idled by COVID-19 and the slew of shutdown orders that followed to help slow the spread of the coronavirus. Now, however, with vaccines on the way, analysts' outlook for an economic recovery in 2021 is much more optimistic.
"Expect strong catch-up growth in 2021 and the following years," say Morningstar analysts Preston Caldwell and Karen Andersen. Just note that industrials stocks might not take off immediately in 2021 – a second wave of COVID-19 infections in the U.S. is prompting more lockdown orders that could at least temporarily slow the recovery, and thus the sector.
Once it takes off, however, analysts say the rebound in industrial stocks will be fueled not just by more spending, but by mergers and acquisitions (M&A), largely of those producing equipment, machinery and supplies.
"M&A pipelines are full of opportunities and acquisition capital is available," write Baird analysts.
With that said, here are five of the best industrial stocks for 2021. Not only can they take advantage of a market rotation back into the sector, but they also could be beneficiaries of a wave in dealmaking action.
Data is as of Dec. 16. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Generac Holdings
- Market value: $13.9 billion
- Dividend yield: N/A
The pros like what they see in Generac Holdings (GNRC, $220.44). Forecasts by Wall Street analysts project plenty of upside for the North American manufacturer of power generation equipment, energy storage systems and power products for the residential, light commercial and industrial markets.
Eleven of 15 analysts polled by CNN Business rate the stock a Strong Buy, another calls it a Buy, and three call it a Hold. And a median price target of $251 per share implies at least 14% upside in the new year.
Baird analyst Michael Halloran has GNRC among his best industrial stocks to buy for 2021, putting it in his "Top Ideas" list.
"So many ways to win," he says. "(The) stock has been a monster, yet we think aspects of their ability to win in the marketplace are underappreciated."
For instance, in 2019, Generac, recognized for its standby generators, began providing energy storage systems as clean energy solutions for residential usage. Capturing and storing energy from solar panels and other power sources helps safeguard homes from power outages and save owners money.
"We think the company is well positioned for future trends such as climate change and energy market disruption, 5G deployment, and automation in manufacturing," writes Argus Research analyst John Eade, who rates the stock at Buy.
Regal Beloit
- Market value: $4.7 billion
- Dividend yield: 1.0%
Regal Beloit's (RBC, $116.51) growth is being fueled by ongoing sales of its electric motors, power transmission products and generators for prime and standby power.
Regal, another Baird "Top Idea," is an original equipment manufacturer (OEM) of mechanical equipment used by the aerospace, automotive and oil and gas industries, which are sold through four business segments: Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions.
The bulk of Regal's sales come from the pandemic-fatigued U.S. The producer of seals and bearings for construction and mining equipment is well positioned for additional upside in 2021 as more of its customers seek components instrumental in the continuous operation of their businesses' heavy machinery. The components help reduce the wear and damage to the equipment and lower energy consumption.
"Internal improvement runway remains extensive and revenue growth outperformance potential is real, both of which are underappreciated," says Baird analyst Michael Halloran, who rates the stock Outperform (equivalent of Buy) and has RBC among his best industrial stocks of 2021. "$9 - $10/share of 2023 earnings power is realistic and not embedded in sentiment."
His sentiment reflects a mostly bullish analyst consensus. Of nine covering analysts, six rate RBC a Strong Buy and another says Buy, while just two say Hold. Their average 12-month price target of $137.50 implies 17% upside in 2021 – impressive especially given the stock's 38% performance through mid-December 2020.
Teradyne
- Market value: $19.9 billion
- Dividend yield: 0.34%
Teradyne (TER, $119.77) produces automatic test systems for semiconductors, wireless products and electronic systems used by companies of all sizes around the world.
This is a truly future-facing industrial stock. The maker of robots, provides manufacturers with automated solutions that can improve productivity, efficiency and cost-effectiveness in the production of automatic test systems across industries including automotive, aerospace and defense.
Teradyne Industrial Automation offerings include collaborative and mobile robots to help manufacturers improve their productivity and lower costs. Its business is expected to bounce back in 2021 with the introduction of a new leadership position.
"Creation of the Industrial Automation (IA) President role signifies TER's view on the importance of IA going forward," says Baird analyst Richard Eastman (Outperform), who adds that key priorities for the new president include expanding the "M&A opportunity set."
IA revenue declined during 2020 on weakness in global manufacturing, and thus is expected to pick back up as the world's economies do. And analysts discounted any potential negative impact from possible changes to trade policy that may be enacted by President-elect Joe Biden.
"Net/net, the administration over the next three to four years probably doesn't matter," Eastman says.
Mercury Systems
- Market value: $4.6 billion
- Dividend yield: N/A
Mercury Systems (MRCY, $82.08) develops technologies used in processing modules and subsystems, microwave assemblies and electronic components for defense contractors. Its military applications include data signal, sensor and image processing capabilities.
Mercury's footprint in 2020 encompassed more than 300 programs across multiple platforms and delivered record bookings for its mission-critical technologies. Revenues for fiscal 2020, which ends in June, jumped 22% year-over-year to a record $797 million.
Numerous analysts have MRCY among their top industrial stocks to buy for 2021. Of 11 polled, eight call it a Strong Buy, one calls it a Buy and two are on the sidelines at Hold. Price targets are all over the board, but an average price target of $90 per share imply at least 10% upside – several see more.
Despite the pandemic, demand for Mercury's weapons systems, space, avionics processing and mission computing remains healthy.
"Management indicated that while activity slowed due to COVID, there has been a significant pick-up of late with activity set to ramp over the next 6-12 months, adding to the consistent double-digit organic growth story," says Baird analyst Peter Ament.
Mercury's 2020 year-end backlog, up 33% from 2019, has the company positioned for above-industry average growth in fiscal 2021. Also boding well for MRCY is a recently announced M&A move.
"Mercury announced its planned acquisition of Physical Optics Corporation (POC), which designs, develops, and integrates technologies focused on avionics and mission subsystems for defense applications," say William Blair analysts (Outperform), who say the acquisition will further scale the company's avionics and missions systems capabilities.
BrightView Holdings
- Market value: $1.5 billion
- Dividend yield: N/A
BrightView Holdings (BV, $14.22) provides commercial landscape services for client properties throughout the United States.
Landscape design, development and maintenance are the cornerstones of its comprehensive landscaping services BrightView performs for education, healthcare and sports and leisure clients. It is also the "Official Field Consultant" to Major League Baseball.
For the fiscal year ended September 2020, BrightView's revenue fell 2.4%. That was due in part to a reduction in demand for its ancillary landscape services as a result of COVID-19, but also a lack of meaningful snowfall compared with historical averages.
BrightView has been expanding its market reach through organic and inorganic growth and expects its M&A pipeline to continue to be a reliable and sustainable source of revenue growth in 2021. In September 2020, BrightView acquired a Fresno, California-based landscaping firm that specializes in landscape services including irrigation, tree care and water management. Then in October, to boost its presence throughout Central Texas, it purchased an Austin-based landscape management company whose clients are developers, homeowners associations (HOAs) and municipal clients.
"The M&A environment remains healthy," writes Baird analyst Andrew Wittmann (Outperform), citing several small deals that BrightView has completed over the last quarter. He's one of seven analysts who believe the stock is a Strong Buy or Buy, as opposed to three pros who say the stock is a Hold.
