UBS Investment Research recently published a report entitled “U.S. Research” on December 30, 2011. It isn’t publicly available but we will summarize its main points. The report lists their top stock ideas for 2012. In this article, we will discuss their most-preferred stock ideas for the Industrial sector. This is the second of two articles (read Part I).
General Electric Co. (GE) operates as a technology, service and finance company on a global scale. UBS has given the company a buy rating because it believes that General Electric’s risk/reward profile is the best in the multi-industry space. The company’s industrial equipment and finance businesses are recovering from lows and UBS is optimistic about the company’s growth potential. UBS also expects the company to post double digit earnings per share growth due to the recovery of key equipment end markets. The biggest catalyst for 2012 will be the reinstatement of GE Capital’s dividend to the parent company, resulting in the growth of dividends and share repurchase programs. Shares of General Electric are currently trading at $18.7 per share and are expected to reach a price target of $20 per share. According to UBS, General Electric has the highest dividend yield among its peers at 4%. Warren Buffett had $118 million invested in GE at the end of September.
KBR, Inc. (KBR) operates as an engineering, construction and services company. UBS has given the company a buy rating. It believes that KBR is in a good position for backlog growth in 2012 which will help the company attain significant earnings in 2013. This growth will be driven by projects in LNG, refining, power, mining, and other upstream projects. KBR’s excess cash flow has enabled it to buy back shares, to be involved in accretive acquisitions, and to give out dividends. Shares of the company are currently trading at $28.6 per share and are expected to go north of $42.
Toll Brothers (TOL) designs, builds, markets, and arranges finance for homes. UBS has given the company a buy rating and it has been picked as the best stock among homebuilders. The company has strong liquidity and cash flow. The company owns land in premier locations and the management of Toll Brothers is focused on profitability. Shares of the company are currently trading at $21.7 per share and are expected to reach a price target of $25. The company returned 8.5% in 2011.
Deere & Co. (DE) provides products and services for the agriculture and forestry sectors on a global scale. Deere & Co. has been given a buy rating by UBS. The company is likely to be a beneficiary of the North American agriculture demand in 2012, coupled with an increase in demand for construction equipment. UBS expects the company to generate higher earnings per share, increase revenue by gaining market share, and strengthen its commodity prices. Shares of Deere & Co are currently trading at $82.3 per share and are expected to go north of $110. Ken Fisher’s Fisher Asset Management had $340 million in Deere at the end of the third quarter.
International Paper (IP) is a paper and packaging company. UBS has given the company a buy rating due to its ability to generate free-cash-flow and attain high dividend yields. Despite the macro uncertainty, the entire sector is expected to perform well. International Paper has a lot of beneficial catalysts in the near future, including its acquisition of Temple-Inland, expansions in China and Russia, and setting high targets for profit growth. Shares of the company are currently trading at $30.9 and are expected to reach a price target of $43 per share. The company has a dividend yield of around 4% and it generated returns of 8.8% in 2011. David Tepper’s Appaloosa Management had $77 million invested in International Paper at the end of September.
Actuant Corporation (ATU) designs, manufactures and distributes industrial products and systems. UBS has given the company a buy rating and picked it as the most-preferred stock in the small/mid cap industrial market segment. Organic and inorganic growth is supported by the core Enerpac hydraulic tools business, which is able to generate strong free-cash-flow. UBS also expects the Electric business to gain momentum in 2012. Actuant Corporation has a healthy balance sheet also. Shares of the company are currently trading around $23 per share and are expected to reach a price target of $26. This price target has been generated by giving the base case a weightage of 75% and the recession case a weightage of 25%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.