Industrial machinery is not an easy business to be in. Manufacturers of industrial equipment, hardware, and tools not only operate in a highly cyclical and competitive environment, but also have to evolve to meet the ever-changing demands of the various industries they serve. Not surprisingly, industrial machinery stocks tend to be volatile, but if that has deterred you from investing in them so far, you could be overlooking some incredible stocks that have proven to be breeding grounds for rich returns.

I have three particular industrial machinery stocks in mind right now that are not only poised to benefit tremendously from a potential upturn in key sectors, and industries within, like manufacturing, energy, and infrastructure, but are also trading at attractive valuations. Here's why Stanley Black & Decker, Inc (NYSE:SWK), Dover Corp (NYSE:DOV), and Ingersoll-Rand PLC (NYSE:TT) deserve your attention right now.

The industrial machinery dividend stalwart

Given Stanley Black & Decker's legacy and brand power, I'd be surprised if you haven't used one of its hand or power tools yet. The company is so pervasive that it is possibly touching your life every day without your even knowing it. That's because it goes beyond hand tools: Its fastening systems, for instance, are used globally across industries like automotive, aerospace, electronics, infrastructure, healthcare, and transportation.

A variety of hand tools laid out on a wooden surface.

Some industrial machinery stocks are simply too good to ignore. Image source: Getty Images.

Stanley Black & Decker has grown its earnings per share and free cash flow (FCF) at compounded averages of 13% and 10%, respectively, in the past five years. Wait until you hear about the company's dividend history: Stanley Black & Decker has paid a dividend every year for 140 years – yes, that's right – and has increased it for 49 consecutive years. Growth isn't a concern, as it isn't resting on its laurels. Currently, the company is busy integrating two of its recent iconic acquisitions, Craftsman and Newell Brands, into its operations while taking advantage of strong end markets.

Stanley Black & Decker not only recently beat first-quarter earnings estimates but also raised its fiscal year 2017 earnings per share guidance by about 4% at the midpoint, citing "improved outlook for the company's industrial businesses." That should be music to the ears of investors, more so because management is now aiming for more than 20% growth in earnings per share (EPS) this year. With Stanley Black & Decker growing at such a torrid pace, there's no reason its stock shouldn't follow suit.

Your dual bet on industrial machinery and energy

If you're bullish on industrials and also upbeat about the energy sector, Dover is the perfect stock for you.

People at work in each of Dover's four business segments.

Image source: Dover.

Dover manufactures equipment and components for various industries through its four operating segments: energy, engineered systems (primarily industrials), fluids (mainly pumps and filtration systems), and refrigeration and food equipment. Among these, engineered systems alone accounted for 35% of Dover's total revenue in 2016.

Dover is growing quickly, having just delivered strong first-quarter earnings and upgraded its full-year guidance. Here's a snapshot of Dover's FY 2017 outlook:

MetricEnergyEngineered SystemsFluidsRefrigeration & Food EquipmentTotal
Organic revenue 20%-23% 2%-3% 1%-2% 1%-3% 4%-6%
Acquisitions        - ~8% ~31%          - ~10%
Dispositions        - (3%)      - (5%) (2%)
Currency        - (1%) (1%)          - (1%)
Total revenue 20%-23% 6%-7% 31%-32% (4%-2%) 11%-13%

Data source: Dover earnings release. 

So while energy is taking care of Dover's organic growth, the company is growing other segments via acquisitions. Dover is a highly acquisitive company, having spent around $2.9 billion on 17 acquisitions in just the past three years. After acquiring six companies last year, Dover is clearly hungry for more, as evidenced by its projected 8% and 31% growth in revenue from engineered systems and fluids, respectively, driven by acquisitions.

Given Dover's target of converting 11% of its revenue to free cash flow, back-of-the-napkin math tells me that it should be able to generate at least $800 million in FCF this year. As that represents a big jump over its 2016 FCF of $697 million, investors can expect a good bump up in dividends as well. That Dover will increase its dividends in near months is almost beyond question, given its history of 61 consecutive years of dividend increases.

For a company growing its sales and cash flows so rapidly and yielding 2.2% in dividends, the stock is anything but pricey at a price-to-sales ratio of 1.8 and price-to-FCF ratio of about 19.5.

A rapidly growing industrial machinery stock

Although Ingersoll-Rand shares are already up 17% so far this year, there's little to suggest that they won't head higher. Ingersoll-Rand has a pretty simplified business structure, with only two operating segments: climate, which offers heating, ventilation, and air conditioning (HVAC) products and services; and industrial, which manufactures a broad range of products such as compression technologies, power tools, fluid management, and motor vehicle parts.

As you might've already guessed, Ingersoll-Rand is a hugely diversified company, and that, coupled with its innovation, has enabled it to grow its net profits by nearly 45% in the past five years on a much smaller revenue base. Management has done an equally incredible job at converting profits into FCF, having grown its FCF by almost 38% during the five-year period.

While no one can vouch that Ingersoll-Rand will grow as rapidly in coming years, management's clear-cut financial goals through 2020 should at least give you a sense of its direction:

Metrics2017-2020 Targets
Revenue growth 4%-4.5% CAGR
Operating income growth ~10% CAGR
Operating margins ~14.5%-15% in 2020
EPS growth 11% to 13% CAGR
(based on ~22% tax rate)
Climate unit operating margin ~16.5% in 2020
Industrial unit operating margin ~15% in 2020
Cash generation (% net income) >= 1.0 times
Working capital/revenue 3% to 4%
2020 ROIC ~14.5%

Data source: Ingersoll-Rand financials.

Not to mention that Ingersoll-Rand expects to generate FCF worth nearly $4 billion between 2018 and 2020, which should also mean higher dividends for shareholders. Ingersoll-Rand's dividends have grown fivefold in just the past six years, with the last hike in October 2016 coming in at 25%. Given the company's incredible earnings and dividend growth, there's enough reason for investors to stay hooked on this stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.