To see Part I of this column, please click here.
Last weekend, we wrote about how Industrials have been shaking off their recent lethargy and how the businesses seem to be entering a renewed growth mode. The business pickup is rooted in better macroeconomic conditions and a renewed global confidence that is conducive to capital investment.
The stocks have had very healthy increases into these improved business trends and outlooks. In our view, we appear to be in the early stages of a more protracted and sustained upward move for the sector, especially for the more global and successful companies.
3M (MMM) reported a sold in-line earnings quarter of $1.41 per share. What surprised investors was the company's 4.4% organic volume growth, it's strongest since the fourth quarter of 2011. Global business is also picking up, and its health care and consumer office businesses account for much of this growth.
Management reaffirmed its 2013 earnings forecast of $6.70 to $6.95. Upside earnings growth will be harder to come by, since 3M already boosted margins during the previous three years. Nevertheless, the company should fully participate in a rising global recovery. 3M is reasonably valued at 14.5x 2013 earnings and boasts a 2.5% dividend yield.
Honeywell (HON) reported a solid but in-line quarter of $1.10. Revenue was a bit light because of its highly variable transportation unit. Otherwise, top-line revenue continues to grow. What boosted investors' enthusiasm for the quarter was Honeywell's 15.6% margin, which was 20 basis points greater than expected, thanks to a better product mix and operating efficiencies.
Management reaffirmed its 2013 earnings forecast range of $4.75 to $4.95, which would be a rise of 6% to 11%. Most analysts believe that Honeywell gave very conservative guidance. The company will be a major beneficiary in the upcoming years of increased globalization, transportation and energy conservation. Honeywell is reasonably valued at 14x 2013's earnings and a 2.4% dividend yield.
Parker-Hannifin (PH) reported much better-than-expected revenue and earnings for the quarter. Revenue of $3.07 billion, compared with an expected $2.93 billion, was led by better North American and international industrial sales. This revenue beat helped propel earnings to $0.08 a share better than expectations.
While orders declined on a year-over-year level, they were up on a quarter-over-quarter basis. Management reiterated its 2013 earnings outlook at $6.40, which was better than the more fearful expectations of investors. Overall, analysts are beginning to sense that business is beginning to turn up, and that likely accounts for the stock's 20% rally over the past quarter. Parker-Hannifin is fairly valued at 14.7x 2013's earnings and carries a 1.6% dividend yield
Dover (DOV) reported slightly better-than-expected earnings at $1.09, compared with the $1.07 consensus. The energy and engineered systems divisions reported better-than-expected numbers, while printing and ID were also solid. Communications technologies came up short of estimates. The book-to-bill ratio began to improve in the quarter to 0.98, from 0.94 from last quarter. Overall, management was upbeat and reaffirmed its 2013 earnings guidance of $5.05 to $5.35. The company will fully participate in any broad-based industrial recovery. Dover is attractively valued at 12.5x 2013's earnings and a 2% dividend yield.
Thanks to significant productivity gains over the past five years, successful industrial companies do not require a strong resurgence of economic growth to produce attractive incremental earnings increases. The slow and steady growth in the U.S., the re-acceleration of growth in China and the re-emergence from recessionary conditions in Europe should provide a sufficiently favorable economic environment for these companies to post attractive earnings gains.
Because these gains should in turn generate dividend increases, stock repurchases and P/E multiple expansion, we also believe that shareholders will benefit from growing income and capital appreciation. We like the sector in 2013.