8 Industrial Stocks With Big Upside Potential

By Vinayak on Friday, September 13, 2013 with 1 comment

The industrials stock sector looks like a good place to pick up some bargains right now.
Its members are expected to post by far the strongest second-quarter earnings performance of any sector in the S&P 500, and earnings growth is one trait investors are actively seeking.
S&P has eight industrial stocks rated “strong buy,” its highest rating, and the premiums on their prices to the firm’s 12-month price targets range from 18% to 78%.
The industrials sector is highly diverse, ranging from aerospace and defense conglomerates to temporary employment agencies.
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Industrial’s expected second-quarter earnings performance, a rise of 8.7% over last year, is a standout in an otherwise bleak earnings season compared with the S&P 500 stocks, whose second-quarter earnings per share are expected to decline 1.2% year-over-year on average, according to an S&P Capital IQ review of analysts’ outlooks. If that holds up, “(it) would mark the weakest EPS showing since the second quarter of 2009.”
Only three sectors are seen posting second-quarter EPS year-over-year growth, said S&P, with industrials leading the way followed by information technology at 4.8%, and consumer staples at 1.3%.
On the flip side, materials companies’ EPS are seen falling the most at 13.5% compared with last year in the quarter, followed by energy companies at a decline of 12% and telecommunications by 8.2%, S&P said.
But the share performance of the industrials sector is so far lagging the pack, up an average 4.4% this year versus the S&P 500′s 7.7% gain.
S&P Capital IQ recommends a “market weight” position, “believing the sector’s favorable fundamentals will be restrained by weakening global economic trends and industrial commodity prices as well as bearish technical readings.”
Given that outlook, and the sector’s diversity, any ebullience on industrials is not sector-wide, which means stock picking is in order.
But one example of the outperformance seen by select sector members is that of the bellwether Caterpillar (CAT), the world’s largest maker of construction and mining equipment. On Wednesday, it reported second-quarter profit jumped 67% to a quarterly record, because of growing demand for its construction and mining equipment from the US and Asia. It also boosted its 2012 earnings outlook by 10 cents, to $9.60 per share. That helped its shares pop 1.4% on the day.
Here then are the eight industrials sector stocks rated “strong buy” by S&P, presented in inverse order of their potential share-price upside versus S&P’s price target:

8 Industrial Stocks With Big Upside Potential



8. A.O. Smith (AOS)
Company profile: A.O. Smith, with a market value of $2 billion, is a manufacturer of water heating equipment and electric motors for the residential, commercial and industrial markets.
Dividend Yield: 1.5%
Investor takeaway: Its shares are up 26% this year and have a three-year, average annual return of 25%. Analysts give its shares four “buy” ratings, two “buy/holds,” and seven “holds,” according to a survey of analysts by S&P. S&P has a $60 price target on its shares, which is an 18% premium to the current price.

7. Flowserve (FLS)
Company profile: Flowserve, with a market value of $6 billion, is a manufacturer of industrial pumps and related equipment for the chemical, oil and gas and power industries.
Dividend Yield: 1.28%
Investor takeaway: Its shares are up 11.4% this year and have a three-year, average annual return of 15%. Analysts give its shares 10 “buy” ratings, two “buy/holds,” and one “hold,” according to a survey of analysts by S&P. S&P has a $145 price target on its shares, which is a 29% premium to the current price.

6. Federal Express (FDX)
Company profile: Federal Express, with a market value of $28 billion, provides domestic and international air express, residential and business ground package and freight delivery and logistics services worldwide.
Dividend Yield: 0.62%
Investor takeaway: Its shares are up 5.3% this year and have a three-year, average annual return of 11%. Analysts give its shares 15 “buy” ratings, six “buy/holds,” and six “holds,” according to a survey of analysts by S&P. S&P has a $122 price target on its shares, which is a 36% premium to the current price. It has a price-to-earnings ratio of 14, the lowest of its peers.

5. Fastenal (FAST)
Company profile: Fastenal, with a market value of $13 billion, provides building industry and industrial customers with all types of fasteners such as nails and screws as well as general-purpose maintenance, repair, and operations items. With more than 2,600 store and distribution locations, it generated $2.8 billion in revenue in 2011. Its results are closely tied to that of the construction industry.
Dividend Yield: 1.7%
Investor takeaway: Its shares are down 1% this year, but have a 10-year, average annual return of 18%. Analysts give its shares two “buy” ratings, nine “holds,” and two “weak holds,” according to a survey of analysts by S&P.
S&P has a $60 price target on its shares, which is a 40% premium to its current price. For fiscal year 2012, analysts estimate it will earn $1.44 per share, including 37 cents in the second quarter, which is up 19% over last year. It’s expected to grow annual earnings by 19%, to $1.71 per share, in 2013.

4. Cummins (CMI)
Company profile: Cummins, with a market value of $17 billion, designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products worldwide.
Dividend Yield: 1.67%

Investor takeaway: Its shares are down 0.4% this year but have a 10-year average annual return of 29%. S&P’s year-end price target is $152, a 44% premium to the current price. Analysts give its shares six “buy” ratings, three “weak holds,” and nine “holds,” according to a survey of analysts by S&P.

3. Textron (TXT)
Company profile: Textron, with a market value of $7 billion, is an aerospace and industrial conglomerate that makes Cessna business jets, Bell helicopters, and industrial and military equipment and components. It also operates a commercial finance company.

Category: Stocks

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