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Quarter-End Insights

Industrials: Healthy Demand, But Few Values

Among a mostly fairly valued industrials sector, some good values remain.

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  • We consider the industrials sector to be slightly overvalued at a market-capitalization-weighted price/fair value estimate ratio of 1.06. In our view, investors need to select undervalued stocks, given that we rate most individual industrial stocks as roughly fairly valued.
  • Demand for industrial products is healthy, and most industrial firms are executing well. We still expect improvement in the U.S. housing market, and note that aircraft manufacturing backlogs are particularly robust.
  • U.S. corporate tax law changes will benefit many industrial firms both directly from lower cash tax outflows, and also via stronger capital purchases for customers.
  • We believe the direct economic effect of steel tariffs announced in March will be mild for most companies we cover, but stronger second-order effects could prove more damaging for select firms, such as  Boeing (BA).

Overall we consider the industrials sector slightly overvalued, given its market-cap-weighted price/fair value ratio of 1.06 as of the end of February. That said, we rate a number of stocks as undervalued, and highlight several below:  Anixter International (AXE) ,  G4S GFS(), and  GEA Group G1A().

Keith Schoonmaker has a position in the following securities mentioned above: GM. Find out about Morningstar’s editorial policies.

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