3 Companies For Industrial-Sized Returns

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The global industrial machinery market will reach $514 billion by 2015, growing by 7.2% annually. The industry is showing signs of improvement with increasing economic activities, which in turn increase the demand for industrial equipment. However, the rising cost of raw materials and environmental regulations are a challenge for this industry. This article analyzes three industrial companies adopting different strategies like new products, entering into a joint venture, and signing new contracts to keep pace with industry growth.

Joint venture with growth in rail group segment

On May 7, Trinity Industries (NYSE: TRN) entered into a joint venture with Napier Park Railcar Lease Fund and its co-investors to form Rail Holdings. In this joint venture, Trinity will own 31%, while Napier and its investors will have a 69% interest. The joint venture will provide railcar leasing services in North America. RIV will acquire approximately $1 billion of rail cars from Trinity Rail Group and Trinity Industries leasing company. The joint venture provides opportunities for Trinity to grow its leasing platform by reducing capital investment, which is required by a growing lease fleet.

Napier and its co-investors also purchased 55% interest in TRIP Rail holdings, reducing Trinity’s holdings from 73% to 45%. These transactions will generate cash of $575 million - $625 million to Trinity by the end of 2014, with $175 million already received. Trinity has the modest dividend pay-out ratio of 8.80%, which should increase in the coming quarters.

The company’s rail group segment will show strong performance this year due to increasing orders for railcars. This segment reported revenue of $625 million in the first quarter ended March, representing growth of 33.9% year-over-year. The revenue was driven by railcar deliveries totaling 5,230 units at an average sale price of $120,000. In the future, the company will benefit from its order backlog, as it had 42,265 rail car orders at the end of the first-quarter. The company will deliver 22,000 rail car units this fiscal year. Therefore, revenue from this segment will rise to $2.6 billion this year compared to $2 billion last year.

New product and capital deployment

On May 1, Flowserve (NYSE: FLS) announced the launch of its new Limitorque UEX electronic control package for L120 series actuators. Actuators are a type of motor for moving or controlling a system operated by a source of energy like electrical current. The new UEX provides customers expanded features and will include liquid crystal displays, or LCDs, that will provide actuator set up by displaying continuous position indications and fault conditions.

The company is expanding worldwide. It won a multi-million dollar contract from M.N Larnaca Desalination in April to provide a complete pump package and energy recovery devices. Additionally, it will have a few other large deals. New product innovation will help the company meet customers’ expectations and will enhance its revenue in the coming quarters. With the help of the new addition to its Limitorque product line, its revenue is expected to rise to $4.91 billion this year and $5.23 billion next year compared to $4.75 billion last year.

On May 23, Flowserve announced an increase in quarterly dividend from $0.36 per share to $0.42 per share, indicating growth of 16.7%. The company has a strong history of returning cash to shareholders in the form of share buybacks and dividends. It has paid a quarterly dividend for the past 23 years, increasing the dividend every year. In the first quarter, it announced the share repurchase plan of $750 million. This includes around $193 million of a previously announced buyback of $1 billion. This additional buyback will uplift its share price in the future.

Navistar agreement and NS4 standard adoption

Navistar International has announced that it will use Cummins’ (NYSE: CMI) Selective Catalytic Reduction, or SCR, after treatment technology for medium duty trucks engines. SCR is a cost effective and fuel efficient technology, which helps in reducing emissions. Navistar has been using Cummins SCR technology in heavy duty trucks and will begin using it for medium duty trucks in order to meet federal emission regulations.

The production of SCR equipped medium duty trucks will commence in the beginning of 2014, and provide around $350 million in new product sales to Cummins in 2014. Navistar’s use of Cummins’ SCR won’t have an immediate impact on EPS, but as the production of medium duty vehicles equipped with SCR increases, an EPS benefit of $0.30 can be expected from 2014 onward.

The adoption of NS4, a Chinese truck emission standard, provides opportunity for Cummins to sell more components in China. Chinese cities like Guangzhou, Beijing, and Shanghai are emphasizing enforcement of NS4 regulation. Zhengzhou has already begun enforcement of this standard this month. The total market in China for medium and heavy trucks with 100% NS4 enforcement is around $2 billion. The expected enforcement rate of NS4 in 2014 is 10%. Cummins’ NS4 market share will be around 50%, and component revenue in China will rise to $200 million this year and $300 million next year compared to $189 million last year.

Conclusion

Cummins agreement with Navistar and NS4 standard adoption in China bodes well for the company’s future.

Trinity’s joint venture of RIV, with restructuring of interest in TRIP Rail holdings provides good prospects for growth in rail leasing services. Further, increasing railcar orders will enhance revenue of its rail group segment.

Flowserve’s new product launch will increase revenue, and capital returning to shareholders will increase investors’ confidence.

All of these stocks are a buy.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. 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!

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