Industrial Equipment Companies That Shouldn’t Be Missed for Long-Term Growth
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to a Global Industry Analyst report, the global industrial machinery market will reach $514 billion by 2015, with an annual growth rate of 7.2% from 2012. Companies in this industry are establishing their foothold by looking at inorganic growth options and improving their operational efficiencies. Also, they are working to improve their margins which will result in gaining investors’ confidence.
I have analyzed three companies from this sector, as these are focusing on gaining the larger market share with their different strategies. Let's find how these strategies are going to work for them and drive growth.
Divestiture and acquisition driving growth
Barnes Group (NYSE: B) acquired the world's largest hot-runner-system manufacturer, Synventive, for $335 million in August 2012. Synventive's hot runner system is a technology that enables complex molding injection applications and helps companies to meet industrial standards. Synventive serves facilities across 50 countries, with three manufacturing units in the U.S. It has contributed $58 million to Barnes' revenue in 2012, but with no meaningful contribution to EPS.
Synventive has served automobile manufacturing companies designing new car models. According to IHS Global Insights, new car models are projected to double in 2014, to 47, compared to 26 in 2013, and the automobile manufacturers are using more plastics in their new cars. Hot runner injections will be used in the automobile industry in designing new models, and Barnes will fulfill this demand around 12 months in advance. Synventive is expected to boost Barnes' revenue by $152 million in 2013 and EPS of around $0.25 annually in 2013.
On April 24, 2013, Barnes completed the sale of its Barnes Distribution North America business, or BDNA, to MSC International Direct for $550 million in cash. BDNA provides logistics support through inventory management and technical sales and support. It will utilize the sale proceeds to expand its core business manufacturing facility, aftermarket services, and is also planning to improve its financial ratios through debt reductions and share buybacks. It has planned to repurchase 4 million-5 million shares in 2013, which will boost investor confidence.
New contracts mean new opportunities
Parker-Hannifin’s (NYSE: PH) operating segment, Parker Aerospace, has signed a contract with Rolls-Royce to partner in its Trent XWB-97 engine program. This Trent XWB-97 engine is developed for the new Airbus A350 XWB-1000 aircraft, which is the only engine currently available to power this new aircraft. The first Parker developed Trent XWB-97 engine will be delivered by the end of 2013, and the initial testing will commence in 2014. The new Airbus with this engine will be ready for take-off by 2016. Parker-Hannifin expects to generate revenue of around $2.2 billion from the total life of the project. Parker believes this long-term partnership will strengthen its relationship with Rolls-Royce and will enhance its presence in the global market.
The company reported free-cash-flow growth of 116% in the third quarter ended March 2013. This was mainly driven by its efficient operational management. The company plans to use this money for share repurchases and dividend distribution. Parker, after completing $49 million in share repurchases in the third quarter ended March 2013, plan for the additional repurchase of $50 million in the fourth quarter of 2013. This makes for the total repurchase of $206 million in fiscal year 2013. It expects the share repurchase program to continue into the next year with the expected free cash flow of more than $1.22 billion. Because of the share repurchases, it expects flat EPS in fiscal year 2013, EPS of $7.5 per share in fiscal year 2014, and $8.10 in fiscal year 2015, from $7.41 in fiscal year 2012.
Synergies improving finances
In September 2012, Pentair (NYSE: PNR) acquired Tyco International's flow-control unit for $4.9 billion. This unit focuses on water filtration and fluid solutions and equipment-protection products. This acquisition has helped Pentair to serve developing nations, where rising GDP and urbanization are driving increasing demands for energy, infrastructure, and water. With this acquisition, it has become the leader in this segment.
It expects a total cumulative operating synergy of around $230 million by 2015. It had projected the synergy of $90 million in 2013, and $80 million has already been achieved. Therefore, it has raised the target for 2013 to $100 million. The remaining $20 million will be a gain from its lean initiatives, which have proved their potential in improving speed and reductions in non-value-added work, eliminating waste. With this lean initiative, the company expects further synergies of more than the initial target of $230 million in the future.
Pentair's valves and controls segment is contributing around 33% to its total revenue. In the first quarter it reported a year-over-year decline of 4%. This decline was mainly due to currency headwinds. The company is optimistic on the efficiency of its valves and controls and solutions, which it currently offers to oil and gas, power generation, and mining industries. Also, it expects the currency headwinds to be neutralized.
Its energy segment has reported a backlog growth of 7% year over year, and its mining segment has increased by 17% year over year in the first quarter ended in March 2013. With this, it expects revenue will reach $615 million in the second quarter and $651 million in the third quarter, from $586 billion in the first quarter of 2013.
Barnes Group, with the acquisition of Synventive and the sale of its distribution segment, expects long-term growth opportunities.
Parker Hannifin's new contract with Rolls-Royce represents its leadership efficiencies in the engine segment, and its share-repurchase plan will benefit investors.
Pentair, by acquiring Tyco's flow-control segment, became the leader of this segment. The company, with growth in valves and controls segment backlogs, expects to generate higher revenue.
Therefore, I recommend a buy on these three companies.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Pentair. 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!