DJ FedEx and 4 Other Stocks to Play an Industrial Recovery -- Barrons.com
Industrial stocks have rallied on hopes of a global economic recovery, and there may be more gains ahead as the outlook improves.
While vaccines are rolling out slowly, they are expected to curtail the pandemic by the second half of the year. Central banks are pumping liquidity into capital markets, buying bonds and other securities, and keeping interest rates low. Consumer spending should get a lift with more stimulus likely coming from Washington, lifting end-market demand.
Consumers are sitting on a mountain of savings -- dry powder for a spending recovery. Personal savings hit $2.4 trillion in December, nearly double the $1.3 trillion in savings a year earlier, according to the U.S. Bureau of Economic Analysis. Consumers are starting to open their wallets for cars, appliances, and other big-ticket items, according to Wolfe Research.
The S&P 1500 Industrials sector is up 23% over the past six months versus a 17% gain for the broader S&P 1500 Composite index. Industrials have underperformed over the last year as earnings fell sharply, and the sector looks pricey at 24 times estimated 2021 earnings.
But it trades at 18 times 2022 profits, a slight discount to the market. A global recovery is expected to be well under way by then, and we could see a rotation into the sector as investors seek more cyclical exposure.
Industrial manufacturers and equipment makers need capital expenditures to pick up. That is likely to ramp up in the second half of 2021. But capex has likely bottomed: Spending by S&P 500 companies was down 14% in the fourth quarter, year-over-year, an improvement over the 16% decline in the third quarter, according to Bank of America. The energy and materials sectors led the declines, but they are likely to start spending again with commodity prices recovering.
Overall, companies are issuing capex guidance a bit higher than consensus estimates for the first time since July 2020.
"With manufacturing data staying strong, coupled with rising commodity prices and reopening of the economy, we expect to see better capex trends going forward," BofA said in a report last week.
Many industrial stocks are no longer bargains, trading within a hair of Wall Street price targets. Further gains would have to come from multiples expanding and/or companies raising growth and margin targets.
But there may still be values. Barron's screened for stocks trading at least 20% below the average Wall Street price target. We looked for profits expected to increase at least 10% in 2021, based on Ebitda (earnings before interest, taxes, depreciation, and amortization). And we screened for price-to-earnings ratios below the market's average forward P/E of 22 times.
Here are the five stocks that made our cut:
FedEx (ticker: FDX) has been a pandemic winner with online shopping and e-commerce surging. The stay-at-home trend will slow as the economy normalizes, but FedEx is still expected to grow sales 8.6% this year, down only slightly from 2020 -- with operating margins rising from 6.3% to 7.8%.
Even with the stock gaining 66% in the last 52 weeks, it trades at 13 times estimated 2021 earnings of $18.42 a share. The low multiple may reflect fears that Amazon.com is building its own transportation and logistics network, cutting into FedEx's growth.
Still, Ebitda is expected to increase 21% this year. Wall Street sees the stock hitting $333 over the next 12 months, up 35% from recent prices around $246.
Curtiss-Wright (CW) is a defense and aviation supplier, including products for Navy submarines and aircraft carriers, defense electronics, and commercial aircraft. About a third of revenue comes from general industrial customers and the private nuclear sector. Earnings slumped 6% in 2020 as commercial/industrial sales fell 23%. The recovery is going slowly, but the defense segment looks robust, fueling earnings growth for the company overall.
Analysts see Ebitda rising 10% this year to $543 million. The stock fetches 15 times earnings. At recent prices of $113, it trades about 27% below the average price target of $142.
Tools maker Stanley Black & Decker (SWK) benefited from the do-it-yourself trend as the pandemic kept millions of Americans homebound. Retail sales were up more than 30% in North America last year and e-commerce grew faster, the company recently reported. Revenues took a hit in the first half of 2020, but increased 10% organically in the second half.
"Tools and outdoor demand is on a roll, and we think it will be for some time to come," CEO James Loree said on an earnings call last week.
Wall Street expects Stanley's Ebitda to increase 14.6% this year. The company is deleveraging its balance sheet, and is expected to pay down about $1.2 billion in debt this year. Shares trade at a reasonable 17 times earnings. Wall Street expects the shares to hit $215, gaining 23% over the next year.
Trucking and logistics company Knight-Swift Transportation (KNX) took a sales hit in 2020 as the economy collapsed, but sales have been improving since the third quarter and are expected to increase 9.7% this year to $5.1 billion. Ebitda is also on the rise, expected to rebound 14% this year.
The company told investors recently that it expects strong freight demand in 2021, fueled by inventory restocking, though it is also facing wage inflation and shortages of drivers. More competition from railroads is also likely.
But investors aren't paying much for Knight, which trades at 12 times earnings. The average price target on the stock is $51, implying gains of 28% from recent prices around $40.
Harsco (HSC) handles material processing and environmental services for metal and steel manufacturers. It also sells rail products, and manages 88 waste and recycling sites in the U.S., following its 2019 acquisition of Clean Earth, a specialty waste processing company. The company bought Stericycle's hazardous-waste business last year, and it is pivoting overall to environmental services.
Sales are rising, thanks in part to acquisition. They increased 24% in 2020 and are forecast to increase 15% this year.
The company is expected to grow Ebitda by 22% this year to $289 million. The stock barely made our cut for valuation, trading in line with the market at 22 times earnings. However, it looks much cheaper based on 2022 estimates, at 14.6 times earnings. Wall Street sees the stock hitting $22.50 a share over the next year, up 27% from recent prices around $17.70.
Write to Daren Fonda at email@example.com
(END) Dow Jones Newswires
February 05, 2021 07:56 ET (12:56 GMT)
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