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Place Your Bets On These Undervalued Industrial Stocks In 2014

|Includes: Kadant Inc. (KAI), NNBR

Industrial stocks have done reasonably well so far in 2013 and an underwhelming yet stable recovery underway in the United States bodes well for these stocks in the next year. Industrial players such as NN, Inc. (NASDAQ: NNBR), Kadant Inc. (NYSE: KAI) have rewarded shareholders smartly this year, but relatively underperforming price movement has left enough headroom for further growth. Here is a closer look at valuations and fundamentals of these companies.

Tennessee based NN, Inc. is a supplier of metal bearings, plastic and rubber products, and precision metal components to its industrial clients. While there is no dearth of competition in the market where suppliers are often squeezed between raw material players and assemblers, NN, Inc. enjoys strong pricing control. In the past, the company has successfully passed on material cost increases to its customers. This is visible in solid earnings (net income up 62.2 percent in the latest quarter) as well as a reasonably clean balance sheet in a capital intensive industry (debt equity ratio of 0.3). The company is a major supplier to the automotive industry and given that auto sales are faring well in the United States, there is no reason to believe the growth will not flow in 2014. Its shares, valued 15.3 times forward earnings, leave enough on the table from the perspective of further growth while offering annual dividend yield of 1.2 percent.

Kadant Inc. is engaged in the business of supplying equipment used to produce paper. The company also caters to paper recycling and processing industries, manufacturing granules from papermaking by-products. Despite a marked reduction in the usage of paper globally, the company's business has actually flourished in recent years. From a loss making entity in 2009, Kadant transformed itself to become a profitable company and posted a net income of $31.6 million last year on sales of $331.8 million. This translates into a net margin of 9.5 for 2012 and although the metric drops to 7 percent for the nine months of this year, it is still quite high for a machinery supplier. Helping the company in this regard is a balance sheet without any major debt obligations. The stock has gained 52 percent so far in 2013 and currently trades at its 52-week high level, but a newly constituted share repurchase program can propel it to newer heights. Kadant management has authorization to buy up to $20 million of its equity securities by November 2014 which, coupled with a forward earnings ratio of 15.8, presents a strong investment thesis.