Amid headwinds in the broader economy teetering on the brink of a Fed-induced recession, investors could load up on fundamentally strong industrial stocks Caterpillar Inc. (CAT), Powell Industries, Inc. (POWL), and LSI Industries Inc. (LYTS) to capitalize on the government-aided increase in industrial and manufacturing activity.

Amid souring relationship and rising tensions between the U.S and China, not helped by Xi Jinping’s ascension to an unprecedented third term in power, there is an ever-increasing imperative for the American economy to become self-reliant in manufacturing and critical infrastructure in an increasingly fragmented world that also needs to manage an energy transition to combat the common threat of climate change.

To that end, the Bipartisan Infrastructure Law has already provided more than $185 billion in funding for over 6,900 projects, including 2,800 bridge repair and replacement projects.

In addition, the CHIPS and Science Act has authorized $280 billion to be doled out for domestic manufacturing of semiconductors and research in the applied sciences at agencies such as the NSF.

The Inflation Reduction Act (IRA) of 2022 aims to catalyze investments in domestic manufacturing capacity, encourage procurement of critical supplies domestically or from free-trade partners, and jump-start R&D and commercialization of leading-edge technologies such as carbon capture and storage and clean hydrogen.

The aforementioned legislations introduce $2 trillion in new federal spending over the next ten years.

With the domestic economy at the dawn of an industrial renaissance, let’s take a closer look at the featured stocks.

Caterpillar Inc. (CAT)

CAT manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The company operates through three segments: Construction Industries; Resource Industries; and Energy & Transportation.

On February 17, CAT paid its regular quarterly dividend of $1.20 per share of common stock. CAT pays $4.80 annually as dividends, which translates to a forward yield of 1.99% at the current price.

CAT has paid a cash dividend every year since the company was formed and has paid a quarterly dividend since 1933. The company has paid higher annual dividends to shareholders for 29 consecutive years and is recognized as a member of the S&P 500 Dividend Aristocrat Index. Its payouts have increased at an 8.7% CAGR over the past five years.

On January 6, CAT announced its investment in Lithos Energy, Inc., headquartered in San Rafael, California. Lithos specializes in designing, engineering, and manufacturing shock-resistant and high-performance battery solutions for applications including off-road and marine.

Since CAT designs its equipment to operate in the most demanding conditions, the company expects Lithos’ experience manufacturing battery packs for similarly demanding environments to augment its electric product development.

On December 15, 2022, CAT announced its collaboration with Luck Stone for its first autonomous deployment in the aggregates industry at Luck Stone’s Bull Run Plant in Chantilly, Virginia. This would allow the company to gain greater insights into quarry operations in order to tailor the next generation of autonomous solutions specific to quarry and aggregate applications.

For the fiscal year that ended December 31, 2022, CAT’s total sales and revenue increased 16.6% year-over-year to $59.43 billion, primarily due to a $151 million favorable impact from higher average financing rates and a $55 million favorable impact from returned or repossessed equipment, partially offset by a $38 million unfavorable impact from lower average earning assets.

CAT’s adjusted operating profit for the fiscal increased 31% year-over-year to $9.13 billion, while its adjusted profit increased 23.7% and 28% year-over-year to $7.34 billion and $13.84 per share, respectively.

For the fiscal year 2023, CAT’s revenue is expected to increase by 6.4% year-over-year to $63.23 billion, while its EPS is expected to grow 15% year-over-year to $15.91. Moreover, the company has impressed by surpassing consensus EPS estimates in three of the trailing four quarters.

The stock has gained 27.2% over the past six months to close the last trading session at $240.96.

CAT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

CAT also has a B grade for Growth and Momentum. It is ranked #20 out of 79 stocks in the A-rated Industrial – Machinery industry. 

Click here for additional POWR Ratings for CAT for Value, Stability, Sentiment, and Quality.

Powell Industries, Inc. (POWL)

POWL designs, develops, manufactures, sells, and services custom-engineered equipment and systems which distribute, control, and monitor electrical energy and provide protection to motors, transformers, and other electrically powered equipment.

On January 31, 2023, POWL announced that its board of directors had approved a 1% increase to the quarterly cash dividend on its common stock to $0.2625 per share, equating to an annualized dividend of $1.05 per share. The dividend is payable to the shareholders on March 15, 2023.

POWL pays $1.05 annually as dividends, which translates to a forward yield of 2.27% at the current price. This is comparable to the 4-year average dividend yield of 3.63%.

For the first quarter of the fiscal year 2023, which ended December 31, 2022, POWL’s revenue increased 19% year-over-year to $126.86 million, while its gross profit increased 44.9% year-over-year to $19.46 million. During the same period, the company’s operating income came in at $1.09 million, compared to an operating loss of $4.29 million.

As a result, POWL’s net income for the quarter came in at $1.16 million, or $0.10 per share, compared to the net loss of $2.85 million, or $0.24 per share, during the previous-year quarter.

For the fiscal year 2023, POWL’s revenue is expected to increase 12.6% year-over-year to $599.43 million, while its EPS is expected to increase 211.4% year-over-year to $1.09. The stock has further impressed by surpassing consensus EPS estimates in three of the trailing four quarters.

The company’s EPS for the same quarter is expected to increase 150% year-over-year to $0.33. Additionally, POWL topped consensus EPS estimates in three of the four trailing quarters.

POWL’s stock has gained 2.7% over the past month and 96.6% over the past six months to close the last trading session at $46.23.

POWL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. It also has an A grade for growth and a B for Value and Sentiment.

POWL is ranked #3 out of 79 stocks in the A-rated Industrial – Machinery industry.

Click here for additional ratings for POWL’s Quality, Stability, and Momentum.

LSI Industries Inc. (LYTS)

LYTS offers non-residential lighting and retail display solutions. The company operates through two segments: Lighting and Display Solutions.

On March 8, LYTS introduced its long-term strategic growth plan, including new, five-year financial targets through FY28. According to the plan, the company is aiming to deliver 800 million in net sales and $100 million in adjusted EBITDA by fiscal 2028 while expanding customer share within existing verticals, expanding market share into new verticals, and continuing the ongoing launch of vertical/customer specific new products.

On February 14, LYTS paid its regular cash dividend of $0.05 per share. The company pays $0.20 annually as dividends, which translates to a yield of 1.26% at the current price.

On January 10, LYTS announced the results from its turnkey solar installation at a Speedy Stop refueling and convenience store in Austin, Texas. The installation that mounts a full array of solar panels atop the refueling center’s canopy and car wash generates 170 megawatt-hours (MWh) of electricity annually, which would allow the entire investment to be paid back in less than four years.

LYTS’ net sales came in at $128.80 million in the second quarter of the fiscal year 2023 that ended December 31, 2022, up 15.9% year-over-year. During the same period, the company’s adjusted EBITDA increased 54% year-over-year to $12.98 million.

LYTS’ adjusted net income for the quarter came in at $7.63 million, up 79.8% year-over-year, while its adjusted EPS grew 73.3% year-over-year to $0.26.

Analysts expect LYTS’ revenue and EPS for the fiscal year 2023 to increase 9% and 35.8% year-over-year to $496.01 million and $0.73, respectively. Revenue and EPS are expected to keep growing over the next two fiscal years to $554.76 million and $0.95 by fiscal 2025. Moreover, the company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.

The stock has gained 12.4% over the past month and 94.9% over the past six months to close the last trading session at $15.88.

LYTS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It also has an A grade for Value and Sentiment and a B for Quality.

LYTS is ranked #5 of 90 stocks in the Industrial – Equipment industry. 

Click here for the additional POWR Ratings for Growth, Stability, and Momentum for LYTS.

Consider This Before Placing Your Next Trade…

We are still in the midst of a bear market.

Yes, some special stocks may go up. But most will tumble as the bear market claws ever lower.

That is why you need to discover the brand new “Stock Trading Plan for 2023” created by 40-year investment veteran Steve Reitmeister. There he explains:

• Why it’s still a bear market
• How low stocks will go
• 9 simple trades to profit on the way down
• Bonus: 2 trades with 100%+ upside when the bull market returns

You owe it to yourself to watch this timely presentation before placing your next trade.

Stock Trading Plan for 2023 > 

CAT shares were trading at $227.88 per share on Friday afternoon, down $13.08 (-5.43%). Year-to-date, CAT has declined -4.42%, versus a 0.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

More Resources for the Stocks in this Article