The 4 Best Mid-Cap Industrials for Your Money
Given positive trends in U.S. and global manufacturing activity, industrial production, and construction, there may well be opportunities for investors within the industrial sector. The CAPS Community Stock Screener provides an efficient means of narrowing down your choices, once you decide upon a portfolio strategy. Incorporating the following parameters into the screener...
- A revenue growth rate (average last three years) of at least 10%.
- A long-term debt-to-equity ratio of 1.0 or below.
- EPS growth (three-year average) at least 10%.
- Current ratio (current assets/current liabilities) of at least 2.0.
- P/E Ratio (trailing-12 months) of between 10.0 and 20.0.
... I have selected four mid-capitalization (between $1 billion and $10 billion market cap) industrial stocks for your consideration. Here's the rundown, including company overviews and investment recommendations, starting with the key stats:
|Symbol||Company Name||Rev. Growth Rate (last 3 Yrs)%||LT Debt-to-Equity Ratio||EPS Growth Rate (last 3 Yrs)%||Price-to-Earnings (TTM)||Current Ratio|
|RS||Reliance Steel and Aluminum||12.37||0.6||18.87||15.6||3.8|
Well-situated and diversified
Kennametal has two operating segments, industrial and infrastructure. The former unit generates about 60% of total revenue, while the latter produces roughly 40%. Industrial caters to the aerospace, defense, transportation, and general engineering markets, as well as machine tools. Infrastructure focuses on customers that support oil and gas, power, and process operations such as food and beverage, chemicals, mining, highway construction, and road maintenance.
Kennametal stands out among this group in terms of its three-year earnings-per-share growth rate. Indeed, EPS gains averaged 61.1% between fiscal 2010 and fiscal 2012 (years end in June), culminating in a $3.77 a share showing in 2012.
After a downturn in fiscal 2013 due to slower spending in numerous key end markets, Kennametal looks poised for a recovery going forward. With rising industrial production as a catalyst, it could be on tap for a 15% to 20% upturn in EPS this fiscal year. Profit growth is apt to double global increases in that metric.
The company believes it can achieve this rebound thanks partly to internal initiatives. I surmise this means acquisitions, given its liquid balance sheet and history of buyouts. To investors' likely delight, Kennametal is also putting its strong cash position to use with an aggressive share-buyback program.
All told, at a P/E (trailing-12 months) of 17.3, these shares are attractive for year-ahead price performance and may be a good long-term holding, too, based on the company's healthy balance sheet.
Taking the right steps
Lincoln Electric produces welding, cutting and brazing items. Its customers include metal fabricators and power-generation companies, as well as entities from numerous manufacturing sectors, such as steel, shipbuilding, heavy equipment, shipbuilding, automotive, pipelines, and oil and gas. It derives 59% of sales from North America, 15% from Europe, 10% from Asia Pacific, 6% from South America, and another 10% from "The Harris Products Group," a combination of all non-welding businesses.
A focus on new product introductions, along with other margin-enhancement measures, is likely to bolster income comparisons this year. Certainly, Lincoln should achieve a better-than-10% share-net increase again this year. Over the past three years, those increases have averaged 34% annually.
This is another company that boasts a stellar balance sheet, with no debt and a strong current ratio of 2.5. Management is investing in a facility in Brazil, along with an enterprise resource planning (ERP) system, and new sales-force tools. Additionally, the board has authorized the repurchase of about 20% of shares outstanding, and has edged up the dividend.
I believe Lincoln shares will climb more than the market average, particularly over the long run, or when its customers' cyclical markets take a turn for the better. The company's belief in its own capabilities, as seen by its investments in its own stock, adds enticement. Plus, its historical performance is indicative of a company with solid potential going forward. The P/E (trailing-12 months) is 19.5.
Steel fabricator a good buy-and-hold investment
Reliance Steel & Aluminum operates metals service centers serving the general manufacturing, non-residential construction, transportation, aerospace, electronics, and semiconductor industries. In the June quarter, it derived 58% of sales from the sale of carbon steel products, 17% from aluminum, 15% from stainless steel, and 10% from alloy.
Tonnage sales from each product category, with the exception of alloy, all rose by more than 20% year-over-year in that quarter. A recent acquisition, Metals USA, assisted growth and ought to support profit gains over the long haul.
Reliance has the best near-term liquidity position among these four stocks, with a current ratio of 3.8. It might well look to make further external asset purchases while investing in facilities and equipment.
At the same time, conditions in Reliance's core markets ought to improve to some degree. I expect that the company will keep growing its market share and revenue, leaving it well-positioned when the environment is more favorable. At a trailing P/E of 15.6, the shares still deserve a spot in investors' portfolios.
Utility pole maker on a solid growth path
Valmont Industries , a producer of steel and aluminum poles primarily for the irrigation and utility markets, is structured as follows:
- 31% of second-quarter sales were derived from its irrigation segment.
- 29% of sales were generated by its engineered infrastructure product segment (lighting and traffic products).
- 26% was contributed by the utility-support structures segment.
- 11% was generated by the coatings segment
Valmont's share earnings advanced a whopping 49% year over year during the first six months of 2013. Its three major operating divisions are all growing profits at robust rates. This comes after the company grew revenue and earnings at 20% and 37% clips, respectively, over a three-year span.
It should continue to perform well, partly thanks to the addition of manufacturing capacity for its utility business. That unit's healthy prospects are based on the upgrading of the U.S. electrical grid.
Valmont will seek out opportunities to use cash for productivity gains, capacity expansion, and acquisitions, as well as a modest dividend.
The stock is a good selection for price recovery as it persists along a growth trajectory. At a trailing P/E of 12.8, it is attractively valued.
My favorite within this screen result is Valmont, which makes a solid choice for those with aspirations of six-month to one-year price gains. The other three are fundamentally sound companies that will probably continue to fare well. In particular, Lincoln Electric offers long-term price upside for those with a more extended horizon, as does Reliance Steel. Finally, Kennametal, having come off an outstanding growth stage recently, still holds appreciation potential going forward.
The article The 4 Best Mid-Cap Industrials for Your Money originally appeared on Fool.com.Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Kennametal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
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