CAT: 3 Industrial Stocks to Bet on an Economic Recovery Next Year

While the technology sector majorly benefited from the rapid digital transformation, the industrial sector was severely disrupted due to shut down of most of the operations in the initial months of the pandemic. While the US industrial production index witnessed a steep decline in the first few months of the year, it increased at an annualized rate of 39.8% in the third quarter. Moreover, as of September, production recovered more than half of its decline between February and April.

This recovery has been well reflected in the stock market. The SPDR Select Sector Industrial ETF (XLI) gained 64.4% since hitting its 52-week low in mid-March, versus S&P 500’s gains of 53.6%.

With the world becoming more aware about the effect of greenhouse gases on the climate, the demand for Electrical Vehicles and cleaner energy has been rising. This should result in increasing demand for natural resources like nickel and lithium among others, boosting the performance of some industrial companies. In addition, according to Trading Economics, the United States Manufacturing Purchasing Managers’ Index (PMI) is projected to trend around 50.00 points in 2021 and 51.00 points in 2022. These readings are good enough to predict the steadiness of the sector.

With quality financials, including balance sheet strength, Caterpillar, Inc. (CAT), Freeport-McMoRan, Inc. (FCX), and BHP Group Limited (BHP) are expected to gain from the revival of the economy in 2021 and beyond.

Caterpillar, Inc. (CAT)

Founded way back in 1925, CAT is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments: Construction Industries, Resource Industries and Energy & Transportation, and the Financial Products segment. While production and sale of large industrial work vehicles and machinery are CAT’s main revenue drivers, the company also earns from its subsidiaries. Some of its notable subsidiaries are Caterpillar Financial Services, FG Wilson, Perkins Engines, Progress Rail Services Corporation, and Solar Turbines.

Severely hit by the pandemic, CAT’s revenues decreased 31% to $10 billion for the second quarter that ended June 2020. However, the company still has strong financials which should help tide it over during the pandemic. The company has announced that it will maintain its quarterly cash dividend of $1.03 per share. Analysts expect CAT’s revenue to increase 7.6% in 2021. The company’s EPS is expected to increase 39.7% next year.

The stock has gained 83.2% since hitting its 52-week low of $87.50 on March 12^th. CAT’s actual EPS of $1.03 for the quarter that ended June 2020 surpassed the consensus estimate by nearly 61%. Earlier this month, the company signed an agreement to acquire the Oil & Gas Division of the Weir Group PLC at a purchase price of $405 million. The stock is well positioned for long-term growth as the economy revives.

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How does CAT stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

A for Industry Rank

A for Overall POWR Rating

The stock is also ranked #2 out of 60 stocks in the Industrial – Machinery industry.

Freeport-McMoRan, Inc. (FCX)

FCX is a leading international mining company and the technology leader in the copper industry. The world’s premier publicly traded copper company, FCX was founded in 1987 and is based in Phoenix, Arizona. Operating across North and South America, and Indonesia, the company engages in the acquisition of mineral assets, oil, and natural gas resources. Its portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits.

FCX’s copper sales increased 10% to 759 million pounds for the second quarter that ended June 2020. The company’s gold sales for the quarter increased 12% to 184 thousand ounces, reflecting stronger performance in Indonesia. Its underground ramp-up at Grasberg is also advancing on schedule. Analysts expect FCX’s revenue to increase 12.1% for the quarter that ended September 2020 and 30.1% in 2021. The company’s EPS is expected to increase 1,650% in the current year, 334.3% next year, and at a rate of 276.8% per annum over the next five years.

Last month, FCX announced its commitment to the Copper Mark, signaling its dedication “to supplying the global economy with responsibly produced copper,” in the words of Richard C. Adkerson, President and CEO of the company. The stock gained 231.6% since hitting its 52-week low of $4.82 on March 19^th. As the economy revives, and with increased demand for cleaner energy, the company should thrive in the upcoming years.

FCX’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. Among the 33 stocks in the Industrial – Metals industry, it’s ranked #7.

BHP Group Limited (BHP)

Headquartered in Melbourne, Australia, BHP is a world-leading resources company. The company engages in the discovery, acquisition, development, and marketing of natural resources worldwide. Besides operating mainly through Petroleum, Copper, Iron Ore, and Coal segments, the company is also involved in mining, smelting, and the refining of nickel, which is a key element for batteries of Electrical Vehicles.

BHP’s group copper equivalent production increased 2% year-over-year owing to strong performances in metallurgical coal and iron ore, with record production achieved at Jimblebar for the fiscal year 2021 first quarter that ended September 2020. The company’s major project Atlantis Phase 3 achieved first production in July 2020, ahead of schedule and on budget. BHP’s first production from the Spence Growth Option is expected between December 2020 and March 2021.

Earlier this month, BHP announced that it has signed a Membership Interest Purchase and Sale Agreement with Hess Corporation (HES) for a purchase price of $505 million to acquire an additional 28% working interest in Shenzi, a six-lease development in the deepwater Gulf of Mexico. Also, the pioneer in EVs, Tesla (TSLA), is in talks with BHP over the Nickel-Supply pact. The stock gained 66% since hitting its 52-week low in mid-March. The company’s EPS is expected to grow at a rate of 5.3% per annum over the next five years.

BHP’s strong fundamentals are reflected in its POWR Ratings, it has a “Buy” rating with a grade of “B” for Trade Grade, Buy & Hold Grade, and Industry Rank. Within the Industrial-Metals industry, it’s ranked #3 out of 33 stocks.

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CAT shares were trading at $168.41 per share on Thursday morning, up $1.01 (+0.60%). Year-to-date, CAT has gained 16.76%, versus a 8.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...