3 Industrial Stocks Set To Soar On Increased Capital Spending
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The coronavirus pandemic led to historic government stimulus programs, as seen with the most recent bill this month. The stimulus has so far been a boon to consumer spending, but the best has yet to come for certain stocks. Like consumers, businesses have also benefited from the stimulus measures. Many companies now have hordes of cash on the books, which is expected to increase capital spending, directly benefiting industrial stocks.
That’s why I am recommending my top three industrial stocks for the month: Deere & Company (DE), Eaton Corporation (ETN), and Cummins Inc. (CMI). But before I get into evaluating those stocks, let’s recap the week.
Market Commentary
Stocks were up on Monday, March 22, with technology leading the way as interest rates fell. The 10-year Treasury yield dropped to 1.69%, providing a tailwind for equities. Stocks reversed course on Tuesday, with cyclical stocks taking the brunt. Cyclical stocks have been climbing higher due to stimulus measures and an improving economy. The drop was likely a mix of profit-taking and renewed COVID-19 worries.
The market was mixed on Wednesday, as the price of oil jumped and economic data confirmed the strength in the economy. Value stocks were up, while growth stocks underperformed. Tech stocks lagged again on Thursday, with value shares up on a day with high volatility due to quarter-end rebalancing. The market was up again Friday, with energy stocks benefiting from higher oil prices as the Suez Canal blockage continued.
Market Outlook
We all know the market’s latest run is predicated on an improving economy, and the one industry that benefits the most from an improving economy is industrials. Right now, there are many companies not only sitting on a ton of cash, but at near-record levels. This is mainly due to the massive stimulus efforts over the past year and companies hoarding cash in a recessionary period.
But we are no longer in a recessionary environment. As the economy reopens, there should be an influx of capital spending (Capex). That money will be spent on infrastructure and technological upgrades, as demonstrated by the Philadelphia Fed’s Future Capital Expenditure indicator heading close to record highs. This is great news for industrial companies that provide machinery for companies will be buying to upgrade their operations.
That’s why I am highlighting these three companies below.
Deere & Company (DE)
DE is the world’s leading manufacturer of agricultural equipment. The company has a leading market share in multiple large farm-equipment segments. Its three main areas are Agriculture and Turf, Construction and Forestry, and Credit.
An increase in capital spending should benefit DE’s construction segment. In addition to corporate spending, infrastructure spending in the U.S. is a tailwind for the company. Its agriculture segment will benefit from solid crop demand due to improving demand in China and a tight global supply. There will also be healthy replacement demand for large agriculture equipment as farmers will be incentivized to grow more crops due to higher crop prices.
DE has an overall grade of B, which translates into a Buy Rating in our POWR Ratings system. It also has a Sentiment Grade of A, which means analysts love the stock. According to the StockNews Price Target feature, fifteen analysts have a Strong Buy or Buy rating on the stock. We also grade DE based-on Growth, Value, Momentum, Stability, and Quality. You can find those grades here.
DE is ranked #46 in the A-rated Industrial – Machinery industry. You can find other top stocks in that industry by clicking here.
Eaton Corporation (ETN)
ETN is a diversified power management company operating for over 100 years. The company operates through various segments, including electrical products, electrical systems and services, aerospace, vehicle, and most recently, e-mobility.
In addition to Capex, the company’s sales should see a boost from the growing demand for upgrading power infrastructure in developing economies and the trend toward industrial Internet of Things and automation. The electrification of vehicles should also help growth as the company created the new eMobility segment in 2018. Plus, upgrades to aging infrastructure in the U.S. is a secular tailwind for the company.
ETN has an overall grade of B or a Buy in our POWR Ratings system. The company has a Momentum Grade of A, as its stock has shown bullish momentum in the near-, mid-, and long-term. Plus, ETN has a Quality Grade of B, indicating a healthy balance sheet. The company has a current ratio of 1.6, which means it has more than enough liquidity to handle short-term debts. To access the rest of ETN’s grades (Growth, Value, Stability, and Sentiment), click here.
ETN is ranked #11 in the same A-rated industry as DE, Industrial – Machinery.
Cummins Inc. (CMI)
CMI is a leading manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, along with diesel-powered electric generators. The company is an industry leader in the class 8 truck market, where it currently supplies 35% of engines. It also provides components for on- and off-highway vehicles and power generation markets. As more companies ramp up capital spending, there will be a greater need for diesel engines.
The company is poised to capture a more significant share of upfront vehicle content as customers want the most reliable and fuel-efficient diesel engines. CMI should also see improved truck sales due to increased investment in electrification. The shift to electric vehicles and machinery should benefit the company due to its leading-edge technology in truck engines. Plus, the company’s efforts to increase its fuel cell and hydrogen production technology capabilities are also a positive.
CMI has a Buy rating or a grade of B in our POWR Ratings system. It also has a Quality Grade of A, indicating a solid balance sheet. As of the most recent quarter, CMI had $3.9 billion cash, compared with only $554 million in short-term debt. To access all of CMI’s grades (Growth, Value, Momentum, Stability, and Sentiment), click here.
CMI is also ranked (#20) in the Industrial – Machinery industry.
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