Analysts have identified buying opportunities in these industrial stocks.
Investors had high hopes for the industrial sector coming into 2022 as the U.S. economy continued to recover from the pandemic. However, high inflation, rising interest rates and ongoing supply chain disruptions have weighed on the industrial sector so far this year. In fact, the Industrial Select Sector SPDR ETF (ticker: XLI) is down 18.4% year to date through July 18. Travel-related industries have been hit particularly hard by the conflict between Russia and Ukraine, while many aerospace and defense stocks have outperformed. Here are 10 of the best industrial stocks to buy and hold in 2022, according to Morningstar analysts.
Honeywell International Inc. (HON)
Honeywell is an industrial conglomerate that specializes in aviation, construction and industrial process automation, and other industrial materials and equipment. Analyst Joshua Aguilar says Honeywell’s solid first-quarter earnings report, which included 13% order growth and 20% long-cycle order growth, is a testament to the company’s ability to execute even in a difficult climate of supply chain disruptions. Aguilar says Honeywell is a top multi-industry stock pick and is on track to generate $36.3 billion in sales and $5 billion in unadjusted free cash flow in 2022. Morningstar has a “buy” rating and $231 fair value estimate for HON stock, which closed at $170.95 on July 18.
Boeing Co. (BA)
Boeing is one of the world’s largest producers of commercial airplanes and one of the biggest U.S. defense contractors. Boeing’s narrow-body business took a hit from the extended grounding of its 737 Max, but analyst Burkett Huey says Boeing shares are attractively valued in 2022. Huey says Boeing’s share of the global narrow-body market will likely fall from around 50% to 40% in coming years, but it should retain its roughly 60% share of the wide-body market, which may not return to peak levels until 2030. Morningstar has a “buy” rating and $239 fair value estimate for BA stock, which closed at $147.72 on July 18.
3M Co. (MMM)
3M is a diversified industrial, health care and consumer product manufacturer. Aguilar says 3M’s first-quarter earnings report was a disappointment, but the stock is attractively valued for long-term investors. Aguilar says 3M’s health care business was the silver lining in the quarter, growing revenue by nearly 3% even as margins contracted. He says there is still significant room for upside in health care given that health care procedures remain about 10% to 15% below pre-pandemic levels. Aguilar says 3M should maintain more than 4% revenue growth in the medium term. Morningstar has a “buy” rating and $186 fair value estimate for MMM stock, which closed at $128.91 on July 18.
General Electric Co. (GE)
General Electric is an industrial conglomerate that specializes in jet engines, gas and wind turbines, and medical scanning and imaging equipment. GE shares are down 37% in the past year, but Aguilar says there is significant valuation upside for patient investors. In 2021, GE announced a plan to break up the company into three distinct, publicly traded companies focused on aviation, health care and energy. Aguilar says the recent management changes GE announced in June are puzzling as the company works through its restructuring and turnaround plan. Morningstar has a “buy” rating and $126 fair value estimate for GE stock, which closed at $63.68 on July 18.
Illinois Tool Works Inc. (ITW)
Illinois Tool Works is a diversified manufacturer serving the industrial and consumer end markets. Aguilar says Illinois Tool is a collection of well-run businesses with strong competitive moats. He says the company’s products are designed to make customers’ businesses less costly to run and more efficient. In addition, Illinois Tool Works’ patents protect it from competition and allow it to charge premium prices that support margins. Aguilar says Illinois Tool will further expand its operating margins as it focuses on its most important customers and most profitable products. Morningstar has a “buy” rating and $205 fair value estimate for ITW stock, which closed at $180.29 on July 18.
Eaton Corp. PLC (ETN)
Eaton is a diversified industrial equipment and parts producer that makes electrical systems and components. Aguilar projects Eaton will organically grow its revenue in the mid-single-digit percentage range or better and expand its operating margins to roughly 21.5% by 2025. In addition, he projects greater than 10% annual earnings per share growth and free cash flow margins in the mid-teen percentage range. Aguilar is bullish on Eaton’s decision to sell its lighting and hydraulics businesses and acquire high-growth power protection and connectivity company Tripp Lite. Morningstar has a “buy” rating and $154 fair value estimate for ETN stock, which closed at $126.88 on July 18.
Emerson Electric Co. (EMR)
Emerson Electric is a diversified global industrial technology company. Aguilar says Emerson is the “undisputed powerhouse” in process manufacturing in the U.S. He says the company is either first or second in market share in a variety of product categories within a $214 billion total addressable market in industrial automation. Emerson has a very large installed base of customers that appreciate its unique expertise, and Aguilar says automation is the best area for manufacturers to invest to potentially increase profits in the long term. Morningstar has a “buy” rating and $113 fair value estimate for EMR stock, which closed at $79.36 on July 18.
Parker-Hannifin Corp. (PH)
Parker-Hannifin produces industrial pneumatic, hydraulic and vacuum motion and control systems. Aguilar says he was pleased with the company’s fiscal third-quarter earnings report in a difficult environment. In fact, amid an environment of rising costs, Parker-Hannifin’s operating margins increased by 1.3% in the quarter. Aguilar says the company is well-run and diversified, operating in a broad range of markets. Its technology also has a high degree of intellectual property protection, limiting competition. Finally, Aguilar is bullish on Parker-Hannifin’s recent acquisitions of Lord, Exotic Metals and Meggitt. Morningstar has a “buy” rating and $325 fair value estimate for PH stock, which closed at $247.76 on July 18.
TransDigm Group Inc. (TDG)
TransDigm designs and produces aircraft parts for manufacturers and commercial and military aircraft operators. Huey says TransDigm will retain pricing power even in an inflationary environment. He says TransDigm has a clear, consistent strategy of acquiring businesses that make proprietary aircraft products. The fact that TransDigm is the only producer of many of its products ensures it will maintain pricing power and financial leverage. Huey says it’s bullish for TransDigm if airlines use their current older fleet of planes to accommodate post-pandemic commercial aviation demand recovery. Morningstar has a “buy” rating and $640 fair value estimate for TDG stock, which closed at $541.70 on July 18.
Cummins Inc. (CMI)
Cummins is a leading manufacturer of truck engines, standby power equipment and industrial filters. Cummins recently announced that Chief Operating Officer Jennifer Rumsey will be taking over as CEO. Analyst Dawit Woldemariam says Cummins is one of the highest-quality investments within the industrial sector. Given its large, experienced management team, Woldemariam says it’s understandable that Cummins would promote one of its internal leaders to fill the CEO vacancy. Woldemariam says Rumsey is well-equipped to guide the company forward, and investors will benefit from Cummins’ strong capital returns. Morningstar has a “buy” rating and $238 fair value estimate for CMI stock, which closed at $197.62 on July 18.
10 best industrial stocks to buy in 2022:
— Honeywell International Inc. (HON)
— Boeing Co. (BA)
— 3M Co. (MMM)
— General Electric Co. (GE)
— Illinois Tool Works Inc. (ITW)
— Eaton Corp. PLC (ETN)
— Emerson Electric Co. (EMR)
— Parker-Hannifin Corp. (PH)
— TransDigm Group Inc. (TDG)
— Cummins Inc. (CMI)
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Update 07/19/22: This story was published at an earlier date and has been updated with new information.