A Selection of US Industrial Companies

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

Since the year started, I have kept a watch-list of US industrial companies. These days I could only find three companies that represented a long opportunity at current market prices.  Here I propose a portfolio composed of these three picks. The three companies combine value and growth, but one of them is especially interesting. Let's take a one-by-one look.

Investing in special situations

NCR (NYSE: NCR) is a leading manufacturer of ATMs, self-service kiosks and POS devices. The company sells its products to the financial, retail, travel, and gaming industries. The company was bought by AT&T in 1991 and spun-off a few years later. With its 10.3% free cash flow (FCF) yield and selling at 2013 8.3x EV/EBITDA, I think NCR trades at a very conservative level.

Besides, it seems that right now may be the right time to start buying NCR shares. Near-term catalysts include: (1) The announcement of the third phase of the pension plan to address the remaining unfunded balance (which could boost FCF by $50 to $70 million in the next two years); and (2) greater than expected synergies from recently purchased Radiant and Retalix.

I believe that current market prices do not reflect NCR's potential earnings upside, nor Radiant and Retalix deal synergies, nor the value of the company's defensive services business.

Gaining market share and growing margins across the board

Wesco International (NYSE: WCC), one of the leading providers of electrical products in America, continues to drive market share gains in the fragmented US electrical distribution market. I am convinced the company is a clear long as the US housing market gains stamina. 

For the first quarter this year, EPS was $1.12, or up 13% year-over-year (yoy) on revenues of $1.81 billion (up 13% yoy). One important factor to stress when looking at Wesco is its constant gross margin expansion. As a matter of fact, for the first quarter, gross margin of 21.1% was up 120 basic points yoy (a record), and well above the company's 20.6% guidance. The recent EECOL acquisition reinforces business momentum, and I would expect the steady gross margin improvement to support a future multiple expansion.

To sum up, I believe Wesco represents a good long idea when trading at 2013 11.8x P/E.

This flying giant seems ready for take-off

I chose Boeing (NYSE: BA) because I feel there is increasingly convincing evidence that the 787 program is starting to work for the company. If the program is finally a success, it could drive Boeing's fundamentals and, henceforth, its stock performance. 

The reason is simple. The 787 program accounted for 40% of Boeing's top-line growth last year and should represent more than 80% of its growth during 2013. Besides, as demand for the 787 is driven primarily by secular rather than cyclical factors, the aircraft will help protect Boeing from the budgetary headwinds threatening other parts of the business (such as defense). To give yourself an idea of how important the 787 program is, keep in mind this figure: there is +$20 billion of working capital to be unlocked from inventory.

Trading at 2013 14x P/E and operating in a business with huge barriers to entry (the company is one of only two suppliers of large commercial aircrafts), I believe it could be the time to start looking at Boeing's shares. 

Bottom line

The three companies named above operate in very different businesses within the industrial sector. That said, they are all trading at fair multiples and facing operational changes that could help boost valuations. 

Boeing operates as a major player in a multi-trillion-dollar market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors and the company's execution problems have investors wondering whether Boeing will live up to its shareholder responsibilities. The Fool's premium research report on the company provides investors with the must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out — simply click here now to claim your copy today.


Federico Zaldua 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!

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