Industrial Sector Stocks Face Challenges; Why You Should Stick With Aerospace

by: Valuentum

On Friday, Ingersoll Rand (NYSE:IR) cut its third-quarter revenue and earnings-per-share outlook to the range of $3.9 billion to $3.95 billion (was $4.05 billion to $4.15 billion) and $0.77 to $0.80 (was $0.85 to $0.95), respectively. Perhaps unsurprisingly, the cause was due to its consumer-related business (residential HVAC, golf and residential security) and poor commercial security activity. Though it noted that transport, industrial and commercial HVAC revenue remained strong, such strength offers little consolation to investors, given the magnitude of the outlook revision.

Further, Ingersoll noted that third-quarter operating income was hurt by the lower volumes and an unfavorable product mix in the residential and security segments. And topping things off, the company indicated the strengthening of the dollar against the euro will likely hurt performance in its fourth quarter. We don’t think such performance bodes well for most of the industrial sector and Honeywell (NYSE:HON) and United Technologies’ (NYSE:UTX) residential building divisions (air conditioners, control systems), though we expect outperformance from these respective companies’ aerospace divisions to offset any weakness.
Aerospace continues to be one of the bright spots in the global economy as both Boeing (NYSE:BA) and Airbus (OTCPK:EADSY) plan to ramp up production of their narrowbody aircraft in coming years -- driven by a competitive response to thwart new entrants from China, and Russia, and less so from immediate demand. We think our exposure to arerospace is a key reason behind the outperformance in our Best Ideas Newsletter.
All told, we wouldn’t be surprised to hear more earnings warnings from the industrial space in coming weeks, and we are maintaining our fair value estimates for Honeywell and United Technologies. We believe aerospace is the best place to be within industrial-land, with Precision Castparts (NYSE:PCP), Astronics (NASDAQ:ATRO), and Edac Tech (NASDAQ:EDAC) as our top three aerospace picks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.