4 Stocks With Industrial Strength Growth
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It certainly seems like the economy is improving. We see on a regular basis the improvement in housing starts, consumer sentiment, and other measures. Hoping for an investment play on a better economy I've written posts in the past about the improvement this should mean in the housing market and the auto industry. However, there is a more fundamental industry that will benefit from a better economy as well, and that is the industrial production industry. It's not hard to understand the correlation. As the economy improves, orders for products improves, and the companies providing the parts for these products benefit. With this in mind, I went to the trusty Fool.com CAPS Screener to find some investment ideas. I didn't want just any industrial company though, I wanted companies that had increased their earnings and revenue at a better than 10% clip over the last few years. Of the several companies the screen returned, the following looked attractive to me: Allegheny Technologies ), Rockwell Automation ), Ametek (NYSE: AME), and Robbins & Myers ).
For those who aren't aware, Allegheny produces high-performance metals of all types. The company counts the industries of aerospace, oil and gas, electrical, medical, automotive, construction, mining, and more as its customers. In short, for investors you buy Allegheny and you get exposure to some of the most basic economically driven industries in one company. The stock appears attractively priced as well with about 17 times forward earnings, with analysts calling for nearly 16% earnings growth in the next few years. In addition, investors get a 2.2% yield while they wait. As proof that this company knows how to grow earnings, consider that over the last three years, the company has increased its net income by over 570% in total. If there are two chinks in the company's armor, it is that they have missed estimates by an average of 11% over the last four quarters, and that their operating cash flow growth has not kept up with net income growth. That being said, if the company can deliver on earnings expectations, investors would be hard pressed to find a better combination of growth and income.
Rockwell is a familiar name to anyone in the manufacturing industry. The company offers automation systems, information solutions, and software to support these systems to the manufacturing industry. In plain English, if you produce something, Rockwell wants to help you be more efficient. Rockwell pays a dividend that is higher than the other companies we will look at, with a yield of about 2.66%. The company's dividend appears fairly well covered with just a 40% free cash flow payout ratio as well. While the company isn't expected to grow quite as fast as some of its competition (11%), analysts could be underestimating the company. In the last four quarters, the company beat expectations by an average of 3% per quarter. In addition, the company's strong balance sheet that shows a net cash position of $83 million should allow Rockwell to perform well in the future.
The one worry about the company has to be their ability to turn net income growth into cash flow growth. Over the last three years, the company's net income has jumped a total of 216%, while operating cash flow only increased by 22% during this time frame. I would normally attribute this to greater capital expenditures, but in the last few years, capex has been relatively flat. If the company can become more cost efficient and drive more cash to the bottom line, this could be an attractive investment.
Ametek is a direct play on the airline industry, though the company also provides instrumentation for the medical, laboratory, and research markets as well. The company's aircraft instruments and displays could be the most important part of the company over the next few years. With Boeing already sitting on a massive backlog of airline orders, Ametek could benefit from this pent up demand. Investors seem to believe the company will deliver on this promise, with the stock trading at about 19 times forward estimates. With analysts calling for about 14% growth, the stock is relatively more expensive than its competition. That being said, the company has beaten expectations in three of the last four quarters, and the company's operating cash flow has increased a total of almost 40% in the last three years.
If there is one thing the company could do to improve the value to shareholders, it would be to grow its dividend. The stock pays a minuscule yield of just 0.68%, and this only required an 8.38% free cash flow payout ratio. If the company expanded its payout ratio to a higher level, the better yield might attract some income investors. A better yield would warrant the higher P/E ratio, but at today's prices, investors would be wise to watch for a dip before buying.
Robbins & Myers:
Robbins & Myers might be the most under appreciated of the group we are examining today. The company produces equipment and systems for virtually every important industry you can think of. With exposure to energy, chemical, pharmaceutical, and oil and gas markets, investors get a diversified bet on an economic recovery. The company at first doesn't seem like much of a value at about 17 times earnings, with just 10% expected EPS growth in the next five years. However, there is more to this story than meets the eye. The company has beaten earnings expectations in four of the last four quarters by an average of 11.38%. In the last three years, the company's net income has grown a total of 142%, and operating cash flow has increased by 94.85%. In addition, the company's strong balance sheet shows $230 million in cash and virtually no long-term debt. While the company's dividend at 0.33% isn't much, the company is only using about 10% of its free cash flow on the payout. With the potential for huge growth in the dividend, better than expected earnings growth, and a solid balance sheet Robbins & Myers could be a winning combination.
Whether you want exposure to multiple industries through Robbins & Myers, or you want a more focused play on the airline industry like Ametek, you can see industrial stocks look like good values. If the economy continues to recover, investors would be wise to keep an eye on each of these companies. You can start by adding one or all four of these companies to your personalized Watchlist to keep up with developments.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.