Machinery Stocks Getting Into Gear

 | May 31, 2013 | 1:00 PM EDT
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Manufacturers are doing well but playing it cautious. They are being very careful about ordering new machinery.  That's typical post-recession behavior. But as times get better, manufacturers are likely to expand production capacity, and that often means purchasing new machines.

I believe industrial machinery stocks will be better-than-average performers in the second half of this year and the first half of next year. So far this year, the group has just matched the market. The industrial machinery stocks in the S&P 500 are up 17.01% through Thursday, compared with 17.05% for the S&P 500 as a whole.  

Standex International (SXI) of Salem, N.H., is one of the smaller companies in the group. But it intrigues me, partly because of its offbeat product mix. Standex makes display cases for food and merchandise, components for space-launch vehicles and magnetic connectors.

Analysts expect Standex to report earnings of about $3.60 a share for the current fiscal year, which ends in June. That would break the previous record of $2.77 a share, set in fiscal 2011. The company has paid dividends for 195 consecutive quarters, though the current dividend yield of 0.6% is nothing to write home about. In my opinion, Standex has ample room to raise the dividend, and it should.

Kadant (KAI), like Standex, is a small-cap stock. Indeed, it is even smaller than Standex, with a $339 million market cap, compared with $667 million for Standex.

Based in Westford, Mass., Kadant primarily makes machinery for paper manufacturing and paper recycling. It also makes fluid-handling equipment used in several other industries, such as steel and rubber manufacturing. In addition, it takes sludge from paper mills and makes cellulose granules used to encase fertilizer and pesticide, as kitty litter and as industrial absorbent.

Both Kadant and Standex sell for about 14x earnings. Earnings have grown at a 13% average annual clip at Standex the past five years, and at a 22% pace at Kadant.

A mid-cap company ($3.7 billion market value) that looks attractive to me is Gardner Denver (GDI), which makes air compressors and blowers. It gets a little more than a third of its revenue in the U.S., about a third in Europe and a little less than a third in the rest of the world.

Not surprisingly, growth has been slowest in Europe, which entered a recession later than the U.S.  Many European countries are still in a recession today. But I believe there is a good chance that Europe's economies will normalize in 2014, providing a kick to earnings

That would probably come as a surprise to Wall Street analysts, who disdain Gardner Denver's stock. Only one analyst recommends it out of the nine who cover it.

Gardner Denver has shown a profit in nine of the past 10 years (the exception being 2009) and has increased earnings at a little less than a 10% pace in the past five years. This stock, too, sells for 14x earnings.

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