According to a consensus of Wall Street analysts, buying these three stocks below could result in a 22% gain. However, it doesn't make sense to slavishly follow Wall Street thinking as it can be somewhat short-term in its view. That said, all three of these companies are highly profitable, cash-generative, and leading players in their fields.
Let's take a look at why data equipment maker Vertiv Holdings (VRT -3.17%), copper miner Freeport-McMoRan (FCX -0.84%), and asset intelligence-solution provider Zebra Technologies (ZBRA -1.96%) are good values now, and make sense for long-term minded retail investors to buy.
Vertiv is in recovery mode
This data equipment company operates in attractive end markets. It's a hardware, software, and services provider to the data transmission, analysis, processing, and storage market. As such, its customers include data centers and cloud companies such as Google Cloud or Microsoft Azure.
But it hasn't always executed as well as it might have. For example, in 2021 the company was behind the inflation curve and failed to raise prices sufficiently to offset rising costs. The following year, management pushed through price increases in line with its plan but missed its initial earnings and cash-flow target due to rising costs and delays in cash collections from China and elsewhere.
Fast forward to the first quarter of 2023, and the supply chain issues that dogged the company in 2021 and 2022 appear to be easing, as are the benefits of the pricing increases through 2022. Meanwhile, Vertiv is doing a better job of collecting receivables from customers. The company beat its first-quarter guidance on earnings and cash flow, and management nudged its full-year margin and earnings guidance higher.
The midpoint of management's guidance gives the stock a forward price-to-earnings ratio of 12.6 and price-to-free cash flow multiple of 17.3. Those are attractive valuations for a company set to grow over the long term due to the explosive growth in data (not least from artificial intelligence and the Internet of things) and ongoing investment by cloud providers and data center companies.
Freeport-McMoRan's electrifying future
Freeport-McMoRan mines for molybdenum and gold, but its real long-term earnings potential comes from copper. Industrial metal is traditionally seen as a play on economic growth due to its broad-based use across many industries. These include electrical networks, construction, transportation, industrial machinery, and consumer goods.
While that still holds true, a new growth kicker is playing across all five of the company's end markets. Namely, the trend toward electrification is being driven now by new technologies such as electric cars, renewable energy, industrial automation, smart buildings/infrastructure, and the growth of web-enabled devices and the Internet of Things (IoT).
Meanwhile, on the supply side, the increasing difficulty of acquiring permits due to environmental regulation and political interference may also contribute to higher pricing over time.
Image source: Getty Images
The company's earnings, cash flow, and market valuation relies heavily on the price of copper -- currently at $3.72 per pound. It's a price that still leaves the company as highly profitable. For reference, management models its earnings before interest, taxes, depreciation, and amortization (EBITDA) at $10.5 billion, assuming a copper price of $4 in 2024 and 2025. Note that the price has been above $4 per pound for most of 2023.
An EBITDA of $10.5 billion would value the shares at about 5 times EBITDA in 2024. That's an attractive valuation for the stock, even if its earnings will likely be volatile over time. As a result, Freeport's stock looks like a good value now.
Backing the Zebra for the long-term win
Zebra offers products and services in the so-called asset intelligence and data capture market. In plain English, they sell mobile computers, barcodes, RFID, and other data capture devices used across retail, logistics, transportation, and industry. Some examples include handheld scanners used in a logistics warehouse to monitor stock, or scanners to check products in a retail outlet.
Despite deteriorating end markets and the possibility of more near-term pain, Zebra's stock is up almost 10% in 2023. This comes in a year when Zebra and one of its biggest rivals, Honeywell International, have both seen their end markets be weaker than expected.
Zebra's management expects its sales to decline this year. Similarly, Honeywell expects its productivity solutions and services business (Zebra's direct competitor) to also decline this year on the back of weak demand for data capture products.
Zebra expects its full-year 2023 sales to drop by 2% to 6%. Meanwhile, Honeywell expects its full-year SPS sales to be down in the high single digits, lower than its earlier guidance. Zebra CEO Bill Burns noted on the company's earnings call that "as the risk of broader softening of industry demand has materialized, we have reduced our full-year outlook."
Unfortunately, there's little that Zebra or Honeywell can do about their end markets, but this is likely to prove a temporary and cyclical slowdown rather than any long-term structural problem. The reality is, Zebra's data capture solutions augment the automation of workflow at companies. They are a critical part of the growth of both automation and the use of real-time analytics to improve workflow efficiency.
As such, investors should be looking to take advantage of temporary weakness to buy into an attractive long-term growth story. Just be aware that Zebra could report more bad news over the near term due to the uncertainty in the economy.
