The economic slowdown has created buying opportunities in industrial stocks.
Industrial stocks have performed poorly in 2020, and for good reason. The health crisis and subsequent economic shutdown have decimated industrial demand, particularly in travel-related industries. While the S&P 500 is up about 4.7% year to date, the Industrial Select Sector SPDR ETF (ticker: XLI) is down about 5.5%. The good news is the weakness in the economy and the industrial sector has dragged down the share prices of some high-quality companies and created buying opportunities for patient, long-term investors. Here are 10 of the best industrial stocks to buy and hold in 2020, according to Morningstar analysts.
Lockheed Martin Corp. (LMT)
Lockheed Martin is an aerospace and defense giant best known for its F-35 fighter jet contract. Analyst Burkett Huey says Lockheed is the highest-quality stock primarily exposed to the defense industry. He says Lockheed’s second-quarter numbers were solid, given the difficult environment, and the stock is undervalued after dropping about 10% in the last six months. Second-quarter earnings were up 15.8% from a year ago. The F-35 accounts for about 30% of Lockheed’s revenue, and Huey says F-35 spending should be stable for decades. Morningstar has a “buy” rating and $433 fair value estimate for LMT stock.
Raytheon Technologies Corp. (RTX)
Raytheon Technologies is now the third-largest aerospace and defense company in the world following its April merger with United Technologies. Huey says Raytheon’s defense business was resilient in the second quarter, but the pandemic could have a lasting effect on the company’s Pratt & Whitney commercial jet engine manufacturing unit. Fortunately, Pratt & Whitney has no exposure to the disastrous Boeing 737 Max, and Huey says the initial batch of the Pratt & Whitney-powered Airbus A320neos will soon be old enough to start generating significant servicing revenue. Morningstar has a “buy” rating and $78 fair value estimate for RTX stock.
General Electric Co. (GE)
Industrial giant General Electric has been one of the most controversial investments on Wall Street in recent years. After years of underperformance and management missteps, GE appeared to finally be gaining traction in the second half of 2019. Unfortunately, GE shares have been crushed once again by the economic downturn in 2020, but analyst Joshua Aguilar said patient investors have yet another buying opportunity in GE. Aguilar says the downturn has delayed GE’s turnaround story, but the stock is significantly undervalued after dropping about 40% year to date. Morningstar has a “buy” rating and a $9 fair value estimate for GE stock.
General Dynamics Corp. (GD)
General Dynamics is a global aerospace and defense company that ranks among the five largest U.S. defense contractors. Huey says about 75% of General Dynamics’ business comes from long-cycle defense contracts, which has helped support its struggling business jet segment. Huey says the company’s Columbia-class submarine contract is the crown jewel for investors, while the company’s aerospace revenue is likely less vulnerable during this downturn because fewer companies are going bankrupt than in previous recessions. Huey is projecting 3.1% annual revenue growth between 2020 and 2024. Morningstar has a “buy” rating and $185 price target for GD stock.
Southwest Airlines Co. (LUV)
It takes a brave investor to venture into the airline space in 2020, given that air traffic has slowed to a crawl. Southwest Airlines shares are down about 35% year to date, but Huey says the stock is the best positioned among all the major U.S. airline stocks to weather the downturn. Huey is projecting a 60% revenue decline in 2020, but he says the company’s business model is structured to stay profitable even in a lower-fare environment. He says consumers will be comfortable flying again once they have been vaccinated. Morningstar has a “buy” rating and $44 fair value estimate for LUV stock.
Delta Air Lines (DAL)
Like Southwest, Delta Air Lines shares have been hit hard by travel shutdowns because of the pandemic, dropping about 53% year to date. However, Huey says Delta’s frequent flyer program differentiates the airline from its major competitors and will help drive Delta’s long-term recovery. Huey says Delta’s loyalty programs and credit card partnerships have attracted high-yielding business travelers and make Delta the cream of the major airline crop. He is projecting a 70% drop in revenue in 2020 but says Delta’s stock is still undervalued at current levels. Morningstar has a “buy” rating and $42.50 fair value estimate for DAL stock.
Smiths Group (SMGZY)
Smiths Group is a British diversified engineering company that produces mechanical seals, connectors, detection equipment and other products. Analyst Denise Molina says each of Smiths’ four major divisions is worthy of an investment on its own, given that they are all industry-leading niche businesses with impressive margins and cash flow. Smiths recently delayed plans to spin off its medical division, and Molina says its detection division provides the best long-term growth potential. However, 2020 and 2021 earnings will likely be pressured by weak energy-sector spending. Morningstar has a “buy” rating and $23.20 price target for SMGZY stock.
Rolls-Royce Holdings (RYCEY)
Rolls-Royce Motor Cars is now a wholly owned subsidiary of BMW, but Rolls-Royce Holdings designs and produces power systems used in aviation and other industries. Analyst Joachim Kotze says the company has several near-term hurdles, including problems with its Trent 1,000 engines, a corporate restructuring initiative and the ramping up of two wide-body engine programs. However, Kotze says he’s bullish on the stock in the long term because of the quality and the size of the company’s order backlog and the opportunity for recurring service revenue growth. Morningstar has a “buy” rating and $7.80 fair value estimate for RYCEY stock.
HD Supply Holdings (HDS)
HD Supply is one of the largest industrial distributors in North America. HD announced in early August that the company is divesting its White Cap construction and industrial business for $2.9 billion. Analyst Brian Bernard says the price is fair, and HD management plans to use the proceeds to return cash to shareholders, target potential acquisitions and pay down debt. Bernard says HD has a proven track record of growth, generates substantial cash flow and has an opportunity to significantly improve its balance sheet in the near term. Morningstar has a “buy” rating and $46 price target for HDS stock.
Sensata Technologies Holding (ST)
Sensata Technologies manufactures customized sensors and controls. Analyst Brian Colello says Sensata’s business is well-positioned to capitalize on secular growth trends in industrial safety, emissions regulation and efficiency. Colello says the auto market is the company’s largest opportunity for near-term growth. He says Sensata should increase its content per vehicle in coming years, allowing its business to outgrow the auto industry as a whole. Emissions regulations have been a tailwind, and Colello says China’s tire pressure monitoring standards will also provide a growth opportunity. Morningstar has a “buy” rating and $50 fair value estimate for ST stock.
Buying opportunities with these industrial stocks:
— Lockheed Martin Corp. (LMT)
— Raytheon Technologies Corp. (RTX)
— General Electric Co. (GE)
— General Dynamics Corp. (GD)
— Southwest Airlines Co. (LUV)
— Delta Air Lines (DAL)
— Smiths Group (SMGZY)
— Rolls-Royce Holdings (RYCEY)
— HD Supply Holdings (HDS)
— Sensata Technologies Holding (ST)
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