Barring any dramatic moves in the next few weeks, these 10 mighty companies will be the best performing industrial stocks of the year. Let's see what we can learn from them and whether they are still stocks worth buying.
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The best performing industrial stocks of 2019
Let's start with a rundown of the stocks and their performance so far in 2019.
Three conclusions immediately spring to mind:
- Aerospace remains a hot sector to invest in, as shown by TransDigm Group (TDG -0.79%), HEICO (HEI 0.16%), General Electric (GE -1.04%), Raytheon (RTN) and United Technologies (RTX -0.28%) (RTX -0.28%)
- Value is always in style. GE and Dover (DOV -1.35%) are both proof of that.
- Execution and quality of earnings matters. This is where Ingersoll-Rand (TT -1.19%), Danaher (DHR 0.04%), Illinois Tool Works (ITW -0.86%), and AMETEK (AME -0.69%) come in.
Hot aerospace stocks
Aerospace plays TransDigm and HEICO are leading the way, while the strongest parts this year for conglomerates General Electric and United Technologies (UTC) have been their aerospace segments. Defense and aviation company Raytheon is included in the list since it's set to merge with UTC's aerospace businesses, Pratt & Whitney and Collins Aerospace.
It marks another strong year for the industry even as passenger growth slowed and worldwide airline profit is set to dip. No matter: All the aerospace companies reported strong growth from aftermarket parts/service revenue -- somewhat surprising given slowing passenger growth.
|
Airline Metric |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 (Estimate) |
|---|---|---|---|---|---|---|---|
|
Passenger growth |
5.7% |
6% |
7.4% |
7.4% |
8.1% |
7.4% |
5% |
|
Passenger load factor |
79.8% |
80% |
80.5% |
80.4% |
81.5% |
81.9% |
82.1% |
|
Operating profit |
$3.5 billion |
$4.6 billion |
$8.6 billion |
$8.5 billion |
$7.5 billion |
$5.8 billion |
$5 billion |
Data source: International Air Transport Association.
Looking ahead, it seems likely that the aerospace market will remain strong in 2020. About 49% of respondents (airline CFOs and heads of cargo) to an International Air Transport Association survey believe profitability will increase over the next 12 months, while only 27% believe it will decrease. That's good news for TransDigm and HEICO -- two plays on the commercial aviation aftermarket due to their history of growth through acquisitions.
But there's one slight cause for concern: It's far from clear how much impact that the grounding of the Boeing 737 MAX has had on aftermarket demand as older planes are run more in the plane's absence -- something that could reverse itself if and when the MAX returns to service.
In these circumstances, TransDigm is probably still a good value, but it's hard to argue that HEICO is, too.
TDG P/E Ratio data by YCharts.
And since aerospace remains the strong point of UTC's operations (the idea of sharing technology while marrying Raytheon's stable defense-industry cash flows with UTC's growth initiatives is a good one), it makes more sense to buy Raytheon ahead of the merger.
The value investment plays
The case for buying Dover has long been about the potential to generate earnings growth through restructuring and cutting costs, and management has executed very well on it. Meanwhile, the company has continued its ongoing shift to make its revenue less cyclical -- microphone company Knowles and upstream oil and gas business Apergy have been spun off in the last five years.
In common with Illinois Tool Works, Dover is probably close to fair value now, but it's a Dividend Aristocrat with a 63-year record of raising dividends, and has a well-covered payout.
GE's rise in 2019 is as much a part of CEO Larry Culp having set the bar low for the company when he took over as it is about the strong growth in aerospace and the slow turnaround in progress at power. No matter: It's better to underpromise and overdeliver than the other way around, and GE has made progress on reducing debt and improving cash flow generation.
Frankly, GE looks slightly undervalued, but if gas turbine end demand is set to grow again, then the restructuring at power could be made a lot easier.
Execution and good-quality management
Danaher's life sciences and diagnostics exposure means it's a safe place to hide as the broader industrial sector slows in 2019 and 2020. In addition, the company continues to grow revenue in mid single digits while shifting toward a higher percentage of recurring consumables revenue. Meanwhile, it's becoming increasingly clear that the deal to buy GE's biopharma business is very good news for Danaher.
The chart below shows the big reason electronic instrument and electromechanical product company AMETEK, multi-industry Illinois Tool Works, and HVAC company Ingersoll-Rand have outperformed: It's largely down to excellent margin expansion in recent years.
AME Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
Illinois Tool Works' margin expansion -- even in the face of declining end markets -- is a consequence of its self-help initiative, such as product-line simplification and focusing on its key products and customers, designed to wring every bit growth it can out of its businesses. It's hard to make the case that the stock is a good value now, but it might suit investors looking for a safe and stable dividend.
AMETEK's aerospace, medical, and process automation has helped it offset weakness in its industrial automation and engineered solutions end markets. But trading on a forward P/E of 23 and with analysts forecasting just 7% growth in earnings, AMETEK isn't a compelling buy at these levels.
Ingersoll-Rand's valuation is somewhat cheaper. And its raising of earnings guidance through 2019 and continued strong growth in HVAC orders suggest it can continue its growth trajectory. Throw in some growth potential from the refocusing of the business after its noncore industrial business merge with Gardner Denver, and Ingersoll-Rand stock still has some upside potential left.
