The recent market rally is starting to feel a wee bit tired here. Much like fellow columnist Helen Meisler, I think investors have gotten a little complacent -- and the bullishness has put my inner contrarian on notice. I do not foresee a major selloff in the near term, but a decline of 2% to 4% would not surprise me at all.
If we see any such slump in the market, one of the action items on my agenda would be increasing my exposure to domestic manufacturing. This area has some strong tailwinds, such as low-cost energy, auto production that should hit 16 million vehicles in 2013 and a sustainable domestic housing recovery. Furthermore, China looks appears ready to reaccelerate after its once-per-decade political transition.
Two manufacturers that look well positioned, and whose shares offer solid values, are profiled below.
Triumph (TGI) designs and manufactures aerostructures, aircraft components, accessories, subassemblies and systems worldwide.
Here are four reasons this stock offers solid value at just over $71 a share:
● The company is ideally positioned to benefit from the long-term secular growth in airline traffic in the developing world.
● Its mid-2010 acquisition of Vought Aircraft Industries has been extremely positive for operating margins, which came in just below 14% in fiscal 2012 (ended March 2012). That's up from around 11% in fiscal 2011, and Standard & Poor's expects these margins to post above 15% for fiscal 2013.
● Analysts consistently underestimate the company's earnings power. Triumph has beaten consensus earnings estimates by double-digit percentages in each of the last six quarters. Consensus estimates for both fiscal 2013 and 2014 have moved up consistently and smartly over the last three months.
● The stock is cheap at under 10x forward earnings, and analysts' median price target is $82.50, well above Monday's close of $71.83.
Flowserve (FLS) develops and manufactures industrial flow-management equipment. The company operates in three segments: FSG engineered product, FSG industrial product and flow control.
Here are four reasons the stock still has upside from just over $150 a share:
● The stock is near a 52-week high, so I would wait for a pullback in the market to add to this position. However, it's trading at under 15x forward earnings, which is reasonable, given its earnings visibility and consistency.
● The company is a side-door play on the expanding energy production coming from the shale revolution. Almost 60% of its sales are to industries that are expanding to take advantage of this low-cost fuel source -- oil-and-gas and chemicals. With every new pipeline, refinery expansion or multi-billion-dollar new chemical plant build, there is an excellent chance Flowserve's products will be utilized.
● Flowserve rewards shareholders. Management upped the dividend by 12.5% and bought back more than $750 million worth of stock in 2012.
● Credit Suisse just raised its price target on the shares from $158 to $180 while maintaining its Outperform rating on Flowserve. Further, in December shares were initiated as a Buy at KeyBanc and at Outperform at Oppenheimer.
