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Quarter-End Insights

Industrials: A Few Bargains Still Remaining

Despite generally rich valuations across the industrials space, some pockets of value still exist.

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  • Our industrials coverage currently trades at about fair value, with many subsectors lingering in overvalued territory. Nonetheless, pockets of opportunity exist in select stocks.
  • Industrials have enjoyed relatively healthy macroeconomic conditions in the U.S., and investors seem to be extrapolating those trends out over the long run. Even so, a strengthening U.S. dollar may blunt 2015 export growth as manufactured U.S. goods become relatively more expensive.
  • Global trade has seen healthy expansion since the middle of 2013, providing a boost to many industrial stocks, especially those in transportation. Lower fuel prices could support consumer spending and reduce industrial transportation costs in 2015.

Continuing the theme of recent quarters, we find few bargains throughout our industrials coverage. No stocks trade in the 5-star range, and only about 14 (out of 163) trade in 4-star territory. That said, this dynamic doesn't deviate too far from the broader market. At the time of writing, industrials stocks carried a market price/Morningstar fair value estimate ratio of 1.08 (8% overvalued compared with our discounted cash flow-derived fair value estimates), while the price/median fair value of all stocks that Morningstar covers was 1.03 (3% overvalued).

Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.