3 Industrial Stocks to Buy

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

The financial sector displayed the most growth in 2012. However, for 2013, the experts predict that Industrials will be the sector of the year, given expected growth in the developing economies. Therefore, I have shortlisted some stocks from this space that are expected to bring capital gains to investors.

Boeing (NYSE: BA)

I have always liked Boeing, especially after James McNerney took over the reins last year. I have always felt that the stock was overly punished for its slower than expected production rate over the year. This is why the stock hardly moves despite winning billions of dollars of orders, since investors do not trust Boeing’s capability of producing the ordered jets on time.

In late 2012, the stock saw a dip because of the famous battery issues of one of its ‘most controversial’ jets, the 787 Dreamliner. However, after lagging the broader market and its aerospace peers, the stock has shrugged early-year concerns regarding the 787 battery and is  up 12% since the start of March. This shows that investors are finally turning their attention away from the battery issue and potential SPEEA labor strike and focusing more on Boeing’s long-term top and bottom-line growth story.

Pent up demand for Boeing stock is expected to rise as Federal Aviation Authority approves Boeing’s lithium-ion battery system as safe for airlines worldwide. Putting all of this together, the stock is poised to go up on higher earnings visibility in the near future, strong cash flows and attractive valuations.

Sensata Technologies (NYSE: ST)

The manufacturer of sensors and controls is currently viewed as another favorite stock in the industrials space for a couple of reasons:

1) Below peer valuation;

2) The recent pullback in the stock has made it an attractive investment.

It is interesting to note ST is one of the very few growth stories in the industrial sector that are trading below the sector’s average. The recent surge in car sales and expected continued growth in the auto sector for the next five years or so seem to be promising for the manufacturer of sensors. It is interesting to note that ST sits on a large pile of cash, and in case the company decides to reinvest cash through M&A (which has not happened for the past 12 months), the stock is set to go higher.

Cummins (NYSE: CMI)

Cummins has been one of the top picks by the Street this year as the company is poised to benefit from its strong position in North American truck markets and improvements in Brazilian truck markets. Also, the Street continues to expect modest sequential improvements from 4Q12 levels in North American Class 8 builds and to see good support for resilient medium duty demand given modest economic growth and signs of ongoing improvement in markets such as residential construction.

Cummins is expected to make incremental revenues from Navistar’s adoption of ISX15 engines (made by Cummins) for some of its North American heavy duty trucks and Navistar’s adoption of emissions control components (that too made by Cummins) across its North American heavy duty truck range.

Outside of North America, Cummins’ end markets seem to be more mixed, although expectations regarding Cummins’ international businesses are generally more muted. However, Brazil truck markets could improve through 2013 as economic growth in the market continues to crawl back and as Brazil moves beyond the Euro 5 emissions transition, which impacted demand patterns in 2012. While China remains somewhat of an overhang, the company’s Chinese construction end market has largely bottomed, and although it is too early to gauge the magnitude of any potential recovery, it seems that investors are not expecting a significant acceleration in Chinese construction machinery demand. Similarly, while the company could see some modest improvements in its Chinese truck end markets, here too, expectations remain relatively muted.

Foolish Bottom Line

Apart from the commonality that all three stocks belong to the industrials sectors, another theme followed by these stocks is that all three of them, Boeing, Sensata and Cummins, are expected to outgrow the markets in a slow growth environment through secular growth.

 


Zain Abbas 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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