Company / Analytics

Analytics, 23 March 2022

Top Industrial Stocks to consider in 2022

Investors remain hopeful in the potential of the industrial sector as global and U.S. economy continues to recover from the pandemic, despite the impact of high inflation, rising interest rates and ongoing supply chain disruptions on the sector so far this year.

Industrial companies have rebounded from the adverse impacts of the pandemic. Corporate revenues and margins have gained momentum, and companies are exhibiting strong growth potential.

Improving industrial production in the U.S. is a leading indicator of the sector’s health. Industrial production expanded 7.5% year-over-year in February, compared to 4.1% in January. Industrial activities are further supported by growth in the country’s GDP, investments in infrastructural development, and a rise in export demand for industrial goods.

Though the Industrial Select Sector SPDR ETF was down 2.9% year to date as of March 21 due to the conflict between Russia and Ukraine which impacted many sectors, aerospace and defence stocks have outperformed. The industrial sector is likely to outperform in 2022.

Top Industrial stocks to consider for your portfolio

1. Honeywell International Inc. (HON)

Honeywell is an industrial conglomerate that specializes in aviation, building automation, industrial process automation and other industrial materials and equipment. Analyst Joshua Aguilar says Honeywell is an attractive value stock with multiple growth vectors. He says a slowdown in N95 mask demand may weigh on safety and productivity solutions growth in the near term, but the segment will still be the biggest contributor to Honeywell’s long-term growth. Aguilar predicts that Honeywell’s five-year compound annual revenue growth rate will be in at least the mid-single-digit percentage range.

2. Boeing Co. (BA)

Boeing is one of the world’s largest producers of commercial airplanes and one of the biggest U.S. defense contractors. Boeing’s narrow-body airplane business took a hit from the extended grounding of its 737 Max passenger aircraft, but analyst Burkett Huey says demand from emerging market economies will continue to serve as a long-term tail wind for narrow-body growth. He says geopolitical relations between the U.S. and China remain critical, given that Boeing projects about 25% of global aviation demand growth in the next decade will come from China.

3. General Electric Co. (GE)

General Electric is an industrial conglomerate that specializes in jet engines, gas and wind turbines, and medical scanning and imaging equipment. GE shares are down about 9% in the past year, but Aguilar says the market is missing the GE opportunity. Despite noisy financials and declining revenue, he says GE’s long-term fundamental outlook has been steadily improving. The company has strong order and backlog growth, which Aguilar says bodes well for future revenue growth. Planned spinoffs of GE’s health care and energy businesses could also be bullish catalysts.

4. Energy Transfer LP

Based in Dallas-TX, Energy Transfer engages in the storage of natural gas as well as transportation of natural gas liquids, natural gas, and crude oil. The $31.4-billion partnership operates mainly in the U.S. and Canada.

Shares of Energy Transfer have swollen 19.2% year-to-date. In the fourth quarter of 2021, Energy Transfer’s earnings per limited partner unit increased 52.6% year-over-year on the back of an 85.9% increase in revenues.

Energy Transfer is well-positioned to benefit from synergies of acquisitions completed in the past few months (including that of Enable Midstream), healthy demand for midstream infrastructure, and growth investments (including in the Gulf Run Pipeline project). A 15% hike in quarterly distributions and debt-reduction efforts are reflective of Energy Transfer’s strong cash position.

5. 3M Co. (MMM)

3M is a diversified industrial, health care and consumer product manufacturer. Aguilar says 3M shares trade at discounted valuation as the company navigates litigation uncertainty related to lawsuits alleging that 3M sold the U.S. military defective combat earplugs. He says the stock’s 4% dividend is attractive and safe due to the company’s strong balance sheet and commitment to capital returns. Aguilar projects 6% annual dividend growth over the next five years and says only the company’s share buybacks would be temporarily disrupted by a worst-case litigation outcome.

6. FedEx Corp. (FDX)

FedEx provides global express and ground package delivery, truck freight and logistics services. Analyst Matthew Young says labor shortages are pressuring FedEx ground margins, but underlying demand remains robust. Young says FedEx has leveraged its speed advantage over primary competitor United Parcel Service Inc. (UPS) to improve its U.S. ground market position over the past decade. He says ground margins should improve in coming quarters. E-commerce tail winds should also continue to drive delivery growth for years to come, even as Amazon insources last-mile package deliveries.

7. Emerson Electric Co. (EMR)

Emerson Electric is a diversified global industrial technology company. Aguilar says Emerson got off to a strong start to its fiscal year, reporting 7.5% year-over-year revenue growth and 13% earnings-per-share growth in the first quarter. He says Emerson’s tool, commercial/industrial and automotive-related markets should be particularly strong growth sources in the coming year. Aguilar says automation will be one of the most important investments that manufacturers can make in the next several years, and Emerson is well positioned to capitalize on that trend.

8. Parker-Hannifin Corp. (PH)

Parker-Hannifin produces industrial motion and control technologies, including pneumatic, hydraulic, and vacuum systems. Aguilar says management was confident enough to recently raise guidance even in the face of supply chain disruptions and inflationary headwinds. He says Parker-Hannifin’s diversified industrial segment produced particularly impressive top-line growth in the most recent quarter, generating 15% organic revenue growth in North America and 14% growth international markets. The company has intellectual property protection on about 85% of revenue generated from motion and control technologies, which Aguilar says helps protect Parker-Hannifin’s competitive position.

9. Cummins Inc. (CMI)

Cummins is a leading manufacturer of truck engines, standby power equipment and industrial filters. Cummins recently guided for diesel engine sales of between $33 billion and $35 billion in 2030, and analyst Dawit Woldemariam says that target is certainly achievable for a high-quality supplier like Cummins. Woldemariam says emissions standards will drive truck manufacturers to shift away from in-house engine production, leading to market share gains for Cummins. He is impressed by Cummins’ ability to both invest in next-generation technology and improve emissions of existing diesel products.

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