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Quarter-End Insights

Industrials: Stronger U.S. Dollar, Weaker Energy Activity Weigh

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

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  • Our industrials coverage currently trades 13% above fair value, nearly the highest such ratio of any sector, with many subsectors lingering in overvalued territory. Nonetheless, pockets of opportunity exist in select stocks.
  • Macroeconomic conditions for many industrial sectors have softened in 2015 in the U.S. and Europe, though investors seem to be positioning for improving future trends. Even so, a strengthening U.S. dollar may benefit exporters elsewhere 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 transportation costs for many in the sector.

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 20 (out of 172) 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 1.13 (13% 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).

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