For the year, U.S. stock market performance has been dominated by health care and consumer discretionary stocks, whereas energy, basic materials and industrial stocks have underperformed the market. As the economy continues to gradually improve, industrials (and in particular manufacturing stocks) should begin to see improved performance as demand for their products and services increases.
The screen. We used Recognia Strategy Builder to search for large U.S. manufacturing companies poised to benefit from an improving U.S. economy.
We began by setting a minimum market cap threshold of $5 billion. We focused on the largest and most stable companies in the market, as they offer the greatest security and will be best able to ride out any unfavorable developments in market conditions.
Next, we looked for companies with strong projected earnings growth. We screened for companies with an earnings-per-share growth rate (projected this year versus last year) of 10 percent or more. In light of the probable increase in U.S. interest rates in the coming year, we also looked for companies with low debt levels as evidenced by their debt-to-equity ratio. Although debt is often necessary to operate and grow a business, it can become a drag on earnings in the event that interest rates rise significantly.
Finally, in order to pick companies with reasonable valuation levels, we specified a forward price-to-earnings ratio of 20 or less. Forward P/E compares the current stock price to the expected earnings for the coming year, based on analyst estimates. This allows us to focus on companies whose stocks are reasonably priced compared to their expected earnings. Here are the results:
Cummins Inc. (ticker: CMI). This is a U.S. Fortune 500 manufacturer of diesel engines and power equipment products. Based in Columbus, Indiana, the company had more than $19 billion of revenue in 2014. Cummins has a very low debt-to-equity ratio of 0.21 and is quite reasonably valued with a forward P/E ratio of just 10.8. At the end of July, the company reported second-quarter quarter results that surpassed analysts’ earnings estimates. With an expected EPS growth rate this year of 33 percent, Cummins is looking very attractive relative to its peers.
Johnson Controls (JCI). The U.S. multinational conglomerate has operations in the automotive, climate control and facility management industries. At the end of July, the company reported second-quarter earnings in line with analysts’ estimates, and revenue was slightly above expectations. In spite of these good results, the stock price has pulled back more than 10 percent since, partly based on overall market conditions and partly based on general weakness in the automotive sector due to the Volkswagen emissions scandal. In light of the company’s expected EPS growth of 28 percent this year, this pullback may be a good entry point into the stock for a patient investor.
Rockwell Automation (ROK). Headquartered in Milwaukee, Rockwell is a supplier of industrial automation products. With a forward P/E of 15.3 and a projected EPS growth rate of 16.1 percent, Rockwell appears well-valued compared to its peers. The company’s stock price has been on the decline since early July and is down almost 20 percent from its 52-week high. This is in spite of good earnings reported on July 29, in which revenue was in line with estimates and earnings beat estimates by 5 cents per share.
3M Co. (MMM). This is the largest company on our list, with a market capitalization exceeding $88 billion. With annual sales of more than $30 billion, 3M produces more than 55,000 products across a variety of industries. The company has a projected EPS growth rate of 15.8 percent and has a low debt level with a debt to equity ratio of just 0.65.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 11.7 percent annualized return compared to 8.4 percent for the Standard & Poor’s 500 index and 10.9 percent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Dynamic Large-Cap Manufacturing Stocks to Buy originally appeared on usnews.com
