The increased investment in infrastructure development and government spending should drive the industrial sector’s growth. Given its solid long-term prospects, fundamentally strong industrial stocks Honeywell International (HON), Caterpillar (CAT), and Ryder System (R) might be worth investing in now. Continue reading.
Despite supply chain issues and recession concerns due to the Fed’s rate hikes to tame inflation, demand for industrial products and services is expected to remain stable. So, fundamentally strong industrial stocks Honeywell International Inc. (HON), Caterpillar Inc. (CAT), and Ryder System, Inc. (R) could be worth your investment.
The industry is growing amid rapid innovation, automation, new business models, and major digital investments. Both traditional players and new entrants are working to capture market share by raising competition and changing standards for quality and speed.
According to Fitch Ratings, overall demand appears intact for U.S. industrials, with solid orders and most issuers expecting modest revenue growth this year. Many issuers in the sector have products and services that address long-term trends around electrification, automation, and digitization and are relatively well-positioned even during a downturn.
Rapid urbanization, increased infrastructure development in emerging nations, and population and migration to cities are driving growth. Moreover, government initiatives like the Bipartisan Infrastructure Law are boosting the industry’s prospects. The global construction equipment market is expected to grow at a CAGR of 6% until 2029.
Let’s discuss the stocks mentioned above in detail:
Honeywell International Inc. (HON)
HON operates as a diversified technology and manufacturing company worldwide.
On March 7, HON launched the first fire alarm system with UL-approved self-testing smoke detectors that can be tested automatically, changing the way fire and life safety systems are installed, tested, and maintained. This is a significant addition to the company’s offerings.
In terms of trailing-12-month EBITDA margin, HON is trading at 23.33%, 76.6% higher than the industry average of 13.21%. Its trailing-12-month gross profit margin of 32.8% is 13.4% higher than the 28.95% industry average.
HON pays $4.12 as dividends annually, translating to a 2.19% yield at the current price. Its four-year average dividend yield is 2.23%. Its dividend payments have grown at a CAGR of 5.3% over the past three years. Also, it has paid dividends for 20 consecutive years
HON’s net sales increased 6.1% year-over-year to $9.19 billion in the fiscal fourth quarter that ended December 31, 2022. The company’s product sales increased 3% year-over-year to $6.56 billion, whereas total segment profit increased 13.7% year-over-year to $2.10 billion. Its adjusted EPS came in at $2.52, representing an increase of 20.6% from the year-ago quarter.
HON’s revenue is expected to rise 1.5% year-over-year to $8.50 billion for the current fiscal quarter ending March 2023. The company’s EPS for the same quarter is expected to increase marginally year-over-year to $1.92. Additionally, HON has topped consensus EPS estimates in each of the trailing four quarters.
Shares of HON have gained 6.7% over the past six months to close the last trading session at $189.14.
HON’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Growth, Momentum, Value, Stability, Quality, and Sentiment. Within the A-rated Industrial – Machinery industry, it is ranked #19 out of 79 stocks.
Beyond what is stated above, we’ve also rated HON for Value. Get all HON ratings here.
Caterpillar Inc. (CAT)
CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company operates through its five segments: Construction Industries; Resource Industries; Energy & Transportation; Financial Products; and All Others.
On January 6, 2022, CAT announced an investment in Lithos Energy, Inc., a battery technology company based in the United States that manufactures lithium-ion battery packs.
CAT’s investment in Lithos further demonstrates the company’s commitment to supporting customers in the energy transition with lower-carbon advanced power technologies for its hybrid and full-electric machines and power generation products.
In terms of trailing-12-month EBITDA margin, CAT is trading at 20.02%, 50.8% higher than the industry average of 13.27%. Its trailing-12-month net income margin of 11.28% is 72.8% higher than the 6.53% industry average.
CAT pays $4.80 as dividends annually, translating to a 2.21% yield at the current price. This compares to the 4-year average dividend yield of 2.43%. Its dividend payments have grown at CAGRs of 6% and 8.7% over the past three years and five years, respectively. Also, it has paid dividends for 33 consecutive years.
CAT’s sales and revenues increased 20.3% year-over-year to $16.60 billion in the fourth quarter that ended December 31, 2022. Its adjusted operating profit grew 78.4% from the year-ago value to $2.81 billion, while its adjusted profit increased 37.9% year-over-year to $2.01 billion. Adjusted profit per share increased 43.5% from its year-ago value to $3.86.
The consensus EPS estimate of $3.74 for the current fiscal quarter ending March 2023 indicates a 30% improvement year-over-year. The consensus revenue estimate of $15.12 billion for the same quarter indicates a rise of 11.3% year-over-year. Additionally, CAT has topped consensus EPS and revenue estimates in three of the trailing four quarters.
The stock has gained 21.9% over the past six months and closed its last trading session at $218.71.
CAT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
CAT has been rated a B grade in Growth and Momentum. Within the same industry, it is ranked #13.
Click here to access additional POWR Ratings for Value, Sentiment, Quality, and Stability for CAT.
Ryder System, Inc. (R)
R operates as a logistics and transportation company worldwide. It operates through three segments: Fleet Management Solutions; Supply Chain Solutions; and Dedicated Transportation Solutions.
On March 10, R announced a discount program for women-owned businesses that are a member of the Women in Trucking Association, where for a limited time, buyers can take advantage of a pre-owned commercial vehicle sales promotion of 5% off the purchase price.
The sales event expands on R’s commitment to provide customers with the flexibility, choice, and control necessary for efficient fleet management.
Its trailing-12-month EBITDA margin of 22.43% is 69.8% higher than the 13.21% industry average. Its trailing-12-month net income margin of 7.22% is 11.1% higher than the 6.50% industry average.
On February 10, R announced a dividend of $0.62 per share, payable on March 17, 2023.
R pays $2.48 as dividends annually, translating to a 2.89% yield at the current price. This compares to the four-year average dividend yield of 3.62%. Its dividend payments have grown at CAGRs of 3.2% and 5.4% over the past three years and five years, respectively.
R’s total revenues rose 18.8% year-over-year to $3.09 billion in the fiscal 2022 fourth quarter that ended December 31, 2022. Non-GAAP operating revenue rose 14.5% year-over-year to $2.41 billion. The company’s net earnings came in at $206 million, up 13.8% from the prior-year quarter, while its EPS came in at $4.18, up 24.8% from the prior-year quarter.
Street revenue estimate of $2.99 billion for the current fiscal quarter ending March 2023 reflects a rise of 4.8% year-over-year. Its EPS estimate for the current quarter came in at $2.94. Additionally, R has topped consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 20.3% over the past six months to close the last trading session at $86.17.
R’s robust prospect is reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
R has a B grade for Value and Stability. The stock is ranked #13 out of 80 stocks in the A-rated Industrial – Services industry.
To see the additional POWR Ratings for R for Growth, Momentum, Sentiment, and Quality, click here.
What To Do Next?
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HON shares were unchanged in premarket trading Friday. Year-to-date, HON has declined -11.27%, versus a 3.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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