As a group, industrial sector stocks have had a tough 12 months. Shares traded down by about 4.5% over that period and by about 2.5 times that much for the year to date. By comparison, tech stocks are up nearly 44% in the past year and about 24% for the year to date.
Industrial companies are highly dependent on the overall economy. Unlike consumer staples or utilities, it’s possible for wholesale customers and individual consumers of industrial goods to delay purchases until they feel more financially secure.
Why, for example, would any business choose now to invest in new capacity? The COVID-19 pandemic has put millions of Americans out of work and no well-run company would build additional capacity when there is so much unused capacity lying idle.
Some of America’s best-known companies have been hit hard by the coronavirus outbreak, and their shares are trading anywhere from a little to a lot lower than they were a year ago. Will they recover their former luster? When?
Expecting the poorer performing industrial stocks to return even to 2019 levels by the end of this year is almost certainly folly. Even expecting them to recover to that level in 2021 may be stretching it.
Here are five stocks currently trading well below their 52-week highs and all have multiples of more than 15 times their expected 2021 earnings. We also have calculated what their multiples would be if they reached 80% of their 2019 earnings per share. In our view, that would be quite an achievement.
General Electric Co. (NYSE: GE) was once the world’s largest conglomerate, but those days are now just a speck in the rear-view mirror. The stock trades at more than 50% below its 52-week high and has a target price of $7.70, compared with Wednesday’s closing price of $6.40. A comeback depends on GE’s ability to cut the losses in its power segment, regain lost revenue in its aviation and health care segments and drive its renewables revenue higher.
That’s a tall order, and Credit Suisse analyst John Walsh doesn’t think GE can fill it. He has maintained a Neutral rating on the stock but cut his price target from $8 to $7. Colin Scarola at CFRA kept his Hold rating and $6 price target, arguing that GE’s 12-month share price decline of around 40% reflects a fair price for the stock.
3M Co. (NYSE: MMM), like GE, saw sales in each of its segments decline in the second quarter. Quarterly sales were down about 12% year over year, but up by a like amount in June. Analysts differ somewhat on 3M’s prospects. At Credit Suisse, the stock is rated Outperform but the price target was cut by a dollar a share to $179 after second-quarter results were reported. Morgan Stanley raised its price target from $160 to $166 and maintained an Equal Weight rating.
3M stock trades at 15% below its 52-week high and at 17 times expected 2021 earnings. At 80% of fiscal 2019 earnings of $7.92 per share, the stock’s multiple is 24.5 times for 2021. The stock closed at $155.35 on Wednesday.
Boeing Co. (NYSE: BA) was once the world’s most valuable industrial company. Then came two crashes of the company’s best-selling 737 Max jet that killed 346 people and led to the March 2019 grounding of the plane. With more cancellations than new orders, Boeing’s climb back to its former glory is going to be even steeper.
The consensus price target on the stock is $175.77, and shares closed Wednesday at $174.28, less than 1% below the target, even though shares remain more than 50% below the 52-week high of $391.00. Boeing lost $1.12 per share last year, and the consensus estimated loss for this year is $9.29. With a consensus estimate for earnings of $3.72 per share in 2021, the stock trades at 46 times that estimate. Boeing is a real long shot, but if it can get its hundreds of planes in inventory delivered and sell its new production, investors with patience and courage could see some major upside.
Honeywell International Inc. (NYSE: HON), like GE and Boeing, is tied to the aviation industry, and it doesn’t take a clairvoyant to see that the industry’s road to recovery will be long and rocky. The company’s aerospace segment (its largest) saw sales drop 28% in the second quarter and profits decline 42%. Yet, the company reported better than expected overall results and, with two exceptions, most analysts boosted their price targets on the stock.
The consensus price target is currently $166.55, and at Wednesday’s closing price of $150.82, the stock has a potential upside of around 10%. At 80% of 2019 earnings of $8.52 per share, the stock’s current 2021 multiple is 22 times. At the consensus estimate for 2021 earnings of $7.83, the multiple is just over 19 times.
Flowserve Corp. (NYSE: FLS) makes a variety of pumps, seals and flow control systems for everything from automobiles to compressors for pushing natural gas through the country’s pipeline system. By market cap, it is the smallest by far of any company in this group and the most exposed to the truly beaten-down energy sector. There is little optimism that the energy sector will bounce back this year, so looking ahead to 2021 is important for Flowserve.
The stock trades at around 43% below its 52-week high of $51.25 and closed Wednesday at $28.97. The consensus estimate for 2021 earnings is $1.57, which implies a multiple of about 18.5 times. Based on 80% of 2019 earnings per share of $2.20, the stock’s 2021 multiple is 18.8 times. With a market cap under $4 billion, Flowserve also could be a takeover target.
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