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The ISM Manufacturing Index rebounded to 50.9 in June, indicating that manufacturing activity and the economy are undergoing expansion (a number below 50 indicates contraction, which is what we saw in the previous months). In addition, the most recent factory orders data have come out better than anticipated. Manufacturing activity picked up in Europe as well, with the U.K. manufacturing index posting a recent high of 52.5 in June.

Let's take a look at top picks in the Industrial sector, using criteria such as earnings growth, revenue growth, cash flow growth, and profit margins.

The Picks

In the machinery industry, companies like Manitowoc Company, Inc. (MTW), Trinity Industries, Inc. (TRN), Cummins, Inc. (CMI), and Flowserve Corporation (FLS) hold a good future in the long term. Domestic construction spending in the United States continue to make new recent highs, as construction activities pick up speed in both public and private sectors. USG Corporation (USG) and United Rentals (URI) are two companies that continue to enjoy the favorable construction environment.

Let's take a look at the key metrics of these top industrial picks that have the potential to create lots of profits in the coming quarters.

  1. Manitowoc Company, Inc. ($18.43 as of July 2, 2013)

    MTW - 1 yearManitowoc designs, manufactures and sells cranes and crane-related products as well as food service equipment worldwide. More than 60% of its sales come from the cranes segment. As the economic activity increases globally and construction spending increases along with it, Manitowoc is poised to grow significantly in next few years.

    The company's EPS grew by 152.94% in the trailing 12 months (or TTM), as compared to the prior TTM. In addition, the projected EPS growth for the next year relative to this year is anticipated to be 44.83%. The profit margins for the company are impressive as well, with TTM EBITD margin at 10.27% and TTM Gross Margin at 25.75%.

  2. Trinity Industries, Inc. ($36.46 as of July 2, 2013)

    TRN - 1 yearTrinity Industries provides products and services to the industrial, energy, transportation, and construction sectors in the North American region, Mexico, U.K., Singapore and Sweden.

    Trinity's TTM EPS growth has been 60.56% as compared prior TTM, and its next year's EPS is projected to grow by 11.75% compared to the current fiscal year. The company's sales have rose by 14.46% in the past 12 months as well. The company's profit margins are high as well: TTM Gross Margin at 26.67%, TTM EBITD Margin at 20.41%, and TTM Operating Margin at 15.31%.

  3. Cummins, Inc. ($110.20 as of July 2, 2013)

    CMI - 1 YearCummins makes engines, electric power generation systems and engine related components that address industrial, construction and highway equipment. I have been in and out of this stock couple of times since the last year, and have written about it as well.

    The company is projected to grow its EPS next year by 21.46%, and EPS growth in the last five years has been an impressive 18.57%. The company has also grown its cash flows at the rate of 14.24% in the past five years.

    Cummins has shown high profit margins as well, with Gross Margin at 27.84%, EBITD Margin at 12.52%, and Operating Margin at 10.29% (all on a trailing 12 months basis).

  4. Flowserve Corporation ($54.33 as of July 2, 2013)

    FLS - 1 yearFlowserve Corporation is a machinery company that designs, manufactures, distributes and provides service for industrial flow management equipment. It is a solid growth company that has enjoyed an average earnings growth of about 13.79% in the past five years. EPS growth in the last quarter (compared to same quarter in the previous year) was 18.94%, and on a trailing 12 month basis, the EPS growth was 16.67%. For the next year, the EPS Growth is projected to be 15.04%.

    Flowserve's cash flows and profit margins have been growing impressively as well. The cash flow growth rate for the last five years has been 10.51%. On a TTM basis, the Gross Profit Margin has been 35.61%, EBITD Margin has been 16.06%, and Operating Margin has been decent 13.87%.

  5. USG Corporation ($23.31 as of July 2, 2013)

    USG - 1 YearUSG Corporation is in a sweet spot in the North American business cycle considering that we are coming out of the deep trough caused by the financial crisis and we have a surge of economic activity ahead of us. USG engages in the manufacture and distribution of building materials worldwide.

    The company's earnings are expected to explode at the growth rate of 207.27% in the next year, and this is after the earnings have steadily grown at the rate of 17.14% in the last five years. On a TTM basis, EPS has grown 17.14% compared to the prior TTM. The company's revenues have been increasing lately (9.52%, TTM), and profit margins have remained high at the same time (TTM Gross Margin at 17.57% and TTM EBITD Margin at 8.33%).

  6. United Rentals ($49.99 as of July 2, 2013)

    1 Year - URIUnited Rentals offers a broad array of many different types of rental equipment that are used heavily in industrial and construction projects. This has been one of my favorite stocks in the past two years. The best thing about this company is that its business is still in the early to middle stages of its business cycle, meaning that there's room for further growth. I have owned and written about United Rentals multiple times at various prices since 2012, and continue to monitor closely to buy it again after taking profits at $55 last month.

    Apart from the top reasons to buy United Rentals that are discussed in this article, we should look at the company's numbers as well. The company's earnings are projected to grow by 21.21% in the next year, the revenue percentage change on TTM basis has been a whopping 66.22%. The company enjoys high profit margins thanks to higher rental rates, with Gross Margin at 56.92%, EBITD Margin at 42.75%, and Operating Margin at 20.39%.

Conclusion

Investing in industrials has risks related to economic expansion and lack thereof. If you choose to invest in any of the above companies, keep a close look at the ISM manufacturing numbers and any readings around economic activity (such as new factory orders or housing starts). You should also look for small pullbacks in these individual stocks and monitor the press releases about them, and "collect" these stocks for the long term and at different price points.

Source: The Second Half Of 2013 - Top Industrial Picks