Valuation Dashboard: Industrials - Update

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Includes: BA, CHRW, DAL, DE, ENS, FAST, FLR, GBX, HII, MAN, PBI, RSG, RTN, SPY, TXT, UAL, XLI
by: Fred Piard

Summary

Four key fundamental factors across industries in the Industrial sector.

A valuation status relative to history.

A reference for picking stocks in each industry.

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers Industrials. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion.

Methodology

  • Four industry factors are calculated: Price/Earnings (P/E), Price to Sales (P/S), Price to Free Cash Flow (P/FCF), Return on Equity (ROE). The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.
  • They are compared with their own historical averages. The difference is measured in percentage for valuation ratios and in absolute for ROE. For valuation factors, it can be interpreted as a percentage in under-pricing relative to a historical baseline. It points to over-pricing when negative. In all cases, including ROE, the higher the better.

Industry Valuation Table On 2/14/2016

The next table reports the four industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference between the historical average and the current value. So there are three columns relative to P/E, and also three for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Aerospace & Defense

18.08

18.02

-0.33%

0.98

1.02

3.92%

18.81

21.28

11.61%

7.66

9

-1.34

Building Products

22.17

20.14

-10.08%

1.09

0.64

-70.31%

24.48

22.38

-9.38%

11.75

6.07

5.68

Construction & Engineering

19.09

18.3

-4.32%

0.35

0.48

27.08%

17.63

19.81

11.00%

2.65

5.98

-3.33

Elec. Equipment

17.69

18.31

3.39%

1.3

1.64

20.73%

22.41

21.88

-2.42%

-7.17

-3.3

-3.87

Ind. Conglomerates

49.11

20.45

-140.15%

2.5

1.3

-92.31%

29.7

29.98

0.93%

5.98

12.12

-6.14

Machinery

16.43

18.25

9.97%

0.95

0.9

-5.56%

22.63

21.81

-3.76%

9.36

8.72

0.64

Trading Companies & Distri

12.98

17.14

24.27%

0.49

0.7

30.00%

10.48

25

58.08%

8.54

8.61

-0.07

Commercial Services & Supplies

18.93

20.86

9.25%

0.93

1.03

9.71%

20.56

19.84

-3.63%

2.89

3.99

-1.1

Professional Services*

20.48

24.04

14.81%

1.4

1.22

-14.75%

19.12

17.43

-9.70%

7.19

3.09

4.1

AirFreight & Logistics

19.96

21.06

5.22%

0.7

0.57

-22.81%

18.31

32.87

44.30%

13.58

11.12

2.46

Airlines

8.56

15.18

43.61%

0.83

0.41

-102.44%

16.69

12.37

-34.92%

37.62

3

34.62

Marine**

10.5

14.04

25.21%

0.46

1.41

67.38%

19.31

23.27

17.02%

-11.78

6.05

-17.83

Road & Rail

14.51

19.17

24.31%

1.12

0.86

-30.23%

28.25

36.17

21.90%

16.52

9.43

7.09

Transport Infrastructure**

6.75

23.6

71.40%

0.88

1.19

26.05%

4.82

20.8

76.83%

-1.04

-3.22

2.18

Click to enlarge

*Professional Services: Avg since 2008.

**Factors may vary a lot for some industries with a low number of stocks or a lot of outliers.

Valuation

The following charts give an idea of the current status of industries relative to their historical average. The higher the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) with the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) (chart from freestockcharts.com):

Click to enlarge

Conclusion

Industrials have outperformed the broad market by about 2% in the last three months. The five S&P 500 industrial companies with the best momentum on this period are C.H. Robinson Worldwide Inc. (NASDAQ:CHRW), Deere & Co. (NYSE:DE), Fastenal Co. (NASDAQ:FAST), Republic Services, Inc. (NYSE:RSG), Raytheon Co. (NYSE:RTN). RSG and RTN are the closest to an all-time high (respectively 2% and 7%).

Since last month, valuation factors are better or stable for most industries except a sharp deterioration for Conglomerates and a more moderate one for Commercial Services, Marine, Road/Rail and Transport Infrastructure.

Trading Companies and Transport Infrastructure are the only industries with the three valuation ratios pointing to underpricing and an ROE above historical averages. Conglomerates are the most overpriced and also below the historical average in ROE. The Marine industry still looks like a value trap, with good valuation ratios and a very bad ROE (note of caution: the small number of stocks in this group makes it more sensitive to outliers).

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Industrial sector. They are all cheaper than their respective industry for three valuation factors simultaneously: Price/Earnings, Price/Sales, and Price/Free Cash Flow. Then, they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return about 13% and a drawdown about -71% for a 17-year back test. The sector ETF XLI has an annualized return of 6.79% with a similar drawdown on the same period. Past performance, real or simulated, is not a guarantee of future return. This list may be considered an entry point for further due diligence or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

BA

Boeing Co.

DAL

Delta Air Lines, Inc.

ENS

EnerSys, Inc.

FLR

Fluor Corp

GBX

Greenbrier Companies, Inc. (The)

HII

Huntington Ingalls Industries, Inc.

MAN

ManpowerGroup

PBI

Pitney Bowes, Inc.

TXT

Textron, Inc.

UAL

United Continental Holdings, Inc.

Click to enlarge

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Disclosure: I am/we are long DAL, UAL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.