• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Industrials

Manufacturing Isn't a Four-Letter Word

Just because other investors are avoiding manufacturers, doesn't mean you have to.
By JOHN REESE
Oct 13, 2011 | 10:30 AM EDT
Stocks quotes in this article: RBC, SHS

Manufacturing was once the king of the U.S. economy. But the widely accepted perception of U.S. manufacturing today is that the king is dead, long live the king. But is that view entirely accurate?

The World Bank ranks the U.S. behind every industrial nation but France in its percentage of overall economic activity accounted for by manufacturing. The New York Times reports that the recent recession reduced U.S. industrial production by 17.3%, "the sharpest drop during a recession since the 1930s."

Wow, that sounds bad for manufacturing, and it is; however, the picture of the manufacturing sector is not uniformly bleak.

The Federal Reserve Bank of Philadelphia reported in its September 2011 Business Outlook Survey (which covers the bank's three-state region of Pennsylvania, southern New Jersey and Delaware): "Indicators for future activity remained positive and strengthened this month. The broadest indicators for future activity improved notably, increasing 20 points and nearly reversing the 22-point decline in August. The indexes for future new orders and shipments also improved, increasing 5 points and 13 points, respectively. The index for future employment increased a modest 3 points."

At the same time, the Federal Reserve Bank of New York in its September 2011 Empire State Manufacturing Survey, which focuses on New York, reported: "Future indexes were generally positive, suggesting that respondents expect business activity to improve in the months ahead, but optimism was well below levels observed earlier this year. The future general business conditions index advanced four points to 13.0, a low level by historical standards but still an indication that conditions are expected to improve."

I am not suggesting that manufacturing is doing well. It is struggling -- but there are winners among the strugglers. Not every area of the country or every manufacturer is performing poorly.

One manufacturing company that is performing full steam ahead is Sauer-Danfoss (SHS), which designs, manufactures and sells engineered hydraulic and electronic components such as transmissions, motors and valves. These are used by off-highway vehicle manufacturers that produce equipment for the agriculture, construction and material-handling industries, among others. I believe Joel Greenblatt would like this company. He created an investment strategy that he described in his bestseller The Little Book That Beats the Market, which I computerized so I could instantly screen all publicly traded stocks using his criteria. This strategy is very fond of Sauer-Danfoss.

The strategy's first criterion is earnings yield, which is calculated by dividing a company's earnings before interest and taxes by its enterprise value. Enterprise value includes not only share price but also the amount of debt used to generate earnings. Of the thousands of stocks in our database, Sauer is ranked number 56 by this criterion. The second criterion is return on total capital, which examines how well a firm uses the capital it employs. Here, Sauer ranks number 193. The strategy's final step ranks each stock based on a combination of the first two criteria. Sauer comes in at number 35 among all the stocks in our database, which is excellent.

Another manufacturer worth looking at is Regal Beloit (RBC), which makes electrical and mechanical motion-control products such electric motors, generators, gear reducers and electronic switchgear used in a wide array of products. The strategy I modeled from Benjamin Graham's writings finds a lot to like about Regal. It has sizable sales of $2.5 billion. It's highly liquid, with current ratio at a solid 2.53:1, modest long-term debt of $428 million and robust current assets of $749 million. It's had strong long-term EPS growth of 189% over the last five years and a modest price-to-earnings ratio. After multiplying PE by the price-to-book ratio (1.32 in Regal's case), this strategy requires a product of 22 or less. Regal's is 19.

Yes, both of these companies are manufacturers -- but they are doing well and their stocks are reasonably priced. In morning trading, SHS was down 2.5% to $33.64 and RBC was off 2.8% to $50.15.

So, don't let the word "manufacturer" scare you. Many investors are avoiding manufacturers, which is precisely why you should not.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Reese and his clients were long RBC, although positions may change at any time.

TAGS: Investing | U.S. Equity | Industrials

More from Industrials

Bearish Bets: 3 Sluggish Stocks You Should Consider Shorting This Week

Bob Lang
May 15, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Bearish Bets: 3 Slumping Stocks You Should Consider Shorting This Week

Bob Lang
May 8, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Bears Remain in Control of Rockwell Automation

Bruce Kamich
May 4, 2022 9:12 AM EDT

ROK continued to weaken Tuesday. Here's our latest outlook.

Plug Power Is a Strictly Speculative Name: Here's My Trade Idea

Stephen Guilfoyle
Apr 19, 2022 10:35 AM EDT

PLUG has a number of high volume clients and that could be huge going forward.

Are Linde's Charts Foreshadowing Economic Weakness?

Bruce Kamich
Apr 18, 2022 2:58 PM EDT

Here's what to avoid with LIN.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:33 AM EDT PETER TCHIR

    Thoughts Ahead of the Fed Minutes

    Recent economic and earnings issues are convincing...
  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login