Machinery Stocks for Upbeat Factory Orders

The U.S. Commerce Department released its monthly report on orders to U.S. factories for the month of May. Orders increased at the fastest pace in over a year. This report augments the July 1 report from the Institute for Supply Management, which showed that its index for manufacturing demand was at the highest since last August--though still below the threshold signaling manufacturing expansion.

Still, if the contraction in U.S. manufacturing is bottoming, some investors may want to begin considering stocks that could benefit. We ran a screen using Morningstar's  Premium Stock Screener, searching for narrow-moat machinery stocks that are currently rated 4 stars or higher. The results are below.

One company on the list is  Illinois Tool Works (ITW). Assessing the firm's first-quarter results, senior analyst John Kearney wrote: "The company appears to be managing its working capital with impressive efficiency. Cash from operations was down just 9.5% from year-ago levels, thanks to reductions in working capital, and free cash flow was down an even more modest 4.9%, with lower capital expenditures accounting for the difference between the two cash metrics. Since we place more value on the stream of cash flows a company produces than an earnings number that can be fraught with accounting gimmickry, we view ITW's cash-flow performance in the quarter as highly encouraging in this economic environment. Coupling this with the fact that the most challenging quarter could now be behind it, ITW appears poised to benefit handsomely once economic conditions improve." Long-term investors may want to pay heed.

Undervalued Machinery Companies in Morningstar Coverage Universe
	Economic Moat	Price/ Fair Value	Forward P/E	P/E 5-Year Average
Graco Incorporated (GGG)	Wide	0.80	19.88	18.12
Illinois Tool Works, Inc. (ITW)	Narrow	0.74	19.12	16.24
ITT Corporation (ITT)	Narrow	0.79	12.52	20.07
Parker Hannifin Corp. (PH)	Narrow	0.73	13.40	13.47
Teleflex Inc. (TFX)	Narrow	0.70	11.17	NA
Data as of 7-02-09.