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The Best Industrials Stocks to Buy

These five companies have competitive advantages—and their stocks are undervalued.

Industrials Sector artwork

After hitting a nadir last fall, industrials stocks appear to be regaining momentum.

The sector struggled throughout most of 2023, underperforming the broader U.S. equity market. Concerns about inflation, interest rates, and depressed commercial real estate markets pressured results. The Morningstar US Industrial Index reported a 20.90% return in 2023, versus 26.44% for the Morningstar US Market Index. However, industrials have slightly outperformed the broad market this year, reporting a year-to-date return of 10.94% to the broader market’s 10.24%.

Is Now a Good Time to Invest in Industrials Stocks?

“Overall, the sector has benefited recently from the resilient U.S. economy,” observes Morningstar director Brian Bernard.

The industrials sector is made up of a hodgepodge of industries, from machinery and handheld tools to payment processors and transportation companies. “Many names in the space have exposure to popular long-term growth themes, including electrification and automation or sustainability and the energy transition,” explains Bernard.

The sector looks pricey today, with the average industrials stock that Morningstar covers trading at a P/FVE of 1.09. In fact, Bernard points out that the sector is the most expensive it’s been in a long while, and only about 10% of the industrials stocks Morningstar covers look undervalued.

To come up with our list of the best industrials stocks to buy now, we isolated companies with Morningstar Economic Moat Ratings of wide or narrow. Why? Because we expect companies that have carved out economic moats to remain competitive for a decade or more. We then ranked those companies by valuation, pulling out the five most undervalued stocks from the list.

The 5 Best Industrials Stocks to Buy Now

The stocks of these five industrials companies, all with Morningstar Economic Moat Ratings of Narrow or Wide, are the most undervalued according to our fair value estimates as of April 1, 2024.

  1. Global Payments GPN
  2. Rentokil Initial RTO
  3. Fanuc FANUY
  4. TransUnion TRU
  5. Chart Industries GTLS

Here’s a little more about each of the best industrials stocks to buy, including commentary from the Morningstar analysts who cover each company. All data is as of April 1, 2024.

Global Payments

  • Morningstar Price/Fair Value: 0.74
  • Morningstar Uncertainty Rating: Very High
  • Morningstar Economic Moat Rating: Narrow
  • Forward Dividend Yield: 0.75%
  • Industry: Specialty Business Services

Global Payments is the cheapest stock on our list of the best industrials stocks to buy. This narrow-moat payment processor boasts the largest market cap on our list at $34 billion. The stock is trading 26% below our fair value estimate of $179.00.

We believe the market is concerned about disruption to incumbent payment players like Global Payments. In our view, though, Global Payments continues to benefit from a strong competitive position and is successfully adapting to a changing industry. While Worldpay struggled under FIS’ roof, we think that was due to underinvestment, an issue that we don’t believe applies to Global Payments.

Global Payments merged with Total System Services in 2019. While it was the last large deal done in the acquiring space that year, we think this combination was the most attractive.

The targeted cost synergies from this deal were the most modest, which we think should lessen any concerns that the company is underinvesting. Additionally, among the three deals, this merger was the only one involving two companies that both had acquiring operations. Given that we believe scale is critical to competitive positioning in the industry, we think the combination immediately strengthened Global Payments’ moat. Additionally, we think the merger better positioned Global Payments to adapt to industry changes. First, we think international expansion will be an increasing area of industry focus going forward. The U.S. market is relatively mature, and international expansion will be necessary to maintain growth. The two companies should be able to leverage each other’s global footprints.

Through the pandemic, Global Payments did feel the pinch from the coronavirus as payment transactions fell markedly. Given its focus on small merchants, we think Global Payments held up fairly well, and results following the pandemic suggest the long-term shift to electronic payments has reasserted itself, and volumes have recovered fairly quickly. As such, we think Global Payments can maintain the solid growth it has enjoyed historically, absent any downturn in the economy. If we do go into a recession, though, Global Payments’ focus on small merchants could be a negative.

Brett Horn, Morningstar Analyst

Rentokil Initial

  • Morningstar Price/Fair Value: 0.75
  • Morningstar Uncertainty Rating: Medium
  • Morningstar Economic Moat Rating: Wide
  • Forward Dividend Yield: 1.63%
  • Industry: Specialty Business Services

The first wide-moat company on our list of the best industrials stocks to buy, Rentokil Initial is 25% undervalued relative to our $39.50 fair value estimate. The company operates the world’s largest commercial pest-control business, and it has superior scale in the vast majority of pest-control markets in which it operates.

Rentokil Initial’s strategy is sharply focused on the attainment and maintenance of market share leadership in the highly localized pest-control and hygiene-service markets it competes in. The strategy aims to benefit from ever-improving unit costs offered by economies of density in each localized geography in which Rentokil Initial operates via organic growth and a strong acquisition impetus aimed at rolling up the pest-control and hygiene-service markets, which remain substantially fragmented. To this end, Rentokil Initial has completed over 200 acquisitions since 2015—and has spent an average of GBP 300 million on tuck-in mergers and acquisitions annually over 2018-23 (excluding Terminix)—focusing on acquisition targets that build geographic density of its customers. The late 2022 acquisition of Terminix Global Holdings was a transformative and moat-reinforcing deal, creating a new U.S. market share leader. Pest-control targets remain Rentokil’s top M&A priority, but tuck-in candidates for the hygiene segment are now also set to become a focus. The successful execution of the strategy has delivered a durable cost advantage for the pest-control business—the source of our wide economic moat rating for Rentokil Initial.

While offering the promise of a strengthened cost position, M&A also attracts risk. Financial prudence will be paramount for the economies-of-scale benefits offered by the M&A programme to ultimately prove shareholder value is accretive. Still, we remain in favour of Rentokil Initial’s acquisition bias, noting risk also exists in failing to further participate in the ongoing global industry roll-up. With a number of other multinational players also actively acquiring pest-control targets to amass scale, Rentokil Initial’s M&A programme reinforces its superior cost position. The company has an opportunity to fortify its economic moat through the ongoing digital transformation of the pest-control business. The rollout of this digital service should reinforce the cost position of the business while lifting service standards for customers in tandem, supporting our expectation for organic market share gains on top of acquisition-led growth.

Grant Slade, Morningstar Analyst

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Fanuc

  • Morningstar Price/Fair Value: 0.77
  • Morningstar Uncertainty Rating: High
  • Morningstar Economic Moat Rating: Wide
  • Forward Dividend Yield: 2.33%
  • Industry: Specialty Industrial Machinery

Fanuc is a trio of Japanese companies that provides robotics and automation products, including robots used on Tesla TSLA assembly lines. This undervalued industrials stock trades 23% below our fair value estimate of $18.05.

Fanuc is well positioned for long-term, secular growth in the factory automation and industrial robotics industry, as the world’s largest computer numerical control and industrial robotics manufacturer. The FA division currently makes up approximately one third of total sales and has the leading global market share with its CNCs, which is the automated control software of machine tools. With an established reputation and record that supports its ability to maintain a 50% market share, we expect this business to grow along with its machine tool manufacturer customers, as the software/control console will differentiate the quality of machine tools and meet increasing demands for extremely high precision by end-users.

The robot division is Fanuc’s largest business by sales, and the company is considered one of the big four in the industrial robotics space. The growth of the industrial robotics industry is being underpinned by secular trends like decreasing labor force from aging population in developed countries, as well as increasing wage levels in key markets like China. As FA continues to grow across a variety of industries, Fanuc will be able to provide its robots to not just its current main customer base like the automotive and electronics industries (for example General Motors, Audi, Panasonic), but will be able to further expand its customer base in other industries such as food and pharmaceuticals.

Fanuc’s Robodrills, which are compact machining centers used to cut and shape metal objects such as the casings of smartphones, are the top contributor to its robomachine division. While the business was able to contribute to 40% of total revenues in 2014 (with more than 80% from Asia) due to a major demand spike in smartphone demand, we believe the demand for Robodrills will not reach peak levels in the future. However, we believe the robomachine division will further diversify its customer base into other industries and continue to grow at a relatively stable rate over the medium term.

Jason Kondo, Morningstar Analyst

TransUnion

  • Morningstar Price/Fair Value: 0.85
  • Morningstar Uncertainty Rating: High
  • Morningstar Economic Moat Rating: Wide
  • Forward Dividend Yield: 0.53%
  • Industry: Consulting Services

TransUnion looks 15% undervalued compared with our $92.00 fair value estimate. One of the three leading credit bureaus in the US, TransUnion earns a wide economic moat rating.

Along with Equifax and Experian, TransUnion is one of the Big Three consumer credit bureaus. Given the fixed costs inherent in a data-intensive business, TransUnion has been able to generate meaningful margin expansion over the past several years.

TransUnion’s core business is selling credit reports to US lenders, but as this business is the most mature, the company has sought other avenues of growth. One avenue has been expanding beyond financial institutions into verticals such as insurance, rental screening, collections, and other sectors. The emerging verticals business was 31% of the firm’s revenue in 2023, up from 21% of revenue in 2009. We believe this will help TransUnion weather a downturn as this revenue is diversified across industries and less macro-sensitive, though these items may be sensitive to coronavirus-related disruptions.

TransUnion has sought to replicate its US playbook internationally, as well. The most intriguing opportunity is in India, which, given the country’s large population, could be an evergreen source of growth for the firm. TransUnion’s early entry has allowed it to build a commanding market share in this country. While it will probably take many years to fully realize this market’s potential, we think the company’s leading position provides meaningful long-term upside.

Since its public debut in 2015, TransUnion’s acquisition strategy has run the gamut from smaller bolt-on deals to larger acquisitions. Examples of bolt-on deals include Tru Optik and Signal Digital, which provide data and analytics for digital marketing. TransUnion’s larger deals include its $1.4 billion acquisition of UK credit bureau Callcredit in 2018, its $3.1 billion acquisition of Neustar in 2021, and its $638 million of Sontiq in 2021. We believe TransUnion’s acquisitions have generally made strategic sense and have not weakened the firm’s moat.

Rajiv Bhatia, Morningstar Analyst

Chart Industries

  • Morningstar Price/Fair Value: 0.80
  • Morningstar Uncertainty Rating: Very High
  • Morningstar Economic Moat Rating: Narrow
  • Forward Dividend Yield: NA
  • Industry: Specialty Industrial Machinery

Our list of the best industrials stocks to buy now closes with Chart Industries, which manufactures engineered equipment for the clean energy and industrial gas markets. Shares of this stock look 20% undervalued compared with our $200.00 fair value estimate.

Since 2020, Chart Industries has engaged in a successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 analyst day included a 17%-plus CAGR on revenue, 25%-plus CAGR on EPS, and margin expansion of 300-600 basis points.

The Howden deal in 2023 has effectively doubled the firm’s size in a single transaction to over $1 billion in annual EBITDA. Less than a year after the deal closed, the sales synergies target of $150 million has already been exceeded with $530 million. Over $1 billion in incremental sales seems possible across the next few years. Cost synergies were also beat with $181 million to date versus the $175 million target in the first year, and Chart is targeting $250 million by 2026. Growth opportunities are across fast-growing spaces, including aerospace, cannabis, water treatment, and hydrogen. Investors have been initially skeptical of the price paid as the 12.9 times EBITDA multiple was more than twice the estimated 6-7 times EBITDA multiple that KPS (the seller) paid for Howden when it bought it from Colfax in 2019.

While Chart will be focused on integration, the industrial logic for the deal is sound. There are some positives Howden brings, such as opening up new geographic regions, particularly Asia, and expanding its European footprint. The regional bases are essential given the size of the equipment, making transportation and delivery time frames often dealbreakers when competing for projects, and they allow for high-margin aftermarket contracts. The significantly higher aftermarket revenue (45% at Howden versus 15% at Chart) provides a steady stream of earnings for what has historically been a lumpy order-driven business.

Stephen Ellis, Energy and Utilities Strategist

How to Find More of the Best Industrials Stocks to Buy

Investors who’d like to extend their search for top industrials stocks can do the following:

  • Review Morningstar’s comprehensive list of industrials stocks to investigate further.
  • Use the Morningstar Investor screener to build a shortlist of industrial stocks to research and watch.
  • Read the latest news about notable industrial companies from Morningstar’s Brian Bernard.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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