Electrical Equipment Companies for Your Portfolio
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In reviewing the electrical equipment stocks, several appear to have significant price upside, while others might be best avoided at this juncture. The factors considered in making selections include earnings momentum, as well as the prospects for a particular firm's end markets, its recent buyout activity, and the cost environment (specifically raw materials). Their expansions into emerging markets and, in certain instances, product development activities are also worth looking into.
Here are some to purchase a stake in at this time:
General Cable (NYSE: BGC): Pricing challenges likely temporary
Improved demand conditions are driving up revenues for the distributor of wire and cable. Currently, though, margins are taking a hit from higher-priced copper inventories that are selling through at reduced profitability due to recent declines in the quote on that commodity. Due to this lag second-quarter revenue growth in the teens percentage, thanks to 10% to 15% volume gains, might well result in share net of only about $0.56 versus $0.74 in the prior year.
Still, given the bottoming of copper pricing, growth is likely to resume in the second half of 2013. I believe its core customer markets, energy infrastructure and construction, are in good shape. Moreover, a late-2012 acquisition of Alcan, a cable manufacturer with more than $600 million in annual revenues, should be accretive as the benefits of integration take hold, such as production, logistics and purchasing synergies.
With limited capital expenditure and debt paydown requirements, General Cable could well further expand its operations through asset purchases. The shares might be on track to rebound if material prices have in fact started to recover. Plus, their fundamental strength should support long-term capital appreciation, along with a modest dividend.
Franklin Electric (NASDAQ: FELE): Emerging market expansion and investments
Sales of industrial and irrigation equipment consisting of residential groundwater and wastewater pumps, are pacing up by a high single-digit percentage. Earnings for now, however, will be inhibited by investments in projects aimed at capitalizing on long-term trends. Factoring in also a modestly-sized but rapidly growing Fuel Systems business, share net may well climb just over 10% this year.
Some of the aforementioned expansion initiatives are as follows: The launch of a gas and oil well dewatering category and the startup of the pump rental unit in the U.K. Furthermore, several measures are targeted at gaining a broader presence in emerging markets like Brazil, Colombia, India, and Australia.
Although spending increases will probably restrain second-quarter share profits by $0.02 or $0.03, the benefits ought to be reaped in late 2013 and 2014. All told, Franklin Electric's strategy is sound, as it should limit the impact of market cyclicality over the long run through expansion activity. The shares are at an all-time apex and hold appeal for the near or long term.
Rockwell Automation (NYSE: ROK): Banking on productivity gains
Rockwell's management recently reduced its sales guidance for this year while leaving its net profit outlook at a 5% to 10% year-over-year advance. Indeed, sales are pegged to be only flat to up slightly in the near term due to weakness in its Europeans and Asian subsidiaries. Margins are expanding thanks to restructuring, cost reduction and process improvement initiatives.
The company, with two operating segments, Architecture & Software and Control Products & Solutions, ought to be well positioned for end market recoveries. It is a good selection for exposure to the electrical equipment sector.
The rundown of in-favor electrical equipment stocks is highlighted by companies taking aggressive initiatives toward boosting their revenue bases and/or improving their profitability. Given upward earnings projections and strong, liquid balance sheets, the entities are decent investments. Of the three evaluated here, the best for this year may well be Franklin Electric, while all are good long-term choices.
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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!