3 Real-Deal Stocks to Buy Now

Given the recent market malaise, it's time to start taking a look at some companies that may be being sold off, but still have great long-term prospects. In this context, these companies are the real deal:

• water-quality technology company Xylem
• food safety, clean water, and hygiene company Ecolab
• pilot training and aviation-simulator company CAE

Let's take a look at why.

Valuations

These stocks certainly aren't cheap based on their current valuations. In fact, the case for buying the stocks is based on their long-term prospects -- a point we'll return to shortly.

For now, here's a look at enterprise value (EV) compared to earnings before interest, taxation, depreciation, and amortization (EBITDA) for all three stocks. The EV/EBITDA ratio is a commonly used valuation metric. As a rough approximation, for a company in a mature industry, a multiple of around 11 could be used as a reference point.

However, as you can see in the table below, the consensus analyst forecasts for the next couple of years see EV/EBITDA ratios falling as EBITDA increases. (Note that CAE is based in Canada and reports in Canadian dollars.)

*All figures are estimates. Data source: MarketScreener.com.

The question now becomes: What might give investors confidence that these companies can generate earnings growth consistently over the long term?

Image source: Getty Images.

Xylem

The case for buying Xylem is based on the need for utilities to maintain and improve water infrastructure and for the industrial sector to treat water.

The company has been investing in and developing so-called advanced infrastructure analytics (AIA) solutions, which use web-enabled technologies and data analytics to improve how utilities monitor and deal with theft, leakages, metering, and the overall efficiency of their pipelines. Although adoption has been a bit slower than management previously envisioned, Xylem still reported double-digit growth in AIA orders in 2019, and long-term prospects look good.

The trend toward urbanization, and the need for developed economies to maintain water infrastructure and developing countries to build out new networks, aren't going away anytime soon. With its collection of pumps, AIA solutions, turbines, heat exchangers, and water and wastewater treatment systems, Xylem is ideally placed to benefit.

Ecolab

Ecolab operates in the market for food safety, clean water and hygienic environments. Restaurants, hotels, food-production plants, and industrial plants all need to ensure sanitation, cleanliness, and water quality -- a fact only emphasized by the recent coronavirus outbreak. Ecolab's customers include many of the major global food and beverage companies (like McDonald's, Nestle, Unilever, and PepsiCo), so Ecolab can grow as its customers expand their geographic presence.

The company has delivered earnings-per-share growth at a compound annual growth rate of 11%. And given that management believes it only has a 10% market share in a $130 billion market, it looks like there's plenty of growth to come.

Like Xylem, Ecolab is set to benefit from the trend toward urbanization. Such changes usually bring increased demand for processed food -- notably proteins -- and a need for water-quality assurance in the public environment. This is where the company's cleaning solutions, food treatment solutions, and water and wastewater treatment solutions come in.

Image source: Getty Images.

CAE

Last but not least, CAE is the world's leading manufacturer of aircraft simulators, and is increasingly expanding its pilot-training services as well. The case for buying CAE is based on three favorable trends:

• Thanks to a combination of underlying growth in civil aviation and an aging pilot demographic, CAE believes there's a need for 300,000 new business-jet and airline pilots over the next decade -- compared to 360,000 active pilots now.
• A shortage of pilots could also lead to more airlines outsourcing training to companies like CAE -- the company only has a third of the global market at present.
• The increasing use of electronic assistance in commercial aviation (as seen with the Boeing 737 MAX) is putting pressure on pilots, and there's an increased stress on training standards.

Provided that civil aviation remains in growth mode, the company has a long runway of growth opportunity ahead. Throw in the possibility that a larger company may come along and decide to bid for it -- in line with the trend toward consolidation in the industry -- and CAE is an attractive stock for long-term investors.