A Pair of Promising Industrials

 | Oct 16, 2012 | 10:30 AM EDT
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Manufacturing stocks have been laggards over the past six months. The industrial sector has underperformed the S&P 500 by approximately 5% since the end of the first quarter. Concerns about Europe, slowing growth in China and an anemic recovery domestically have undercut the sector's fundamentals and eroded investor sentiment.

There are some green shoots, however, that could bode well for better industrial demand. Housing finally looks like it has really bottomed in the U.S. The drought in the Midwest was the worst in 50 years, but farm income should still be a record in 2012. And numbers out of China show recent strength. September export numbers came in much stronger than expected and iron ore prices are up some 30% since their lows of six weeks ago. The Middle Kingdom also recently enacted a $150 billion stimulus program focused on building infrastructure. I would look for other efforts to boost economic performance once their leadership transition is completed.

Given all this, it might be time to start to nibble at some beaten down stocks in companies that make the stuff that big mining, agricultural and construction users demand. Here are two stocks in the area I like at current levels.

Joy Global (JOY) is a large manufacturer of both underground and surface mining equipment.

Four reasons JOY is a good long buy at just $60 a share:

  • Even after rising some 15% since its recent bottom in early August, the stock is still down about 40% from its highs earlier in the year. JOY is also still selling near the bottom of its five-year valuation range based on price/earnings, price/book and price/cash flow ratios.
  • The company has grown revenues at an 11% annual clip over the past five years. The stock also sports a very small five-year projected price/earnings/growth ratio of 0.49.
  • The company should continue to benefit from the long growth trend in mining demand in China, where it has expanded its presence significantly over the last two years. It is also a backdoor play on rising natural gas prices, as anything that makes coal more desirable from a price perspective is good for JOY. Finally, it might be even become a takeover target of General Electric's (GE) focus on expanding in the mining equipment sector.
  • The stock is selling at less than 9x forward earnings, a discount to its five-year average of 13.6.

Titan International (TWI) manufactures and sells wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets.

Four reasons TWI has substantial upside from under $19 a share:

  • After falling some 40% from its highs a few months ago, the stock is significantly under the median price target of $31 a share held by the six analysts that hold the stock. TWI was upgraded to Buy from Hold at Jefferies recently.
  • The stock is selling near the bottom of its five-year valuation range based on price/earnings, price/book, price/sales and price/cash flow ratios.
  • The stock is priced at a five-year projected PEG below 1 (0.98). TWI also is selling less than 7x forward earnings, a huge discount to its five-year average of 27.9.
  • Earnings are going up at a nice clip. TWI earned $1.50 per share in 2011 and is on track to post more than $2.25 in 2012. Analysts currently have a consensus estimate of $2.74 a share in 2013.

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