In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2016. For the first article, I reviewed the Airline industry and made my top picks for this year. In this article, I will review the following Machinery stocks:
- Actuant (NYSE:ATU)
- AGCO (NYSE:AGCO)
- Alamo Group (NYSE:ALG)
- Albany International (NYSE:AIN)
- Allison Transmission Holdings (NYSE:ALSN)
- Altra Industrial Motion (NASDAQ:AIMC)
- American Railcar Industries (NASDAQ:ARII)
- Astec Industries (NASDAQ:ASTE)
- Barnes Group (NYSE:B)
- Briggs & Stratton (NYSE:BGG)
- Caterpillar (NYSE:CAT)
- Circor International (NYSE:CIR)
- Clarcor (NYSE:CLC)
- CNH Industrial (NYSE:CNHI)
- Colfax (NYSE:CFX)
- Crane (NYSE:CR)
- Cummins (NYSE:CMI)
- Deere (NYSE:DE)
- Donaldson (NYSE:DCI)
- Dover (NYSE:DOV)
- Enpro Industries (NYSE:NPO)
- ESCO Technologies (NYSE:ESE)
- Federal Signal (NYSE:FSS)
- Flowserve (NYSE:FLS)
- Gorman-Rupp (NYSEMKT:GRC)
- Graco (NYSE:GGG)
- Greenbrier Companies (NYSE:GBX)
- Hillenbrand (NYSE:HI)
- Hyster-Yale Materials Handling (NYSE:HY)
- Idex (NYSE:IEX)
- Illinois Tool Works (NYSE:ITW)
- Ingersoll-Rand (NYSE:IR)
- ITT (NYSE:ITT)
- John Bean Technologies (NYSE:JBT)
- Joy Global (NYSE:JOY)
- Kennametal (NYSE:KMT)
- Lincoln Electric Holdings (NASDAQ:LECO)
- Lindsay (NYSE:LNN)
- Manitowoc Company (NYSE:MTW)
- Meritor (NYSE:MTOR)
- Middleby (NASDAQ:MIDD)
- Mueller Industries (NYSE:MLI)
- Mueller Water Products (NYSE:MWA)
- Navistar International (NYSE:NAV)
- Nordson (NASDAQ:NDSN)
- Oshkosh (NYSE:OSK)
- PACCAR (NASDAQ:PCAR)
- Parker-Hannifin (NYSE:PH)
- Pentair (NYSE:PNR)
- Proto Labs (NYSE:PRLB)
- RBC Bearings (NASDAQ:ROLL)
- Rexnord (NYSE:RXN)
- Snap-on (NYSE:SNA)
- Standex International (NYSE:SXI)
- Stanley Black & Decker (NYSE:SWK)
- Sun Hydraulics (NASDAQ:SNHY)
- Tennant (NYSE:TNC)
- Timken (NYSE:TKR)
- Toro (NYSE:TTC)
- TriMas (NASDAQ:TRS)
- Trinity Industries (NYSE:TRN)
- Valmont Industries (NYSE:VMI)
- Wabash National (NYSE:WNC)
- Wabco Holdings (NYSE:WBC)
- Watts Water Technologies (NYSE:WTS)
- Woodward (NASDAQ:WWD)
- Xylem (NYSE:XYL)
The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed any stock that had negative or flat (less than 2%) earnings growth during this time period. These stocks included:
- Actuant - (61.1% decline)
- Albany International - (45.3% decline)
- Briggs & Stratton - (11.2% decline)
- Caterpillar - (15.6% decline)
- Circor International - (19.8% decline)
- CNH Industrial - (86.1% decline)
- Enpro Industries - (130% decline)
- ESCO Technologies - (30.9% decline)
- Federal Signal - (29% decline)
- Gorman-Rupp - (3.46% decline)
- ITT - (54.1% decline)
- Joy Global - (356% decline)
- Kennametal - (335% decline)
- Lindsay - (0.76% decline)
- Navistar International - (182% decline)
- Oshkosh - (46.4% decline)
- Timken - (95.3% decline)
- TriMas - (57.9% decline)
- Wabco Holdings - (11.7% decline)
- Watts Water Technologies - (104% decline)
I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat revenue growth (less than 2%) or a decline in revenue over the past two years. These stocks include:
- AGCO - (25.4% decline)
- Colfax - (4.69% decline)
- Deere - (24.1% decline)
- Donaldson - (4.94% decline)
- Dover - (0.64% increase)
- Flowserve - (5.51% decline)
- Hillenbrand - (2.12% decline)
- Hyster-Yale Materials - (1.99% decline)
- Idex - (1.39% decline)
- Illinois Tool Works - (4.55% decline)
- Lincoln Electric Holdings - (5.94% decline)
- Manitowoc - (11.6% decline)
- Meritor - (5.96% decline)
- Mueller Industries - (0.36% decline)
- Parker Hannifin - (6.16% decline)
- Pentair - (9.24% decline)
- Rexnord - (2.99% decline)
- Sun Hydraulics - (0.11% increase)
- Valmont Industries - (15.1% decline)
- Xylem - (4.22% decline)
My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1.5 to focus more specifically on fairly valued/undervalued stocks. These stocks included:
- Allison Transmission - 7.80x
- Altra Industrial Motion - 3.10x
- Astec Industries - 2.15x
- Clarcor - 2.01x
- Cummins - 1.86x
- Middleby - 48.04x
- Nordson - 5.19x
- Proto Labs - 4.06x
- RBC Bearings - 1.75x
- Woodward - 1.55x
The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.
|Fundamental Score||Value Score|
|American Railcar Industries||10||8|
|John Bean Technologies||9||4|
|Mueller Water Products||4||3|
|Stanley Black & Decker||10||7|
To determine the best stocks for 2016, I'm only taking into consideration stocks that have values of 7 or higher for both fundamental and value scores. Doing this left me with the following remaining stocks:
- Alamo Group
- American Railcar Industries
- Barnes Group
- Greenbrier Companies
- Stanley Black & Decker
- Trinity Industries
My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. The only stock to see a decline in book value during this time period was Stanley Black & Decker.
I then looked at the remaining stocks and only included stocks with earnings yields of 5% or higher in my final analysis. Each of the seven remaining stocks all had earnings yields higher than 5%.
My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2016. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.
For its last quarter, the company posted 0.2% increase in revenue and a decline in earnings per share from $1.09 to $0.95 compared to the same period last year. The company's main struggles came from its Agricultural and European divisions, which were down 6.1% and 12.6% respectively in terms of sales.
Even though Alamo Group continues to face challenging market conditions it was still able to see a 10% increase in earnings per share for its full year results. I expect similar results this year, with a possibility for even better results with improving market conditions.
American Railcar Industries
For its last quarter, the company posted a 73% increase in revenue and an increase in earnings per share from $1.06 to $1.82 compared to the same period last year. The company had a strong year with record revenue, record earnings per share, and record railcar shipments for the year.
It is the short term future that poses the concern for American Railcar Industries, as the company faces a multi-year cyclical decline forecasted by BB&T as well as American Railcar Industries itself.
With the railcar industry at historically high levels of backlog and deliveries in 2015 and trending toward more normalized levels going forward,
The poor forecast explains why the stock is down more than 17% over the past year, even though it has seen record revenue and earnings during that time. Unfortunately, I don't see any reason to assume American Railcar Industry will perform any better throughout the remainder of 2016.
For its last quarter, the company posted a 7.5% decline in revenue and a drop in earnings per share from $0.62 to $0.60 compared to the same period last year.
The company released an outlook for 2016, forecasting 0% to 2% organic sales growth. And even though its aerospace backlog was up 9%, the same division saw a 12% drop in revenue in Q4. This combined with the worsening margins in Q4 leads me to believe that the stock will continue to struggle throughout 2016 (already down over 14% from 1 year ago).
For its most recent quarter, the company posted a 6.9% decline in revenue and a drop in earnings per share from $1.13 to $1.12 compared to the same quarter last year.
The stock has actually performed well so far this year, with an increase of just under 11%; however, I do not feel there is much more short-term upside potential. The company has forecasted stagnant sales growth for 2016 and faces a more severe softening of its Fluid Handling segment.
I do believe that Crane remains a solid long term option, but until the company's new aerospace programs begin to affect the bottom line, I don't see the stock gaining much ground considering the current market environment.
For its last quarter, the company posted a 62% increase in revenue and an increase in earnings per share from $1.01 to $2.15 compared to the same period last year.
Even though the market conditions are tough right now in the railcar industry, I believe that Greenbrier is positioned nicely to see a strong 2016. In addition to having a solid and diversified backlog, the company has significantly reduced its reliance on energy related railcars and possesses strong flexibility in its manufacturing processes.
The stock is down 17.6% year to date, but that decline happened at the very beginning of the year. Since January 16th, the stock has increased by 28%. While I don't believe the stock will see any earth shattering price increases, I do think it will perform well over the remainder of 2016 and its dividend that currently yields over 3% is a nice bonus to have.
For its last quarter, the company posted a 15.8% decline in revenue and a drop in earnings per share from $1.11 to $0.98 compared to the same period last year. The full year results were far better with record revenue and net income.
The stock is up over 15% year to date and I feel that there remains room for additional price appreciation in the short term for PACCAR. The company continues to expand into emerging markets, has solid financial fundamentals, possesses strong cash flow, and has increased its dividend and share repurchases. Even though the last quarter wasn't great, I feel that PACCAR has enough momentum to keep its stock moving higher in 2016.
For its last quarter, the company posted a 6.6% decline in revenue and an increase in earnings per share from $0.86 to $1.30 compared to the same period last year. The problem with Trinity isn't the recent quarters, its the near term future that continues to show weakness. With its latest earnings release, the company issued FY2016 earnings guidance in the $2.00 to $2.40 range when analysts were estimating $3.65.
The company is focused on cutting costs but with a large decline in demand I don't believe there is much chance for Trinity Industries to perform well in the short term. The stock has already lost 20% year to date and 43% over the past year. I expect this trend to continue with Trinity underperforming the market in general for the remainder of 2016.
Out of this group of stocks, my top picks are Greenbrier Companies and PACCAR. The materials industry is seeing a tough environment both in the US and internationally, especially in relation to the railcar industry. However, I feel that both Greenbrier and PACCAR are nicely positioned to not only handle the difficult market environments they each face, but to actually perform nicely during this short term stretch.
Since February 1st, GBX has seen a 6.98% increase in price and PCAR has seen a 13.97% increase. Greenbrier is facing a decline in railcar demand, but the company has enough diversity in its revenue stream that I believe it will still continue seeing positive growth in both its revenue and bottom line throughout 2016. PACCAR didn't have a great Q4, but it continues to benefit from a healthy heavy-truck market and should benefit from improved capacity and efficiency within its factories and distribution centers.
As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.