The industrial machinery sector is well positioned to witness significant growth, thanks to the robust spending and incorporation of advanced technologies. Moreover, with inflation running higher than expected and the macro environment creating a bearish outlook, investing in stocks with solid metrics could help curb costs eating away at portfolios.
Therefore, let’s probe into the strong fundamentals of Honeywell International Inc. (HON), Deere & Company (DE), and Caterpillar Inc. (CAT) to see if they are worth sticking on your watchlist now.
Strong figures released in recent weeks suggest that the Federal Reserve would require more rate hikes to tame inflation. Last week Powell’s testimony created chaos in the markets, affecting manufacturing and industrial sectors that have experienced volatility over the last two years.
The industrial sector faces significant hurdles from higher interest rates. However, after falling in November and December, industrial production remained unchanged in January. Further, at 103% of its 2017 average, total industrial production in January was 0.8% above its year-earlier level, indicating an improvement in the industrial backdrop.
Amid this, the industrial machinery sector has gained traction due to its incorporation of advanced technology, benefitting productivity and profitability. Moreover, as labor shortage remains a crucial business challenge in manufacturing, capital spending on industrial equipment could get buoyed due to the industrial sector’s drive toward greater automation.
Furthermore, the industrial machinery market is expected to reach $835.34 billion by 2028, growing at a CAGR of 3.6%. Also, the Vanguard Industrials ETF (VIS) has gained 12.3% over the past nine months. With these factors in mind, it could be wise to stick to fundamentally sound industrial machinery stocks HON, DE, and CAT that seem well-positioned to capitalize on the industry’s growth prospects.
Honeywell International Inc. (HON)
HON is a diversified technology and manufacturing company providing services worldwide. It operates in four segments: Aerospace; Honeywell Building Technologies; Performance Materials and Technologies; and Safety and Productivity Solutions.
On March 9, HON announced a new collaboration with Marriott International to improve in-room comfort and control for guests at hotels across Marriott Bonvoy’s portfolio of hotel brands. Through this, both companies aim to deploy personalized and innovative guestroom control offerings built on the Honeywell INNCOM guestroom automation and energy management software and hardware solutions.
In the same month, the company launched the first fire alarm system with UL-approved self-testing smoke detectors that can be tested automatically, transforming the way fire and life safety systems are installed, tested, and maintained. Such innovative additions and integration of intelligence across all aspects of security systems should strengthen its leadership position in fire and life safety.
“Honeywell is integrating intelligence across all aspects of fire and life safety systems,” said Jurgen Van Goethem, global president, Fire at HON.
On February 10, the company declared a quarterly dividend of $1.03 per share on its common stock, payable on March 10, 2023. Its forward annual dividend of $4.12 translates to a 2.13% yield on current prices. The dividend has grown at 5.3% and 6% CAGRs over the past three and five years, respectively.
HON’s trailing 12-month net income margin of 14% is 114.5% higher than the industry average of 6.53%. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 28.16%, 11.37%, and 7.97% compare to the industry averages of 13.83%, 6.90%, and 5.24%, respectively.
In the fiscal fourth quarter that ended December 31, 2022, HON’s net sales increased 6.1% year-over-year to $9.19 billion. Its operating income margin grew 220 basis points from the year-ago value to 19.7%, while its adjusted EPS came in at $2.52, up 20.6% year-over-year.
Analysts expect HON’s EPS and revenue to increase marginally year-over-year to $1.92 and $8.49 billion for the fiscal first quarter (ending March 31, 2023). It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 6% to close the last trading session at $193.10.
HON’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Among the 79 stocks in the A-rated Industrial – Machinery industry, it is ranked #19. HON is also rated B in Stability, Quality, Growth, Momentum, and Sentiment. Click here to see HON’s rating for Value.
Deere & Company (DE)
DE manufactures, distributes, and delivers various agricultural, construction, and forestry equipment worldwide. The company operates through four segments: Production and Precision Agriculture; Small Agriculture and Turf; Construction and Forestry; and Financial Services.
On February 22, the company declared its quarterly dividend of $1.25 per share, reflecting a 5 cents per share increase over the last quarter. This dividend is payable on May 8, 2023. Its forward annual dividend of $5 translates to a 1.26% yield on current prices. DE’s four-year average dividend yield is 1.37%. Also, its dividends have grown at 14.1% and 13.5% CAGRs over the past three and five years, respectively.
The stock’s trailing 12-month net income margin of 14.71% is 125.4% higher than the industry average of 6.53%. Likewise, the stock’s trailing-12-month ROCE and ROTA of 41.84% and 8.94% compare to the industry averages of 13.83% and 5.24%, respectively.
DE’s total net sales and revenues increased 32.2% year-over-year to $12.65 billion in the fiscal first quarter (ended January 29, 2023). The company’s attributable net income improved 116.9% from the year-ago value to $1.96 billion, while its total operating profit came in at $2.52 billion, up 103.9% year-over-year. Also, its EPS increased 124.3% year-over-year to $6.55.
The consensus EPS estimate of $8.37 for the second quarter (ending April 30, 2023) represents a 37.3% increase year-over-year. The consensus revenue estimate of $14.80 billion for the current quarter indicates a 23% increase from the prior-year period. Moreover, DE surpassed the revenue estimates in three of the trailing four quarters.
Over the past nine months, the stock has gained 22.6% to close the last trading session at $398.22.
DE’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our POWR Ratings system. It also has an A grade for Sentiment and B for Growth and Momentum. Within the same industry, it is ranked #32.
Click here to see the additional POWR Ratings for DE (Quality, Stability, and Value).
Caterpillar Inc. (CAT)
CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Its segments include Construction Industries; Resource Industries; Energy & Transportation; Financial Products; and All Other.
CAT’s four-year average dividend yield is 2.43%, and its current dividend of $4.80 translates to a 2.14% yield on prevailing prices. Its dividends have grown at a 6% CAGR over the past three years and an 8.7% CAGR over the past five years. Also, it has a record of 29 years of consecutive dividend growth.
Its trailing-12-month EBITDA margin of 20.02% is 51.5% higher than the industry average of 13.21%, while its trailing-12-month net income margin of 11.28% is 72.8% higher than the industry average of 6.53%.
For the fiscal fourth quarter that ended on December 31, 2022, CAT’s total sales and revenues came in at $16.60, up 20.3% year-over-year. Its adjusted profit increased 37.9% year-over-year to $2.01 billion, while its adjusted EPS increased 43.5% year-over-year to $3.86.
Street expects CAT’s revenue to increase 11.3% year-over-year to $15.12 billion for the fiscal first quarter (ending March 31, 2023). Its EPS is expected to increase by 30% year-over-year to $3.74. The company surpassed the EPS and revenue estimates in three of the trailing four quarters, which is promising.
The stock has gained 21.9% over the past six months to close the last trading session at $224.70.
CAT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Growth and Momentum. In the same A-rated industry, it is ranked #14 of 79 stocks. To see the other ratings of CAT for Value, Quality, Sentiment, and Stability, click here.
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HON shares were trading at $190.96 per share on Tuesday afternoon, down $2.14 (-1.11%). Year-to-date, HON has declined -10.42%, versus a 1.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...
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