Industrial Stocks: Enough Upside To Justify The Risk?

Includes: CAT, CMI, DD, DE, JOY
by: Insider Monkey

By Mark Jones

Cummins (NYSE:CMI) announced earnings last week, beating the Street's $1.74 per share estimate by 26 cents; the company hasn't missed earnings since April 2009. Shareholders earned over 19% in 2012 and the stock is up around 7% already in 2013. Sellers have pushed the stock under $100 a few times in the past two years; now that shares are holding above this price level, I don't think we'll have to worry about that anytime again soon.

Generally speaking, industrial stocks are a solid part of any investor's portfolio because prices tend to follow broader economic conditions. During economic slumps, a lot of industrial-based businesses present good long-term investing opportunities. I think that many companies in this sector currently offer a favorable risk/reward relationship to investors; let's take a look at some industrial stocks that might be worth buying for the remainder of 2013.

Cummins, Caterpillar (NYSE:CAT), E.I. du Pont de Nemours (NYSE:DD), Joy Global Inc. (NYSE:JOY), and Deere & Company (NYSE:DE) are all fairly comparable major players in this sector.


Continuing with Cummins, the company designs, manufactures, distributes and services diesel and natural gas engines, along with engine-related component products (fuel systems, filtration, power generation, etc.). In the long run, Cummins stands to benefit from tighter emission laws around the world - the manufacturing and consumption process for diesel is widely regarded as being friendlier to Mother Nature than gasoline.

It's reasonable to expect the world's developed economies to establish stricter environmental regulations over time, and Cummins stands to thrive from this trend. The company's stock had an impressive performance in 2012, and there's obvious upside here over the longer term.


Caterpillar manufactures construction equipment, diesel and natural gas engines, gas turbines, and other industrial machining products. Most popularly known for its construction equipment, Caterpillar's success clearly depends on a positive macroeconomic environment.

The company's 4Q 2012 earnings results came in at $1.04, far below $2.32 from 2011. This decline was in large part due to a write down from the purchase of Zhengzhou Siwei, a manufacturer of equipment for metallurgy, aviation and engineering applications. The related purchase had an 87-cent per share impact in the past quarter.

On the bright side, sales still grew 9.5% year over year, and top line has grown at an annual rate of 26.7% over the past three years. Similarly, net income rose close to 15% in 2012, and grew at a rate of 85% over the same period.

Interestingly, Caterpillar's share price still closed nearly 2% higher the day after earnings were announced, as investors weren't too concerned with bottom-line declination because Caterpillar still beat revenue and profit estimates. The stock fell a little over 3% during 2012, but it's still up around 115% since the beginning of 2009. CAT is a favorite of hedge fund managers Louis Bacon and Ray Dalio (see Dalio's full equity portfolio here).

E.I. du Pont de Nemours

E.I. du Pont de Nemours is a major basic materials producer. It reported earnings of $0.11 per share in January, beating analysts' estimates by about 28%. Revenue and net income have been fairly stable over recent years, but the company still received a key downgrade after its recent earnings report (see the details here). Concern over weak numbers in solar panel and chemical sales, plus a sharp decline in 4Q 2012 profit over 4Q 2011, among other factors, pushed UBS to cut its price target down to $51.

Despite this news, you should still keep DuPont on your radar. The stock offers a 3.60% dividend yield, so even though it saw a slight decline in price last year, investors still profited from their investment. Plus, considering that analysts are cutting their expectations for DuPont, even slight signs of improvement could lead to an unexpected appreciation. Though its P/E ratio near 16x is a little high, this multiple is still below the chemical sector's average of 17.4x.

Joy Global

Joy Global, meanwhile, saw its stock fall about 20% in 2012 and it's currently 40% off of 2011-era highs. Still, last year's revenue was 28.6% higher than 2011, net income was 21% higher, and EBITDA came in 32.6% higher. Joy trades near 9 times earnings, so I can't help but wonder if this stock might be presenting a good entry opportunity for a value play.

Joy is in the business of manufacturing and servicing mining equipment. The company's equipment is used to extract iron ore, copper, coal and other minerals. Joy produces and offers electric mining shovels, drills, wheel loaders, logistics support services, training and more, making it another great play on macroeconomic development. Manufacturers will need more iron, gold, copper and other minerals to produce goods and services. As demand for those products increases over the long, long run, more minerals will be needed, and Joy is poised to benefit from this chain of logic.

Deere & Company

Deere & Company produces farm and construction equipment and is most popularly known for its agriculture and turf equipment. The company's stock price suffered during the recession, falling from over $90 down to under $25 a pop. Prices recovered to nearly $100 a share in 2011, and currently trade near the $90 mark. Deere rose over 6% in 2012 and currently trades up over 5% year-to-date. 4Q 2012 earnings will be announced February 13, with analysts looking for an EPS of $1.41.

It's important to track hedge fund sentiment (see how to capitalize on this strategy), so investors must realize that Deere was the smart money's second favorite industrials investment at the end of the last 13F filing period, behind Thermo Fisher Scientific (NYSE:TMO). Some of the biggest Deere bulls include Steven Cohen and Warren Buffett (check out the rest of Buffett's portfolio).

Playing with the industrial sector isn't easy during periods of economic uncertainty. Many of these stocks already bottomed out in 2008 and have drifted back to old price levels, so it's tough to say which ones are more likely to be undervalued or overvalued. I personally like all of these companies and would be willing to purchase any of the stocks mentioned in this article. At the very least, I plan to purchase an ETF that is exposed to these stocks in the eventual future because I think the industrial sector will continue to expand over the coming years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Mark Jones, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.