Industrial goods, as boring as they are, have brought a great deal of returns in the past few months; a return of 16.9% within three months and 21.9% in six months. Once I realized how well this sector was performing I immediately went to my portfolio to see if I had any shares in the top companies, if not I needed to buy and get the word out. Below are four stocks that I own and I feel are crown jewels in this sector of the market. With the economy starting to pick up a little bit of steam I believe these stocks are prime for the picking. Below are four industrial goods stocks to buy before it's too late.
Caterpillar Inc. (CAT) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The current market price is $111.75 with a one-year analyst price target of $130.06. This represents a 16.38% upside potential not including its 1.65% dividend yield. At this price CAT still looks undervalued with its PEG of 0.45, a one-year EPS growth rate of 78.22%, and five-year EPS growth rate of 7.42%.
The company's gross margin has been higher than its Industry average for each of the past five years, yet CAT's trailing P/E of 17.4 represents a 5% discount to its five-year average of 18.3. Caterpillar is the industry leader in terms of revenue in various industries such as construction despite the slowdown in the housing market. CAT has strong brand recognition and exceptional international growth. Given Caterpillar's global presence and brand popularity, investors will find the stock as a way to achieve exposure to global economy at a reasonable valuation. Revenues are expected to rise 19% in 2012, following a 41% advance in 2011 attributed to a recovering global economy. CAT has consistently been a great stock returning nearly 100% in the past five years. For the ten years through 2011, CAT recorded compound annual growth rates of 11.4% for revenues and 21.0% for earnings per share. This is a great pick especially for a recovering economy.
Honeywell International Inc. (HON) is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. The current market price is $59.33 with a one-year analyst price target of $64.21. This represents an 8.23% upside potential not including its 2.51% dividend yield. I believe with its PEG of 0.93 and strong balance sheet HON is undervalued and will see a surge in price.
The company's return on equity has been higher than its Industry average for each of the past five years yet its forward P/E of 13.7 represents a 5% discount to its five-year average of 14.3. Lean initiatives, aggressive cost-cutting, and repositioning and restructuring efforts are expected to yield big gains in HON's operating performance ahead. Also, the Sperian acquisition is expected to help Honeywell's ACS business to increase penetration into the safety products market. The company has $4.18B in cash on hand which allows for more merger and acquisition opportunities and the ability to pay its healthy dividend. Over the ten years ending in 2010, sales increased at a compound annual rate of 2.9%, net income from continuing operations by 2.0%, earnings per share by 2.4%, and dividends per share by 4.9%. This stock is healthy and has yet to see its peak. This stock is a great addition to any portfolio especially during a recovering economy.
Deere & Company, (DE) together with its subsidiaries operates in three business segments: agriculture and turf, construction and forestry and credit. The current market price is $87.55 with a one-year analyst price target of $93. This represents a 6.23% upside potential not including its dividend yield of 1.87%. I believe there are several reasons why this stock is a great buy at its current price one being its PEG of 0.83 hinting at its undervalued price per share.
Based on trailing P/E, DE currently trades at a 53% discount to its Heavy Machinery & Vehicles Industry peers. Despite trading at such a discount the company is the largest manufacturer/distributor of agricultural equipment worldwide. DE is focused on utilizing strong cash flow for share repurchase and its ongoing emphasis on precise asset management has continuously produced solid results. The rapidly growing commercial ground equipment, irrigation products, and wholesale nursery operations along with DE's expansion in the "do it yourself" retail channel, offer further growth potential. Deere has a 52.34% one-year earnings per share growth rate and a five-year earnings per share growth rate of 16.55%. For the nine years ending in fiscal year 2011, DE recorded compound annual growth rates of 9.7% for revenues and 29% for earnings per share. Given the cyclical nature of its business, these are outstanding returns and the company should see these numbers increase dramatically if the global economy does turnaround. Demand for construction equipment has shown positive signs in recent periods and I feel these trends will continue throughout the year, but even if they don't, Deere has proven that it's able to have steady growth in a boom or bust economy.
Cummins Inc. (CMI) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust after treatment, fuel systems, controls and air handling systems. The current market price is $120.3 with a one-year analyst price target of $132.93. This represents a 10.5% upside potential not including its 1.33% dividend yield. With a 52-week price change of only 5.95% I believe this company is highly undervalued especially given its 0.7 PEG. One-year earnings per share growth rate is 80.95% and five year earnings per share growth rate is 21.88%
CMI's current forward PEG of 0.7 represents a 52% discount to its Heavy Machinery & Vehicles Industry average and based on Trailing P/E, CMI currently trades at a 50% discount. Cummins is a cash-rich company with $1.76B cash on its books and only $600M in debt. This stock has a five-star S&P rating and a return of over 350% since 2009 with no signs of a slowdown. Revenues are expected to rise about 11% in 2012 after a 36% increase in 2011. Truck sales are off to a good start for 2012 and are expected to attribute to Cummins increase for the year. In the ten years through 2011 revenues grew at a compound annual growth rate of 11.9%, EBIT at 47%, and net income at 37%. In 2011, revenues increased 36%, EBIT rose 65%, and net income increased 78%. For 2012, CMI has announced a target of 10% revenue growth with a 14.5%-15% EBIT margin. I believe these targets will be easily reached this year bringing further attention to this stock. I believe right now is the time to buy before the global economy picks up. This stock is up over 350% since 2009, and I believe could see another 100% rise on growing global demand.