Valuation Dashboard: Industrials - Update

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Includes: CTAS, DAL, DNB, GBX, HII, JBLU, MAN, MAS, MLHR, PBI, RRD, SPY, TDG, TILE, TYC, 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 article series provides a dashboard of industries in each sector of the GICS classification. It starts with a visual status of valuation and quality factors relative to their historical averages. Then, it gives a list of stocks among the best of their industries according to the same factors. The methodology and all the numbers are given at the end of the article. Click "Follow" at the top of this page if you want to be notified of monthly updates.

Valuation and Quality indicators in Industrials on 8/3/2016

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below higher is always better. Refer to the appendix for the detailed data and methodology.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLI) with SPY (chart from freestockcharts.com).

Click to enlarge

Interpretation

Industrials have lagged the broad market by about 1.8% in the last 3 months. The 5 S&P 500 industrial companies with the best momentum on this period are Cintas Corp (NASDAQ:CTAS), Dun & Bradstreet Corp (NYSE:DNB), Masco Corp (NYSE:MAS), TransDigm Group Inc (NYSE:TDG), Tyco International Plc (NYSE:TYC). They all have hit an all-time high in July.

Since last month:

  • P/E has deteriorated in all groups except Airlines (stable).
  • P/S is stable in Electrical Equipment, Conglomerates, Trading Companies, Professional Services and has deteriorated elsewhere.
  • P/FCF has improved in Airlines and deteriorated in Road&Rail, Air Freight, Conglomerates.
  • ROE has improved in Machinery and deteriorated in Electrical Equipment, Conglomerates, Marine, Road&Rail.

Trading Companies look undervalued and just below the baseline in quality. Airlines are very attractive except for P/S. Professional Services, Aerospace & Defense are close to the baseline for all factors. Marine still looks like a value trap, with an attractive valuation and a bad quality. The less attractive group is Conglomerates, far below the baseline in value and quality.

List of stocks to consider

(see methodology in the appendix)

DAL

Delta Air Lines Inc

AIRLINE

GBX

Greenbrier Companies Inc.

MACHINERY

HII

Huntington Ingalls Industries Inc

AERODEF

JBLU

JetBlue Airways Corp

AIRLINE

MAN

ManpowerGroup

SERVICEPRO

MLHR

Herman Miller Inc

SERVICESUPP

PBI

Pitney Bowes Inc.

SERVICESUPP

RRD

R.R. Donnelley & Sons Co

SERVICESUPP

TILE

Interface Inc

SERVICESUPP

UAL

United Continental Holdings Inc

AIRLINE

Click to enlarge

Appendix

Dashboard methodology:

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Aerospace&Defense

19.96

18.02

-10.77%

1.16

1.02

-13.73%

20.67

21.28

2.87%

7.61

9

-1.39

Building Products

25.58

20.14

-27.01%

1.29

0.64

-101.56%

22.23

22.38

0.67%

12.65

6.07

6.58

Construction&Engineering

25.33

18.3

-38.42%

0.45

0.48

6.25%

17.12

19.81

13.58%

3.54

5.98

-2.44

Elec.Equipment

21.23

18.31

-15.95%

1.24

1.64

24.39%

36.88

21.88

-68.56%

-9.48

-3.3

-6.18

Ind. Conglomerates

37.52

20.45

-83.47%

2.7

1.3

-107.69%

33.68

29.98

-12.34%

-0.49

12.12

-12.61

Machinery

21.07

18.25

-15.45%

1.21

0.9

-34.44%

21.49

21.81

1.47%

8.04

8.72

-0.68

Trading Companies&Distri

18.08

17.14

-5.48%

0.58

0.7

17.14%

12.31

25

50.76%

4.02

8.61

-4.59

Commercial Sces&Supplies

26.77

20.86

-28.33%

1.28

1.03

-24.27%

23.08

19.84

-16.33%

3.03

3.99

-0.96

Professional Services*

24.43

24.04

-1.62%

1.38

1.22

-13.11%

17.21

17.43

1.26%

4.64

3.09

1.55

AirFreight&Logistics

19.92

21.06

5.41%

0.75

0.57

-31.58%

23.41

32.87

28.78%

11.01

11.12

-0.11

Airlines

7.8

15.18

48.62%

0.9

0.41

-119.51%

8.74

12.37

29.35%

33.66

3

30.66

Marine**

11.46

14.04

18.38%

0.6

1.41

57.45%

7.2

23.27

69.06%

-21.07

6.05

-27.12

Road&Rail

17.65

19.17

7.93%

1.34

0.86

-55.81%

44.76

36.17

-23.75%

14.79

9.43

5.36

Transport Infrastructure**

37.35

23.6

-58.26%

1.42

1.19

-19.33%

7.52

20.8

63.85%

-1.13

-3.22

2.09

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.

Stock list methodology:

The stocks listed above are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

This strategy rebalanced monthly has an annualized return about 13% and a drawdown about -71% for a 17-year backtest. 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.

If you want to stay informed of my updates on this topic (including the portfolio) and other articles, click the "Follow" tab at the top of this article.

Data provided by portfolio123.

Disclosure: I am/we are long DAL.

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.