Prices Are Right for Industrials
Long-term opportunities now abound in the sector, but defense prime contractors are particularly smart plays right now.
Brian Bernard: The Morningstar US Industrials Index underperformed the broader U.S. equity market by over 600 basis points during the first quarter due to investor concerns about how a COVID-19-driven economic slowdown would affect the sector. Many of the industrials we cover have shuttered manufacturing facilities and withdrawn 2020 guidance, which likely added to investors' angst. While many industrial firms will be adversely affected over the short run, we think many of these companies' stocks are priced as if the current economic environment is normal. In fact, most of our sector coverage currently trades in 4- or 5-star territory, with a median price/fair value ratio of 0.8.
Industrial conglomerates, construction, and aerospace and defense are the most undervalued industries. We see many attractive long-term opportunities across the sector that should bear fruit as the virus abates and business conditions normalize. Industrial conglomerates, like General Electric (GE) and 3M (MMM), have substantial healthcare exposure, which tends to be stable compared to more cyclical industrial counterparts, and stability is an attractive quality given current market volatility. Now, 3M and Honeywell (HON), they also have sizable personal protection segments, which should see revenue growth as global demand for face masks and respirators exceeds supply. Farm equipment firms, such as Deere (DE), may be more resilient during the COVID-19 outbreak because, in our view, it's hard to see how U.S. agricultural commodity production will be affected by the virus. U.S. acres planted remains relatively constant over time, as demand for agricultural commodities varies less than discretionary goods.
Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.