Air Freight: Too Heavy A Load? (Dashboard Update)

| About: Industrial Select (XLI)

Summary

Valuation metrics in Industrials.

Evolution since last month.

A list of stocks looking cheap in their industries.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry, and gives a list of 10 stocks. I update every month eight lists like this one covering all sectors (some sectors are grouped). The eight lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free-access articles.

This article is about Industrials.

Executive summary

Airlines are very attractive regarding Price/Earnings (P/E), Price to free cash flow (P/FCF), and Return on Equity (ROE), but have a bad Price-to Sales (P/S) relative to their historical baseline. This discrepancy is likely mainly due to an oil price far below the average on the reference period. Marine has two good valuation metrics out of three, but the worst ROE: it looks a bit like a value trap. Research/Consulting looks close to a fair value and profitability relative to its historical averages. Other groups are significantly more overvalued. Conglomerates and Air Freight/Logistics look the most overpriced.

Since last month:

  • P/E has improved in Construction/Engineering, Conglomerates, Facilities Services, Research/Consulting, Marine, and Railroads, and deteriorated in Trading Companies/Distributors, Air Freight/Logistics, and Airport Services.
  • P/S has improved in Construction/Engineering, Airlines, Railroads, Conglomerates, and Machinery, and deteriorated in Construction/Engineering, Building Products, Marine, Airport Services, and Trading Companies/Distributors.
  • P/FCF has improved in Aerospace/Defense, Trading Companies/Distributors, Air Freight/Logistics, and Railroads, and deteriorated in Building Products and Marine.
  • ROE has improved in Aerospace/Defense, Research/Consulting, and Marine, and deteriorated in Construction/Engineering, Airlines, and Airport Services.
  • The SPDR Select Sector ETF (NYSEARCA:XLI) has underperformed the SPDR S&P 500 ETF (NYSEARCA:SPY) by about 0.7%.
  • The five S&P 500 industrial companies with the best momentum in one-month are Cintas Corp. (NASDAQ:CTAS), Fortune Brands Home & Security Inc. (NYSE:FBHS), Flowserve Corp. (NYSE:FLS), Pentair plc (NYSE:PNR), Stanley Black & Decker Inc. (NYSE:SWK).

Some cheap stocks in their industries

The stocks listed below 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. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

BA

Boeing Co.

AERODEF

DAL

Delta Air Lines Inc.

AIRLINE

HA

Hawaiian Holdings Inc.

AIRLINE

JBLU

JetBlue Airways Corp.

AIRLINE

UAL

United Continental Holdings Inc.

AIRLINE

PATK

Patrick Industries Inc.

BUILDING

PGTI

PGT Inc.

BUILDING

WNC

Wabash National Corp.

MACHINERY

MLHR

Herman Miller Inc.

SERVICESUPP

CAR

Avis Budget Group Inc.

TRAINTRUCK

Detail of Valuation and Quality indicators in Industrials on 4/3/2017

I take four 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 four industry factors. There are three 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

25.23

18.02

-40.01%

1.33

1.02

-30.39%

25.73

21.28

-20.91%

5.22

9

-3.78

Building Products

23.15

20.14

-14.95%

1.47

0.64

-129.69%

23.54

22.38

-5.18%

14.39

6.07

8.32

Construction/Engineering

26.38

18.3

-44.15%

0.58

0.48

-20.83%

20

19.81

-0.96%

5.73

5.98

-0.25

Elec.Equipment

21.86

18.31

-19.39%

1.35

1.64

17.68%

28.63

21.88

-30.85%

-14.12

-3.3

-10.82

Conglomerates

31.02

20.45

-51.69%

2.85

1.3

-119.23%

30.87

29.98

-2.97%

13.36

12.12

1.24

Machinery

26.8

18.25

-46.85%

1.43

0.9

-58.89%

26.55

21.81

-21.73%

8.1

8.72

-0.62

Trading Companies/Distri

24.85

17.14

-44.98%

0.94

0.7

-34.29%

18.85

25

24.60%

5.72

8.61

-2.89

Facilities Services

25.84

20.86

-23.87%

1.26

1.03

-22.33%

25.53

19.84

-28.68%

3.04

3.99

-0.95

Research/Consulting*

25.6

24.04

-6.49%

1.26

1.22

-3.28%

21.44

17.43

-23.01%

5.97

3.09

2.88

Air Freight/Logistics

47.66

21.06

-126.31%

0.79

0.57

-38.60%

32.25

32.87

1.89%

11.45

11.12

0.33

Airlines

11.65

15.18

23.25%

1.17

0.41

-185.37%

13.7

12.37

-10.75%

26.72

3

23.72

Marine**

17.32

14.04

-23.36%

0.94

1.41

33.33%

4.71

23.27

79.76%

-28.67

6.05

-34.72

Railroads

21.55

19.17

-12.42%

1.26

0.86

-46.51%

37.81

36.17

-4.53%

12.5

9.43

3.07

Airport Services**

25.34

23.6

-7.37%

2.02

1.19

-69.75%

7.94

20.8

61.83%

6.6

-3.22

9.82

*Professional Services: Avg. since 2008.

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

The following charts give an idea of the current status of three 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.

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 XLI with SPY in one month.

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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long SPY.

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.

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