Number Cruncher

Six U.S. Industrial large caps with economies of scale

What are we looking for?
The United States ISM Producing Managers Index dropped to 36.1 in April due to the COVID-19. The manufacturing companies were hit harder, but their valuations also dropped further than the other sectors. The U.S. Industrial sector fell by 27.5% compared to 12.7% for the S&P 500.

Today, we will look at U.S. large caps in the industrial sector. During the 2008 financial crisis, these companies were hit hard but did incredibly well shortly after. With the fiscal and monetary stimulus put in place to mitigate the COVID-19 combined with the reopening of factories, the history could repeat itself once again.

 

The screen

We screened U.S. companies focusing on the following criteria:

  • Market capitalization higher than 10 billion;
  • Earnings per share (EPS) growth 5-year average higher than 5% – We want a company that improved their profitability in the past 5 years;
  • Net operating profit (NOP) growth over 24 months higher than 5% – The EPS can be distorted by accounting classifications. We also use this variable to ensure we have a company that grew their bottom line;
  • Positive sales growth over 24 months – a great company should have been able to grow its revenue in the past 2 years;
  • Net operating profit (NOP) growth over 24 months must be higher than 24 months sales growth – We want a company that displays economies of scale;
  • Future growth value (FGV) lower than 50% – We can separate a company in 2 parts: the current operating value and the future growth value. The current operating value represents the value of the business today if it had no growth. The FGV is the intangible part of the company that we buy. We don’t want it to be too high.

For informational purposes, we have also included recent stock price, dividend yield and one-year price return.

 

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).

TICKER NAME PRICE ($) MKT CAP ($MIL.) SALES CH. 24M (%) NOP CH. 24M (%) FGV (%) EPS GROWTH AVG 5Y (%) DIV. YLD. (%) 1Y RTN. (%) SECTOR
LMT Lockheed Martin Corporation 377.54 105601 18.4 168.7 25.7 14.5 2.5% 10.4% Industrial – Capital Goods
AME Ametek, Inc. 83.24 19098 13.6 31.4 46.7 11.3 0.9% -2.2% Industrial – Capital Goods
CAT Caterpillar Inc. 108.61 58861 5.1 114.9 22.2 8.5 3.6% -6.1% Industrial – Capital Goods
CMI Cummins Inc. 162.03 23867 5.5 135.3 -10.2 7.9 3.2% 0.5% Industrial – Capital Goods
PH Parker-hannifin Corporation 165.14 20307 1.7 28.7 30.1 5.7 2.1% 1.3% Industrial – Capital Goods
DE Deere & Company 137.9 42304 26.5 48.6 23.0 5.3 2.2% 1.9% Industrial – Capital Goods

 

What we found
For those who don’t have any ethical issue with armament, Lockheed Martin Corporation has the highest growth in EPS in the last 5-year period. The company has the second highest sales growth and the highest NOP growth of our list. In their last earnings report, they maintained their previous guidance for EPS, operating profit and cash from operations.

Ametek Inc., a global manufacturer of electronic instruments and electromechanical devices, demonstrates great economies of scale. In the last 5-year period the company converted a 6.7% growth in sales into a 15.2% increase in EPS. In their first quarter sales declined by 6.6% over the previous first quarter, but it managed to increase their adjusted operating margin by 100 bps.

Cummins is organized into distinct business segments including engine, components, distribution and new power. This company is the cheapest of our list based on the FGV while displaying decent past results and big economies of scale. A negative value for the FGV means the company is selling at a discount of the current operating value.


We used this customized screener for the article.
For more details about these industrial stocks, please subscribe the Inovestor for Advisors platform for free: https://www.inovestor.com/en-CA/store/

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.