Industrial-Strength Investments

 | Apr 23, 2012 | 10:30 AM EDT
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General Electric (GE) reported earnings on Friday, beating both top and bottom line estimates. The most impressive part of the report was the 14% sales increase in the comapmy's industrial business, which makes up 64% of General Electric's revenue base. This segment also had a record backlog of orders of more than $23 billion.

Honeywell (HON) also reported earnings on Friday. Like General Electric, it beat estimates. Honeywell came in at $1.04 per share, well above the $0.96 cents to $0.98 it recently guided analysts to last month. Honeywell also said that rebounding U.S. demand offset weakness in Europe. The company raised its guidance for the full year. CEO David Cote also sounded very upbeat Friday night on CNBC's "Mad Money."

Having two of the pre-eminent domestic industrial firms report such upbeat earnings gives investors key insights into the sector. It seems that worries about European demand, while a real headwind, is not as bad as analysts feared and is being offset by more robust demand in the U.S. and Asia. Given this, here are three other industrial stocks that report earnings in the next couple of weeks that appear undervalued and could surprise on the upside.

United Technologies (UTX) provides technology products and services to the building systems and aerospace industries worldwide. There are four reasons UTX offers solid value at $80 a share:

  • The company is expected to post $1.20 a share in earnings when it reports on Tuesday. It is priced at just 12x forward earnings, which is a 15% discount to its historical average.
  • The stock yields 2.4% and has more than doubled its dividend payout over the last six years. It has grown its dividend by more than 15% annually over the last decade.
  • The company's acquisition of Goodrich (GR) will make it a bigger player in the aerospace industry, which should be buoyed longer term by fast-growing air traffic in the developing world.
  • It has an "A"-rated balance sheet, and the median price target by the 20 analysts that cover the stock is $95.

Actuant (ATU) designs, manufactures, and distributes industrial products and systems worldwide. I have four reasons why it is undervalued at $27 a share:

  • The company has easily beat earnings estimates each of the last four quarters, and consensus estimates for both 2012 and 2013 have risen significantly over the past three months.
  • Analysts expect double-digit revenue growth in 2012, and ATU has a five-year projected price/earnings/growth ratio of less than 1 (0.88).
  • It is selling at 12x forward earnings, roughly a 20% discount to its historical average.
  • The median price target by the 11 analysts that cover the stock is $34. Stifel Nicolaus also initiated a "Buy" rating in early March.

Illinois Tool Works (ITW) manufactures various industrial products and equipment worldwide. Four reasons ITW has value at $55 a share:

  • Like United Technologies, ITW reports earnings Tuesday. Analysts expect $0.95 per share and consensus estimates for both 2012 and 2013 have risen in the preceding three months.
  • Like Actuant, the stock sells for just over 12x forward earnings, which is a 20% discount to its historical average.
  • The stock yields 2.6%. More importantly, it has tripled its dividend payout over the last eight years.
  • Analysts expect 7% revenue growth for both 2012 and 2013, and ITW sports a reasonable five-year projected PEG of 1.26, given its dividend growth and yield.

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