These three very different stocks have contrasting investment propositions, but what they share is a significant amount of upside potential over the next decade. They have also all outperformed the S&P 500 so far in 2023. Stanley Black & Decker (SWK -0.41%) is the value option of the three, while GE Healthcare Technologies (GEHC -0.25%) is the option for growth at a reasonable price, and Hexcel (HXL -0.27%) is the growth investor's choice.
1. Stanley Black & Decker's slow march to value
It's been a difficult couple of years for the maker of tools and industrial products. The company started 2022 expecting full-year adjusted EPS in the range of $12 to $12.50, only to end up at $4.62.
Soaring raw material/supply chain costs and declining demand for its tools and outdoor products hit the company hard. There's little the company can do about rising rates hurting the housing market and, consequently, demand for DIY tools. In addition, the housing-related market decline was due to a correction after lockdowns and stay-at-home measures pulled forward demand in previous years. Not only did the lockdowns distort the market, but they also encouraged Stanley to delay making supply chain restructuring necessary to reduce underlying costs.
However, management plans to spend the next few years reducing its bloated inventory in the face of ongoing declines in tool sales while executing its plan to cut run-rate costs by $2 billion by 2025.
The numbers are significant (the company's adjusted operating profit was just $1.2 billion last year) and game-changing. The case for the stock is based on the plan's successful implementation while acknowledging that conditions could hardly get worse for the company than in 2022 and 2023.
Image source: Getty Images.
While it will take time for the plans to come to fruition, and Stanley's tools sales are coming under sustained pressure as rates keep rising, the long-term value case for the stock is compelling. Wall Street analysts have the company generating $1 billion in free cash flow (FCF) when the restructuring plan is complete in 2025, and based on the current market cap of $14 billion, that would put Stanley on 14 times FCF. It will take time, and there will likely be some road bumps along the way, but the stock looks like a decent value for patient investors. In addition, the stock's 3.3% dividend yield provides some useful income while you wait for the turnaround to take place.
2. GE Healthcare Technologies has growth prospects
Speaking of FCF, Wall Street analysts expect GE Healthcare to generate $6.5 billion in FCF over the next three years, the average of which would put the stock on less than 17 times FCF. Considering that a mature industrial company is often seen as having a fair value at 20 times FCF, the stock looks like a good value.
It looks like an even better value when you consider that the company is not a mature industrial with low single-digit growth prospects; it's a company with several long-term growth prospects.
Now that the company is free from General Electric, the stand-alone company can invest in growth. Management's priority is to grow revenue in its high-margin ultrasound and pharmaceutical diagnostics businesses while growing profit margins in the other two businesses -- imaging and patient care solutions.
These growth initiatives include:
- A larger share of the revenue from higher-margin new product introductions (NPIs), of which there were 40 in 2022 alone.
- As the only imaging company that also produces pharmaceutical diagnostics, GE Healthcare has a growth opportunity in Theranostics -- the use of tracers to diagnose and also target the affected area with a drug using the tracer.
- The company, and others in the imaging industry, got hit with significant increases in costs due to the supply chain crisis, and their alleviation should lead to margin recovery.
- Management believes it can grow revenue by launching new products based on its current platforms.
Putting these initiatives together would make GE Healthcare an excellent candidate for investors looking for a stock that combines growth and value in one stock.
3. Hexcel's long-term growth looks assured
The company is a leader in advanced graphite composites used in aerospace, defense, and general industrial applications (including wind blades). Its materials carry a weight and strength advantage over conventional materials like aluminum. As such, they are increasingly used in areas where they generate long-term productivity gains on heavy equipment. For example, on commercial aircraft -- all things being equal -- less weight means less fuel used.
That's why Hexcel is generating more and more content on newer aircraft and why Boeing's CEO Dave Calhoun believes its next plane will have significantly more composite content on it.
As such, the case for buying Hexcel stock lies in a combination of the aggressive ramp-up of airplane production at Boeing and Airbus as they execute on multiyear backlogs and the increasing amount of composite content per plane on newer models. Hexcel can grow its revenue on non-aerospace applications too.
Hexcel's valuation of slightly less than 40 times the estimated 2023 earnings may seem high. Still, this company has a high degree of certainty around its forward earnings and powerful secular growth trends behind it.
