The US GDP is estimated to have expanded by 2.8% in the last quarter of 2011, and a similar trend is expected in 2012 as the country continues its gradual recovery. This can be seen in consumer prices, which rose 0.8% in January 2012, while unemployment has gradually declined to 8.3% from its peak of 10% in October 2009. When an economy is in the very initial phases of recovery, there are a few key sectors which perform well.
The focus of this article is the Industrial sector, a sector which outperforms in such macroeconomic conditions. In this article, 5 top stocks are discussed based on each company's dynamics as well as its product mix, which define its revenue stream and hence, the earning potential going forward.
The Boeing Company (BA):
Despite the slowdown post the financial crisis, Boeing saw its revenues increase by 7% in 2011 to $68.3 billion. With an improvement of 80bps in the operating margins to 8.5%, the company's net income increased by 21% year-on-year to $4 billion. It has two main streams of revenues: commercial airplane deliveries and the defense, space and security segment. In 2011, revenues from commercial airplane deliveries were up by 14%, driven by a 3% growth in deliveries, while the remaining growth was due to an increase in price. The other segment saw its revenue stream remain flat year-on-year, while its operating margins improved on the back of better Boeing Military Aircraft margins.
For 2012, the company reports that it already has over 1,000 orders and commitments for 737 MAX, compared to a total of 477 deliveries in 2011. These orders will boost its revenues from commercial airlines deliveries. Boeing will also benefit from the agreement between the US and the Saudi Arabian Government for the purchase of 84 new aircrafts, along with upgrades on another 70. The company also announced an $18 billion deal with the Emirates airline, a $19 billion deal with Southwest Airlines and, more recently, a $22.4 billion deal with Lion Air for 230 planes. Amidst all this, Boeing recently rebranded its Jet-Services as "Boeing Edge" to target a market estimated to be worth $2.3 trillion in the next 20 years.
All of these measures are expected to not only sustain the company's income statement, but also allow the company to outperform any sluggish industry growth. Over the past year, the stock price is up by 4.25%, and at $76, it is trading at a forward price to earnings ratio of 13.3 times. With an estimated forward annual dividend of $1.76, the stock also offers a dividend yield of 2.4%. Unlike Lockheed Martin (LMT) which showed a quarterly revenues decline of 4.6%, Boeing is expected to reap much better returns for its investors.
Union Pacific (UNP):
With the expected pickup in economic activity, another key sector to benefit will be the railroad transportation services sector. As railroads are much cheaper than road transport, and more far-reaching than sea transport, we can expect Union Pacific to be a major beneficiary of this trend. A brief look at the reasons behind the company's performance in 2011 lends support to this statement.
In 2011, the company's revenues increased by 10% year-on-year to $3.3 billion. Out of this, while 8% was attributable to a price hike, 2% was driven by an increase in carload units. Except for intermodal, all other five segments - agricultural, automotive, chemicals, energy and industrial products - saw an increase in volume of freight transported. Union Pacific also operated more efficiently as measured by its fuel consumption rate, which increased from 1.129 in 2010 to 1.131 in 2011 (fuel consumption rate measures the fuel consumed for every gross ton mile). The company's top line is encouraging as it shows the company's ability to pass on any increase in costs to its customers, as well as the volume growth in almost all segments. With a 2.9% GDP growth expected this year, the pickup in various industries should also lead to a volume growth for Union Pacific.
The company posted decent results with the full year's earnings increasing by 18%, while the fourth quarter's income increased by 24% year-on-year. It has a strong balance sheet, with a current ratio of 1.12 times, and a total debt to equity ratio of 48%. What makes us positive is the company's last quarter result compared to its peers. For the last quarter, Union Pacific showed a quarterly revenue growth of 16%, while Canadian National Railway (CNR) and CSX Corporation (CSX) both showed lower growth rates of 12% and 5% respectively. Union Pacific also announced plans to expand into South Louisiana to cater to the higher petrochemical demand, and to invest an overall $3.6 billion into the business in 2012. Union Pacific is already capturing market due to an increase in its sales which is higher than the sector's. With 150 years in the business, Union Pacific will surely maximize its benefits from the revival of industrial activity.
SPX Corporation (SPW):
SPX Corporation recently announced its results for 2011, in which it reported a net income of $186 million. Its revenues were up by 12% with the flow technology and test/measurement segments showing high growth rates of 23% and 16% respectively. The growth in the test and measurement segment also led the company to improve its operating margins from 8.3% in 2010 to 10.4% in 2011. While the ClydeUnion acquisition in the flow technology segment led to steady operating margins of 13%. SPX is also planning to divest Service Solutions for $1.15 billion cash, and has announced plans for debt reduction and shares repurchase through this cash flow.
SPX Corporation also recently announced that they had been awarded the contract to supply condensers for the largest planned geothermal power plant in Kenya. At the stock's current price of $77, it is trading at a forward price to earnings ratio of 13 times and offers a forward annual dividend yield of 1.3%. The company's current ratio is 1.43 times and it has a debt to equity ratio of 53%, both of which may improve further following the sale of its division. Other companies in the industry like Emerson Electric (EMR) are already losing out on revenues, with a negative top line growth of 4% and a decline in earnings of 23% in the last reported quarter. Hence, we prefer SPX Corporation.
Chicago Bridge & Iron (CBI):
Chicago Bridge & Iron enjoys a higher tilt towards the energy sector in its product mix, which is the main reason why we prefer this stock. In the past 52 weeks, its share price is up by 33.4%, and is now trading at a forward price to earnings ratio of 14.95 times. In its nine months results for 2011, the company reported an increase in revenues of 22.3%, its revenues reaching $3.295 billion. Half of the growth was driven by an increase in the Lummus segment, while 40% was due to an increase in sales of Steel Plate Structures. Chicago Bridge also received significant new awards which are indicative of future revenue streams - $3.8 billion worth of new awards in Steel Plate Structures alone compared to revenues of $1.3 billion from this segment.
The company reported earnings of $184 million in the same period. Its balance sheet is steady with a current ratio of almost 1, and a total debt to equity ratio of less than 10%. The company has healthy cash flows. Other companies in the industry like Matrix Service (MTRX) are not performing well with Matrix Service's share price down by 4% in the last year. However, due to Chicago Bridge's exposure to the energy chain, especially LNG, combined with its future plans, including the recently announced contract from Battleground Oil Specialty, the company's financial performance will likely remain positive in the future.
Deere & Company (DE):
Deere & Company is part of the farm and construction machinery industry. For its first quarter reported results, the company announced revenues of over $6.7 billion, increasing by 11% year-on-year. The performance was backed by stable growth in the agriculture and turf equipment segment, which the company expects will globally show a growth of 15% in year 2012. Deere's other segment, construction and forestry, also grew by 22% contributing positively to the revenue growth. For 2012, the company is expecting an 18% growth in this segment.
One major contributor to growth is the company's global operations, which it is also planning to further expand. In 2012, new factories are planned in Brazil, China and India while expansions are planned in India, US, Canada and Argentina. For the first quarter, the company reported earnings of $533 million, which were up by 4% year-on-year. With attractive fundamentals, the company is trading at a forward price to earnings ratio of 10 times, similar to its competitor, Caterpillar (CAT). However, Deere also offers a forward annual dividend yield of 2%, compared to Caterpillar's dividend yield of 1.6%.