American industry is picking up steam.
The U.S. economy expanded by 3.1 percent in the first half of 2018, driven by $1.5 trillion in tax cuts, and August consumer confidence was at its highest level since 2000. The U.S. economy is booming, and industrial stocks are reaping the benefits. Not only have industrial stocks been on the rise in 2018, their earnings multiples have been expanding. Many of these industrial stocks provide value, dividend yield and relative stability in an expensive and volatile market. Here’s a look at eight industrial stocks Bank of America likes in a red-hot U.S. economy.
3M Co. (ticker: MMM)
3M is one of the pillars of modern U.S. industry and manufacturing. 3M holds more than 500 patents, and its popular brands include Scotch, Post-It and Thinsulate. Bank of America analyst Andrew Obin says Wall Street will likely appreciate new 3M CEO Mike Roman’s direct communication style, which should help with investor transparency. MMM stock offers an opportunity to capitalize on the hot economy while also providing a relatively safe, diversified and cycle-resistant holding for long-term investors. Bank of America has a “buy” rating and $255 price target for MMM stock.
Allegion was spun off from Ingersoll-Rand (IR) in 2013, and Obin says the security products and solutions leader is a better value these days than its parent company. Allegion specializes in security features such as locks, opening and closing devices and access control electronics. Obin is forecasting both full-year revenue growth and earnings per share growth above 13 percent for Allegion in 2018, making the company one of the highest-growth multi-industry stocks Bank of America covers. Bank of America has a “buy” rating and $102 price target for ALLE stock.
Ametek operates an electromechanical segment that focuses on motor products, and an electronic instruments segment that is devoted primarily to measurement instrumentation. Historically, Ametek’s growth strategy has relied heavily on mergers and acquisitions, such as its recently announced $95 million buyout of camera monitor systems company Motec. Obin says Ametek’s track record demonstrates it is disciplined with its acquisitions, a strategy he expects will continue to drive double-digit EPS growth in 2019. Bank of America has a “buy” rating and a $91 price target for AME stock.
Dover Corp. (DOV)
Dover operates three segments: engineered systems, fluids and refrigeration and food equipment. The company’s new CEO Rich Tobin recently acknowledged that Dover management has had a difficult time estimating demand for its refrigeration business, resulting in inconsistent quarterly numbers. However, Obin says Tobin’s more realistic outlook will help generate more reliable guidance, and the company plans to update investors on its restructuring plan and long-term strategy. That clarity could result in earnings multiple expansion for the stock. Bank of America has a “buy” rating and $95 price target for DOV stock.
Eaton Corp. (ETN)
Eaton manufactures industrial equipment such as power fluid systems, electrical control panels, automotive systems and heavy-duty truck transmissions. Obin says ETN stock currently trades at a valuation discount to its peer group, but it could close the gap if it delivers the double-digit EPS growth he is expecting in 2018 and 2019. With a dividend yield of about 3 percent, Eaton is also one of the highest-yielding dividend stocks among its industrial peers. Bank of America has a “buy” rating and $93 price target for ETN stock.
Emerson Electric Co. (EMR)
Obin says Emerson Electric may be one of the best-positioned companies to take advantage of a surge in industrial automation spending. Following a multi-year restructuring effort, Emerson now generates roughly two-thirds of its revenue from its industrial automation business, and Obin says automation solutions revenue will grow by 8 percent in fiscal 2019. Obin says EMR stock should command a premium earnings multiple thanks to its high-quality management team, its strong growth outlook and its impressive free cash flow generation. Bank of America has a “buy” rating and $82 price target for EMR stock.
Flowserve Corp. (FLS)
Flowserve is a major supplier for the U.S. oil & gas, power and chemical industries and produces equipment such as pumps, valves, seals and automation technology. Obin says Flowserve is a rare pure-play in flow control and is currently the industry gold standard when it comes to pricing and cost controls. With oil prices stabilizing in 2018, Obin says the flow cycle is approaching an inflection point. He estimates Flowserve will grow EPS by 31 percent in 2018 and 41 percent in 2019. Bank of America has a “buy” rating and $58 price target for FLS stock.
Honeywell International (HON)
Honeywell is a diversified manufacturing giant with a core focus on the aerospace industry. It offers investors a unique opportunity given the imminent spin-off of its transportation and homes businesses into two new public companies, a process which Honeywell says it will complete over the next two quarters. Obin says the spin-offs will be a positive catalyst for HON stock given the liability transfer involved in the process, and Honeywell’s remaining core business is gaining steam heading into 2019. Bank of America has a “buy” rating and $185 price target for HON stock.
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