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Quarter-End Insights

Industrials: Pockets of Uncertainty Present a Few Opportunities

Industrials are the second-most-expensive sector we cover, but these picks can reward investors.

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  • Industrial stocks climbed higher over the past quarter and currently look rich, with our sector price/fair value estimate at 1.09. In other words, we believe the sector trades at a 9% premium to our fair value estimates. We view industrials as the second-most-expensive sector in our coverage, but we believe  Stericycle (SRCL), Babcock (LSE: BAB), and  General Electric (GE) can reward investors.
  • Industrial activity continues to look healthy, with consistent growth and new orders across the globe. The Institute for Supply Management's Purchasing Index for U.S. manufacturing has not dropped below 58 since June, the National Bureau of Statistics in China reported a PMI around 52, and the IHS Markit Eurozone PMI output and manufacturing indexes are at about seven-year highs.
  • Negotiations surrounding NAFTA have been a focal point for the auto industry, and ending the agreement would likely produce negative consequences. The auto sector is a highly integrated supply chain, with parts sometimes crossing a NAFTA border as many as eight times before final assembly. Tariffs or additional taxes may lower demand and negatively affect the job market.
  • Business-to-business industrial distributors increasingly rely on e-commerce and technology to generate sales and day-to-day business operations. We believe the growing market presence of online wholesalers will change customers' preferences and expectations, and many incumbent distributors must adapt to remain competitive. Still, we believe many of the industrial distributors we cover are fairly insulated from online competition because most of them serve niche markets and sell more specialized products that require technical expertise.

 

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

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