What is your first thought regarding industrial stocks? For the majority, it is the notion of an industry that makes it successful. The industrial sector consists of enterprises that not only run machinery, heavy equipment, and construction materials but also manufacture them. Numerous further enterprises manufacture raw materials. On the other hand, industrial stocks are also regarded as firms that offer services related to those mentioned above.
Some of the largest corporations on the stock market are industrial companies. Major ETFs also invest in companies such as Caterpillar, General Electric, and others. There are other industrial businesses that operate in other industries. When considering how raw materials reach the end-user, travel stocks can also be classified as industrials. Therefore, it is not uncommon to see companies like FedEx in the transportation and industrial sectors.
Types of Industrial Stocks
Like other stock market sectors, industrial stocks can be subdivided into various subindustries. These are the four most critical industrial subsectors:
Capital products. When most people consider industrial stocks, they often consider companies that make heavy machinery. These so-called capital goods industries manufacture the machinery utilized in manufacturing other commodities, including tooling and fabrication equipment, presses, and boilers.
Aerospace and defense. Companies constructing airplanes or producing weapons systems and associated goods for national governments are among the most valuable industrial equities. This subsector also includes firms that manufacture rockets and other equipment for space exploration.
Transportation and distribution. It may sound contradictory, but the most significant industrial stocks are logistics and transportation firms. It is the specialty of airlines, railways, trucking companies, and package delivery services to transport people and things throughout the globe.
Equipment for construction and building materials. Industrial enterprises manufacture the items and machinery required to construct our built environment. This segment of industrial equities includes firms that assist clients in building single-family houses, skyscrapers, highways, or bridges.
Why Should You Consider Industrial Stocks?
Industrial stocks are closely linked to the economy. In a decelerating economy, the industry is an evident engine of expansion and contributor to contraction. This is especially vital to remember if you intend to acquire industrial stocks. In addition, depending on your investment objectives, several of these companies may potentially provide dividends. Price appreciation is unquestionably the product of shareholder value, and a dividend may encourage investors to keep holding industrial equities or purchase more in a down market.
Risks of Investing in Industrial Stocks
Industrial stocks offer numerous benefits, but they can have disadvantages. Before you invest, consider the following risks:
Underperformance during economic downturns. This is the other side of being an excellent investment option during economic expansion. When economic activity slows and enters a recession, orders for industrial businesses fall precipitously, dragging down industrial stocks.
Supply chain difficulties. Industrial firms' goods and services are increasingly reliant on complex supply chains. In the case of transportation and logistics firms, they may be the supply chain itself. As the Covid-19 epidemic has shown, supply chain disruptions may destroy industrial firms.
Variable dividend returns. While certain significant industrial firms provide solid, rising dividends, most industrial payouts are linked to economic fluctuations, much like share price.
1. Waste Management
Waste Management is one of North America's top waste management firms. It provides services for waste collection, transfer, and disposal, as well as recycling and resource recovery. Additionally, the firm is a leader in developing and managing landfill gas-to-energy plants.
Waste Management offers its services to municipal, commercial, industrial, and residential clients. Due to the generally constant need for garbage carrying, its firm is more recession-resistant than other industrial enterprises.
Over the years, Waste Management has spent money to automate its collection truck fleet and convert them to run on cleaner, less expensive natural gas. Such actions have enabled Waste Management to continuously create free cash flow, enabling the company to finance acquisitions. Early in 2022, Waste Management allegedly considered acquiring the recycling company Clean Harbors (NYSE: CLH).
In addition to frequently returning capital to shareholders through dividends and share repurchases, the corporation maintains a solid balance sheet. Waste Management has created tremendous shareholder value over the years due to its strategy of both expanding and rewarding shareholders.
2. Owens Corning
Owens Corning is a worldwide leader in building and construction materials that manufactures glass fiber for composites, insulation, and roofing. O.C. anticipates that demand for its goods will remain robust across all its business divisions in 2022, despite growing inflationary pressures.
Even with increasing inflation, the company situated in Toledo, Ohio, anticipates maintaining good price/cost ratios in all three of its businesses: composites, insulation, and roofing. In the future, it will continue to closely manage the effects of inflation, supply-chain disruptions, and COVID-19's regional effects on its operations.
Several economic elements influence the operations of one of the most significant industrial stocks on Wall Street. Examples are residential repair and renovation, U.S. house starts, worldwide commercial building activity, and global industrial output.
Owens Corning hopes to accelerate its growth and achieve more extraordinary, more stable profits by strengthening its core operations and expanding into new product categories and applications. This will be accomplished by utilizing its market expertise, material scientific understanding, and production capabilities.
"Owens Corning might confront an air pocket in housing in late 2022/early 2023, of a stronger base in demand," Jefferies analysts (Buy) write in a note. "We see pricing holding in 2023 and feel the firm is now better positioned to handle the volatility."
Following O.C.'s record-setting first-quarter revenue, John Lovallo of UBS Global Research boosted the company's profit expectations for 2022 through 2024. In addition, he increased his price objective and reaffirmed his Buy recommendation on the stock.
"We expect the firm will continue to execute and create more than $1 billion in free cash flow annually throughout our forecast period, which can be directed towards strategic expansion and return of capital to shareholders," said Lovallo in a note.
3. Lockheed Martin
Lockheed Martin is a worldwide leader in security and aerospace. It conducts research, designs, develops, and primarily produces sophisticated technology systems, goods, and services for government clients. The primary business segments of the defense contractor are aeronautics, missiles and fire control, rotary and mission systems, and space.
Annually, the corporation invests billions of dollars in research and development (R&D) to enhance cutting-edge defense technologies. It complements its internal R&D effort with acquisitions regularly. The business had wanted to buy Aerojet Rocketdyne (NYSE: AJRD) to provide its clients with improved efficiency, speed, and considerable cost savings. However, the Federal Trade Commission sought to prevent the transaction in 2022, prompting Lockheed Martin to terminate the agreement.
Despite this setback, the defense contractor should continue to expand in the future. As a result of Russia's invasion of Ukraine, more European nations want to increase their defense expenditure, which should improve Lockheed Martin's sales in the future years.
4. Atlas Air Worldwide Holdings
AAWW is included on this list of the finest industrial stocks because of its predicted growth for the remainder of 2022. Significant growth in its worldwide air freight industry resulted from new high-yield, long-term contracts, some of which extend until 2027.
The Purchase, a More York-based aircraft and aviation operational service provider, is adding eight new aircraft to its inventory to accommodate the growth. As a consequence, Atlas anticipates fiscal 2022 revenues of roughly $4.6 billion and adjusted EBITDA of approximately $1 billion. The majority of AAWW's revenue is generated by long-term high-yield contracts and the ad hoc charter market, which are reflected in the company's full-year earnings forecast.
Atlas Air offers three business sectors: ACMI, charter, and dry leasing. Its ACMI business offers aircraft, crew, maintenance, and insurance services. Planeload air cargo and passenger plane charters, including for the United States military, direct shippers, and freight forwarders, are part of the company's charter business. Dry leasing comprises aircraft and engine leasing.
Even while Atlas' worldwide airfreight capacity continues to be capped by the limited number of new freighters entering the market, it is nevertheless higher than before the epidemic.
According to Stifel analyst Frank Galanti, the unusually tight aviation market has pushed contract durations out and prices up (Buy). AAWW's air freight rates are 2.5 times higher than average, allowing the firm to produce about 20% free cash flow returns through 2023, excluding growth capital expenditures.
"We believe there is still upside potential for AAWW shares at present prices based on a still-healthy air cargo market, a much better balance sheet, and a valuation discount to mid-cycle values," Galanti writes, adding, "Atlas Air shares are very close to being a 'Pound The Table' Buy."
5. FedEx
FedEx delivers transportation, e-commerce, and commercial services to its clients. Daily distribution of millions of parcels is facilitated by the company's network of planes and trucks, logistical facilities, and retail outlets. In addition, it provides businesses with various logistics and e-commerce services that facilitate the distribution of their products to customers.
FedEx generates substantial free cash flow. This enables the corporation to pay a rising and competitive dividend. Additionally, it can repay the debt to improve its financial sheet and invest in growing its activities.
The corporation can engage in innovation because of FedEx's robust financial flow. The shipping firm is evaluating delivery services and driverless cars, and it also makes investments connected to sustainability. FedEx aspires to become carbon-neutral by 2040 while delivering attractive profits for its stockholders.
6. Caterpillar
Caterpillar is a global leader in the production of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Construction industries, resource industries, and energy and transportation are the three operational segments of the corporation. In addition, it offers finance and associated services.
Caterpillar is aiming to produce more environmentally friendly machinery. It cooperates with rail, energy, mining, and technology firms to create innovative carbon-efficient solutions. For instance, it works on locomotives fueled by batteries and hydrogen. It is also creating haul trucks and mining equipment with zero emissions. Caterpillar's focus on sustainability will be a significant growth driver in the future years as the global economy continues to make strides in decreasing carbon emissions.
Another significant growth driver for Caterpillar in the following years is the rising infrastructure spending. The United States is among the numerous nations that have increased their expenditures on projects to maintain and build roadway and rail networks, bridges, and other infrastructure. This should increase construction equipment demand.
7. 3M (NYSE: MMM)
3M is one of the world's most diverse industrial businesses. 3M is a crucial participant in the transportation and electronics, technology, health care, and consumer goods industries and the industrial sector.
As a result of this diversification, 3M presently offers tens of thousands of goods to consumers, companies, and municipalities, and the company's innovation is not expected to cease soon. Throughout its existence, the corporation has reinvested around 30 percent of its free cash flow and borrowing capacity in research and development.
Due to this capital allocation approach, the corporation has done an excellent job of fending off competition. This has enabled 3M to regularly generate significant sales and profit growth and free cash flow, notwithstanding challenging economic conditions. Since the commencement of the COVID-19 epidemic, 3M stock has seen one of the best recoveries among industrial equities, rising more than 55 percent from its mid-crisis lows.
The firm also holds its investors in high regard. Throughout its existence, the company has continuously returned 30 percent of its free cash to investors through rising dividends. 3M has grown its dividend distribution yearly for over half a century, with little indication of stopping. According to YCharts, the stock's average dividend yield for the previous five years has been 2.82 percent, with the current yield resting at 3.03 percent.
In addition, the corporation is well-known for repurchasing its shares and delivering additional value to its stockholders. 3M typically completes accretive acquisitions using the capital not utilized for dividend payments and research and development, increasing the underlying value of a share of the company's stock.
3M is a stock worthy of consideration in light of the company's commitment to its shareholders and solid financial position.
8. General Electric (NYSE: G.E.)
Beginning 2020 was a difficult time for General Electric. As the coronavirus took root, industrial equities suffered losses across the board. Nonetheless, G.E. began to make a big comeback around the close of the year and into the beginning of 2021.
The company's products play a significant part in Boeing's jet engines and gas turbines (B.A.). Due to the perils of getting COVID-19, the travel industry halted, and few people were ready to fly. This is beginning to change as vaccinations become more accessible and customers become more ready to travel.
Despite the global health crisis, G.E. had something going for it: the company's health care division was increasingly active.
G.E. has already profited from the lowering incidence of COVID-19, and this trend is anticipated to continue. Numerous analysts predict that the corporation will resume profitability in early 2021. Analysts anticipate the firm will generate $0.04 per share in the current quarter, with EPS steadily increasing to $0.26 for the entire year this year and $0.52 the following year. This is a long cry from last year's adjusted EPS of $0.01, with the bulk of quarters being negative.
However, it is essential to examine the hazards. Wall Street analysts see the company's aircraft portfolio as its most valuable asset. This aspect of the industry will not fully return until consumers once again feel comfortable flying, which might take some time despite the reduction in COVID-19 case counts.
In addition, American Airlines has lately canceled hundreds of flights due to personnel concerns. These sorts of worries amplify the inherent dangers of investing in anything related to the aviation business.
On the other hand, General Electric is a long-standing firm that has seen its share of difficult times. Even though the problems in the aviation business are cause for concern, the company is executing effectively despite the headwinds, leading to predictions of robust growth in the future.
General Electric is a stock worth examining if you want to invest in industrials and are searching for a stock with the potential for solid growth as the economy continues to recover from the COVID-19 outbreak.
9. Honeywell (NYSE: HON)
Honeywell is another industrial stock that has taken a significant blow because of COVID-19. In contrast to Lockheed Martin, Honeywell had made a tremendous comeback and is presently trading considerably above the bargain prices it was selling at when fear of the virus gripped the market. As of June 2021, the stock has increased by more than 90 percent from its mid-crisis lows.
Honeywell, one of the largest industrial businesses in the world, has a strong presence in the Internet of Things (IoT), aircraft, and cybersecurity, among other areas.
Wall Street analysts consider Honeywell's aerospace division to be the company's most significant division. The company's technology is utilized in all aircraft sectors, including commercial, military, and space flight.
Until recently, because of COVID-19, many fewer consumers were eager to fly, putting a spoke in the aircraft industry's wheel. Even though the firm has made a remarkable comeback to date, there is still ample possibility for expansion when consumers resume travel.
Nevertheless, the company's foundations have stayed solid throughout the epidemic, and its strong balance sheet allowed it to continue paying dividends even during the worst recession. Today, the dividend yield is 1.75 percent, which is even more outstanding when considering the stock's significant increase over the previous year.
Honeywell is a colossal corporation that has reached its current status due to great invention, excellent management, and deep regard and admiration for its investors. Even though the stock has already made a significant comeback from pandemic-related lows, there is still ample possibility for development, given that the aerospace industry has not yet returned to life.
10. AGCO
AGCO ($110.89) is a producer and distributor of agricultural equipment. The company anticipates that the backlog of orders for its tractors, combines, seeding, and tillage equipment, and associated replacement components will result in remarkable revenues through 2022. This is the effect of global supply chain disruptions.
In the first three months of 2022, the Duluth, Georgia-based manufacturer's retail sales of small tractors in the U.S. were lower than during the same time in 2021.
In North America, increased commodity prices and optimistic farmer morale are anticipated to boost sales in 2022. Moreover, the decline in demand for smaller equipment after several years of robust expansion will likely be compensated by an increase in demand to replace an aging fleet of larger machines. AGCO anticipates a 5 to 10 percent increase in North American Industry unit sales this year compared to 2021.
AGCO's results are highly dependent on its supply-chain performance in 2022. They could be impacted if actual supply-chain delivery performance differs from estimates, according to Andy Beck, AGCO's chief financial officer, in a recent earnings call with investors.
On the same conference call, AGCO CEO Eric Hansotia stated, "We are experiencing supplier constraints and delays in all areas and anticipate major problems in the next quarters as we seek to fulfill forecasted increases in end-market demand." The uncertain supply chain environment still necessitates that we maintain above-average raw material and work-in-progress inventory levels.
AGCO anticipates that its raw material and work-in-process inventories will stay elevated during 2022, which will aid the firm in navigating the challenging supply chain environment. It is anticipated that production hours will increase between 5 and 10 percent in 2022 compared to 2021.
The analyst at Oppenheimer, Kristen Owen (Outperform), is heartened by the fact that end-user demand for AGCO remains robust while the company's extended order boards give runway through 2023. Moreover, strengthening global agriculture fundamentals supports revenue growth of +13 percent in 2022 and growth in the low single digits in 2023.
Owens states, "We believe AGCO is ideally positioned to capitalize on the secular trends of digitalization, automation, and autonomy emerging in agriculture." We think AGCO is successfully using its technology investments to create a consistent source of incremental value through O.E. integration and aftermarket capture, driving enhanced cross-cycle margins.
The most formidable industrial firms have diverse activities, minimal operating expenses, and investment-grade credit ratings. Because of the industry's cyclical nature, diversification, a low-cost structure, and access to affordable loans are vital. Economic recessions diminish the demand for industrial goods and services directly.
Because their activities are sometimes capital-intensive, industrial enterprises must also have access to affordable finance. To purchase new capital equipment and construct new manufacturing facilities, most industrial firms must borrow money. Another advantage of a low-cost structure is less vulnerability to inflationary cost pressures.
While most investors care about a company's bottom line, industrial companies have even more stringent requirements when it comes to their financial health. Prospective investors should pay close attention to how critical industrial companies fared throughout the crisis.
Final Thoughts
The industrial sector first contributed to the growth of the U.S. economy and continues to do so today. In addition, the sector's rise has resulted in fantastic investment opportunities throughout time.
However, if you intend to invest in industrial companies, you must keep in mind the cyclical character of the industry. Investing in firms that supply items in other industries or produce goods for the government might help mitigate the risks associated with cyclical bets.
As industrial businesses continue their robust recoveries, interesting possibilities begin to appear in the sector. As vaccinations and cures become accessible and the pandemic becomes a thing of the past, the industrial sector will likely see a robust rebound, suggesting that now is the time to investigate prospects in the industry.
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