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All Contents © 2020The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| June 4, 2019
If you are looking for compelling investing opportunities, consider an often-overlooked area of the market: industrial stocks.
Industrials frequently have made headlines because its components have been pressured by tariff volleys between the U.S. and China. But despite this, the industrial sector of the Standard & Poor’s 500-stock index, at 12.6% returns, is the third-best-performing sector of the market behind technology and real estate. And profit growth could see industrial stocks continue to outperform the broader market.
“We’re living in a world where growth is declining,” John Davi, chief investment officer at Astoria Portfolio Advisors, told CNBC back in March. “S&P 500 earnings are de-accelerating, so if you can get stocks that have above-average growth to the S&P, then that’s really attractive.” And while consensus estimates have been scaled back since then, FactSet’s Earnings Insight still shows that industrials are expected to grow profits 5.2% this calendar year – better than the 3.2% projected for the S&P 500.
The sector still faces headline risk, so you only want to buy the best of the best. To help with that, we’ve pinpointed 10 of the Street’s best-rated industrials by using TipRanks’ Stock Screener to scan only for companies in the industrial sector with a “Strong Buy” analyst consensus. The result: This group of 10 industrial stocks to buy.
Data is as of June 3. “Strong Buy” analyst consensus based on ratings published over the past three months.
Market value: $121.2 billion
TipRanks consensus price target: $178.57 (7% upside potential)
TipRanks consensus rating: Strong Buy
Honeywell (HON, $166.47) is a global industrial, diversified tech and manufacturing company with a digital focus. Its operations range from aerospace to chemicals to fire systems to sensors. Shares have surged by 26% year-to-date – double the return of industrial stocks broadly and well more than double the S&P 500’s 9.5%. And Wall Street largely thinks Honeywell has a strong long-term growth profile.
RBC Capital analyst Deane Dray reiterated his “Outperform” rating (equivalent of “Buy”) on HON shares after attending the company’s 2019 analyst meeting. Dray writes that the event underscored “the idea that Honeywell’s transformation to a ‘Software-Industrial’ could largely be happening organically, rather than via some epic acquisition.”
“We came away particularly impressed with all the commentary and exhibits of the connected enterprise and all things digital,” Dray wrote to investors. “We continue to like the company’s strong balance sheet and de-risked pension plan at this point in the cycle. We also like the prospects for an eventual further positive re-rating.”
Credit Suisse analyst John Walsh, ramped up his price target on the stock last month from $170 per share to $185, citing “strong” organic sales growth of 8% and broad-based strength across several business segments. See what other top analysts have to say about HON on TipRanks.
Market value: $97.4 billion
TipRanks consensus price target: $377.67 (10% upside potential)
U.S.-based global aerospace and defense company Lockheed Martin (LMT, $344.56) is enjoying significant Wall Street support right now. Five of the six analysts who have made a call on LMT in the past month have come out on the “Buy” side.
In a recent report, Cowen & Co. analyst Cai Rumohr – who receives five stars from TipRanks because of his accuracy – singles out Lockheed for praise, writing that “LMT remains our top defense big cap pick.”
Prompting this bullish analysis was the company’s “blowout” first-quarter financial results. Lockheed reported a quadruple beat: Sales, operating margin, cash flow and book-bill all came in ahead of estimates. Earnings of $5.99 per share easily surpassed Wall Street expectations for $4.32.
Looking forward, Rumohr writes, “Increased 2019 guide still appears to have upside; and we see further gains in 2020-21.” Indeed, orders received for the second quarter already total $15.4 billion – 7% greater than expected sales. “Furthermore, Lockheed has several new foreign potentials (Morocco F-16, India Blackhawk) that could be booked in H2; and it’s competing with Raytheon for LTAMDS. This is the successor to the Patriot radar, and a decision on the potentially multi-billion-dollar contract is expected by October.”
As a result, Rumohr thinks it’s possible that backlog, which LMT said could be lower than 2018, ends up higher for the year. What are other financial experts saying about this major aerospace and defense stock? Find out on TipRanks.
Market value: $18.7 billion
TipRanks consensus price target: $97.17 (18% upside potential)
Ametek (AME, $82.16) is a leading global manufacturer of electronic instruments and electromechanical devices that had been logging annual sales of about $4 billion for years, but bumped that up in a big way ($4.8 billion) in 2018.
AME shares have built up a head of steam, up 21% year-to-date. And it’s one of the best-rated industrial stocks on Wall Street right now, grabbing eight back-to-back “Buy” ratings over the past three months.
Ametek’s M&A acumen and management reputation help make it one of the best industrial businesses in the sector, RBC Capital’s Dray writes. “(Ametek) ranks among the highest-quality Multi-Industry Primes in our Framework analysis of three-year and 10-year operating track records … We believe AME would garner a premium valuation even in the absence of value-creating deals.”
Oppenheimer’s Christopher Glynn delivers a similar message. Glynn notes that Kevin Coleman, VP of investor relations, “highlighted AME’s record of consistent shareholder returns via its highly successful growth model, with continued focus on leadership in niche markets.”
“We expect positive investor sentiment for Ametek,” Glynn writes, citing a strong free cash flow position, as well as “strong backlog to underwrite outlook, with attention focused on solid orders trends.” See why other top analysts are also bullish on Ametek.
Market value: $13.6 billion
TipRanks consensus price target: $86.50 (14% upside potential)
“With the US economy in its ninth year of expansion and the Fed starting its tightening cycle, we expect that industrial investors will be inching up the quality curve toward more defensive names that have ‘safe haven’ appeal and sustainable long- term megatrend catalysts,” RBC Capital’s Deane Dray writes about the outlook for industrial stocks.
That’s good news for Xylem (XYL, $75.67), which operates in more than 150 countries and is the largest pure play on water technology. The company aims to create smart technology solutions to “meet the world’s water, wastewater and energy needs,” making it a stellar safe-haven investment in the eyes of many Wall Street pros.
The company did hit a stumbling block in its most recent earnings report. First-quarter profits missed expectations, and Xylem even cut its 2019 guidance. Dray blamed uncharacteristic glitches for the “rare execution misstep” including delays in a large analytics project. However, management says these issues have been resolved, and Dray says it’s back to full steam ahead.
“Our take is that neither of these two disappointments derails the long-term bull case,” he wrote last month, reiterating XYL at “Outperform” with an $84 price target. Most of his cohorts agree, with seven of eight covering analysts giving the stock a “Buy” rating over the past three months. For further insights into Xylem stock, check out its analyst page on TipRanks.
Market value: $5.1 billion
TipRanks consensus price target: $69.17 (19% upside potential)
Industrial stock ITT Inc. (ITT, $58.04) is experiencing across-the-board operational momentum right now. With 10,000 employees worldwide, the company produces specialty components for the aerospace, transportation, energy and industrial markets. Shares are up roughly 20% year-to-date, thanks in part to the company’s most recent quarterly earnings report, which included its seventh consecutive quarter of “solid year-over-year segment (operating income) margin expansion.”
Oppenheimer’s Bryan Blair recently hosted CFO Tom Scalera at the firm’s industrial growth conference. The discussion boosted his confidence in “our share gain + execution thesis and the sustainability of ITT’s (double-digit) EPS growth over the intermediate term.”
Following the conference, Blair reiterated his “Outperform” rating with a $70 price target. He cites “positive growth … a war chest of selfhelp opportunities across platforms, and significant dry powder (for further acquisitions).” Discover how the stock’s ‘Strong Buy’ consensus breaks down on TipRanks here.
Market value: $28.54 billion
TipRanks consensus price target: $130.73 (8% upside potential)
Diversified manufacturing company Ingersroll-Rand (IR, $120.76) produces everything from air motors to lifting machinery in its 51 plants worldwide. And Wall Street is convinced the industrial stock can improve upon its 32% year-to-date gains.
Most recently, five-star Cowen & Co. analyst Gautam Khanna reiterated his “Outperform” rating on the stock with a $131 price target. The analyst walked away from a recent meeting with management, who provided an upbeat view of the demand environment and Ingersoll’s positioning – with his bullish thesis reaffirmed.
IR is merging its industrial business with Gardner Denver and splitting this $15 billion merged business from its climate business. “We continue to favor IR given its (sum of the parts) upside, and it was clear that management is well along in its planning to limit dis-synergies that will result from the Industrial separation,” Khanna writes in response.
BMO Capital analyst Joel Tiss, who also rates IR at “Outperform,” ramped up his price target from $112 to $140 in May. He writes, “Ingersoll Rand shares continue to outperform most other industrial companies, as investors are clearly seeing the value-added strategies that management has been implementing for some time and are enthusiastic about Ingersoll’s announced transaction to separate its climate-related businesses.” See what other top analysts have to say about IR on TipRanks.
Market value: $36.1 billion
TipRanks consensus price target: $366.00 (5% upside potential)
Roper Technologies (ROP, $347.41) is a diversified industrial company that produces engineered products for global niche markets. The company has four main business lines: Industrial Technology, Radio Frequency Technology, Imaging, and Energy Systems.
Wall Street views ROP as best-in-class among similar industrial stocks, and so far in 2019, it has earned its reputation. The company posted a high-quality first-quarter earnings beat, and shares have raced ahead by 30%.
“The usual feel-goods of solid organic growth, high incrementals, and healthy FCF conversion were all showcased,” RBC Capital’s Dray wrote in May following the company’s April earnings report. He singled out the recent acquisition of visual effects software company Foundry for particular praise, writing, “The recent Foundry deal – the first by the new CEO at the helm – looks Academy Award-worthy.”
The balance sheet is already reloaded for more M&A, too. Roper signaled that it can immediately splash out over $1.5 billion if the right opportunity presents itself. “We believe that the market is filled with potential software and network-based targets, and management will remain disciplined in sourcing niche, undervalued gems to deliver shareholder returns,” Dray writes.
The analyst’s Street-high price target of $377 places Roper at a 35% premium to its peers based on 2020 estimates. What are other financial experts saying about this Florida-based industrial giant? Find out on TipRanks.
Market value: $926.2 million
TipRanks consensus price target: $30.67 (17% upside potential)
Small-cap Kornit Digital (KRNT, $26.31) is making a name for itself producing high-speed printers and pigmented ink for textiles such as clothing, curtains and bedcovers. This “Strong Buy” stock has enjoyed an explosive year-to-date rally of 41%, extending a three-year rally of 167%.
What’s behind the success? Kornit’s revenues rocketed ahead by 65% between 2015 and 2018, and it continued its expansion with 22.6% year-over-year sales growth in its most recent quarter, thanks to its strongest-ever quarterly revenues from system sales. The company remains on track to reach its goal of a $500 million run rate (run rate is the annualizing of a shorter-term period; say, quarterly or monthly) by 2023.
Kornit’s was thrust into the spotlight in 2016 when it began selling Avalanche 1000 printers to Amazon, and that buzz grew when Amazon received an option to invest in the company in 2017. The five-year option has a potential value of $38 million. Kornit also recently revealed ambitious plans to splash $17.4 million on a new factory for 2020.
Wall Street thinks there’s still more upside ahead. For instance, Needham’s James Ricchiuti reiterated his “Buy” rating while raising his KRNT price target from $30 to $32 following Q1 results. He also increased his estimates for second-quarter revenues from $46 million to $46.3 million. See why other top analysts are also bullish on Kornit.
Market value: $758.4 million
TipRanks consensus price target: $37.33 (72% upside potential)
TPI Composites (TPIC, $21.68) is the largest American independent manufacturer of composite wind blades for global wind turbines. It also stands out on this list for an unfortunate reason – it actually has lost 12% of its value in 2019, versus gains for most of the aforementioned industrial stocks.
The company reported a disappointing preliminary first-quarter results in May that included a cut in the company’s full guidance. Although TPIC already warned of potential problems back in March, investors still were caught off guard and sent shares 16% lower in a single day. Standing out were strikes at a new factory in Matamaros, Mexico, that resulted in an estimated $25 million in damages. The company also anticipates that only 60% of the blade sets from Matamoros will be delivered this year.
TPIC still plans to meet its long-term targets, however, with Matamoros expected to return to full capacity next year. The company expects to double revenues to more than $2 billion by 2021, and capture 20% to 25% of the global wind market.
JMP Securities’ Joseph Osha upgraded TPIC from “Market Perform” (equivalent of “Hold”) to “Outperform” on March 1. He did lower his price target from $41 to $35 in May, but he still reiterated his “Buy” rating. “TPIC’s competitive positioning and solid execution remain unquestioned, but we believe that risk expectations may need to be adjusted a little as the company manages through its labor challenges,” the analyst explained.
For further insights into TPIC stock, check out its analyst page on TipRanks here.
Market value: $681.2 million
TipRanks consensus price target: $15.17 (15% upside potential)
Last but not least is Alabama-based small-cap industrial stock Construction Partners (ROAD, $13.19). As the ticker suggests, ROAD specializes in building roads and preparing sites for new construction. Luckily for Construction Partners, favorable industry tailwinds – including deteriorating U.S. transportation infrastructure and increased public and private spending – are creating strong growth opportunities.
Raymond James analyst Joshua Wilson highlighted ROAD as his favorite stock within construction materials back in late March. The analyst marginally lifted his price target from $14 to $15 (14% upside potential) and raised operational estimates. He cited two acquisitions: a liquid asphalt terminal and an asphalt production and paving company, both in Florida, for $19 million.
M&A opportunities continue to be a source of possible upside, writes Wilson. And a new gas tax in Alabama “is expected to generate approximately $320 million in additional annual funding for investment in Alabama’s roads and bridges when fully implemented,” Construction Partners said in a March release. That could result in additional opportunities for the company.
Shares have already surged 50% year-to-date, thanks in part to its most recent earnings that included a 38.3% year-over-year jump in revenues, to $164.3 million. Two other covering analysts raised their price targets on ROAD following the announcement. Discover how this price target breaks down on TipRanks here.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.