What You Need to Invest for Success in Manufacturing
The manufacturing sector crashed like the Hindenburg in the latter half of 2008. Acquisitions of goods and services imploded as the economy cratered. Since the recession carved up the economy, however, manufacturing has bounced back. Let's take a look at the sector's potential today -- and unearth four of its best companies you can feel confident about regardless of your investment style.
Leaving the recession behind
The U.S. Purchasing Managers Index, or PMI -- a leading indicator of domestic manufacturing health -- has shown growth in the sector between August 2009 and May 2012. While the index contracted during the past two months, manufacturing has still averaged consistent, if slow, growth during the recovery. The slight dip shouldn't overly dampen economic enthusiasm.
Furthermore, a July report by the Institute for Supply Management reported that the overall economy grew for the 38th consecutive month, with durable goods orders -- those products expected to last at least three years -- up nearly 8% from a year ago. With manufacturing dependent on a strong economy to boost demand, the recovery since the recession has this sector doing well.
So the broader state of manufacturing looks good -- which stocks specifically should you target?
Profit large and small
Industrial behemoth Caterpillar (NYS: CAT) makes a safe, strong choice for anyone. As the biggest name (and market cap) in the business, Caterpillar maintains a size advantage in a sector where bigger is better. While the company has suffered losses in Asia from the Chinese economic slowdown, it has continued to diversify geographically by bolstering its presence in growing economies.
Caterpillar's stock has dropped significantly from earlier CY12 highs, making now an attractive time for interested investors. The company has boosted its backlog of orders and boasts attractive growth prospects. At a P/E of under 10 -- far below the industry average -- investors can feel good about this global giant.
Moving from the blue chips to a smaller-cap stock, building products manufacturer SimpsonManufacturing (NYS: SSD) aims to rise with the rebounding housing market. With new-home starts in the U.S. at their fastest pace since 2008, the company should be able to capitalize on the sector's recovery and build upon the recovering housing market.
Like Caterpillar, Simpson's stock has declined substantially from earlier this year, but still boasts strong financials. The company's lack of long-term debt really stands out. In such a capital-intensive sector like manufacturing, that critical strength gives Simpson serious financial flexibility to create value for shareholders, rather than having to pay back debt obligations.
Easy income and great value
For income investors, power-management corporation Eaton (NYS: ETN) offers a strong 3.3% dividend yield. The manufacturer has grown its dividend at an average of 10% over the last five years and lists a dividend payout ratio of only 35% -- far below the industry average. Alongside healthy, industry-beating margins, these numbers are good signs that Eaton can continue to offer great income for long-term investors.
Finally, value investors need look no further than down-on-its-luck automaker Ford (NYS: F) for an attractive pickup. The beleaguered American icon has experienced a number of setbacks since the recession struck, from forecasting a $1 billion-plus loss this year from the European fiscal crisis to suffering through a decline in Generation Y's purchases of new cars.
Still, investors would be hard-pressed to find a cheaper stock with rebound potential. Ford trades at a low forward P/E of 6.3, a bargain for a company that has done a great job becoming solidly profitable, fixing its balance sheet, and is back to making quality vehicles. With cars on U.S. roads averaging near 11 years in age, Ford should see more buyers returning to the market. Ford has made investments in India and China that look to take advantage of these blossoming markets. With Ford making the right moves to rebound, this dramatically cheap stock should only rise.
Build your portfolio future
Investors interested in the manufacturing sector do need to keep an eye out for any market drop or economic woes. While the recovery has boosted the prognosis of these manufacturers, sustained softening of demand due to economic weakness could drastically hurt their stocks. However, should the recovery continue and the sector continue to find its post-recessionary legs, every kind of investor can find a great pick in manufacturing.
The most successful investors in this field will have the most information to make the right picks, however. If you want to join their elite ranks, The Motley Fool has produced this premium report on what investors need to know about Caterpillar's future. To get the facts you need to know about Ford, check out the Fool's premium report on the American automaker -- it comes with a full year of updates, so get your copy today!
The article What You Need to Invest for Success in Manufacturing originally appeared on Fool.com.
Fool contributorDan Carrollholds no positions in the stocks mentioned in this article. The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor and Simpson Manufacturing and creating a synthetic long position in Ford Motor. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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