It's always interesting to see which large-cap stocks (those with a current market capitalization above $10 billion) have outperformed in the last year: Doing so can reveal investing trends that lead to researching other stocks. In this line of thought, let's look at the five top-performing industrial-goods stocks in the last year, and get a glimpse of the hot investing trends of 2019.
The five make up a pretty diverse bunch. There are two aerospace-focused companies, HEICO (NYSE:HEI) and TransDigm Group (NYSE:TDG); a company focused on life science and diagnostics, Danaher (NYSE:DHR); a heating, ventilation, and air conditioning (HVAC) specialist, Lennox International (NYSE:LII); and Zebra Technologies (NASDAQ:ZBRA), a leader in enterprise asset intelligence (EAI).
Zebra has room to run
Zebra Technologies' core activity may sound like jargon, but it's actually a relatively easy company for ordinary investors to understand. According to Zebra, its products help users capture data, analyze it, and then act on it immediately. For examples, consider barcode reading and printing in the retail environment, or identification and tracking in an e-fulfillment warehouse. Other growth drivers include data capture and analytics in industrial and healthcare settings.
Given the developments in data analytics and the ability of mobile devices to capture and analyze real-time information, Zebra's solutions look like they have a long pathway of growth ahead, and analysts are forecasting mid-single-digit revenue growth for the next few years.
If you like Zebra's growth prospects, then it's a good idea to take a look at some of the industrial technology stocks benefiting from warehouse automation. It's not easy to find a large-cap pure-play stock, but Honeywell International has exposure, and machine-vision company Cognex is currently growing its logistics-based revenue (largely from e-fulfillment warehousing) by more than 50%.
There's probably been more media attention on Danaher's former CEO and current General Electric (NYSE:GE) CEO, Larry Culp, than there has been on Danaher's current CEO Tom Joyce. This is somewhat unfortunate, because even though Culp had an outstanding record at Danaher and has set about capably restructuring GE, it's Joyce who's spearheaded the aggressive actions that have doubled the money of Danaher investors in the last five years.
In creating Fortive in 2016, Joyce spun off the industrial businesses of the former Danaher; since then, both companies have massively outperformed the S&P 500. Moreover, Joyce took decisive action to restructure the company by planning a spinoff of the underperforming dental business this year, and then recently agreeing to a $21 billion deal to buy a biopharma business from -- wait for it -- General Electric.
The key conclusion here is that it's possible for a stock to outperform thanks to decisive and aggressive restructuring activity; that's something GE investors will be hoping that Culp continues to do at GE.
The HVAC market has rewarded investors in the last year or so -- Lennox International's rival Ingersoll-Rand (NYSE:TT) only narrowly missed this list -- and there's potential for more. Lennox and Ingersoll-Rand are both expected to grow revenue in the mid-single digits for the next few years.
Despite the "International" moniker, 93% of Lennox's revenue comes from North America. With 61% of its sales going to the residential market, Lennox is really a play on conditions in the replacement market. For reference, 74% of total company sales go to the replacement market, with the remaining to new construction.
Given the possibility of slowing in the U.S. housing market (which could cause hesitancy among consumers to replace HVAC equipment) and Lennox's relatively high exposure, it's somewhat surprising to see Lennox trade at a premium. However, this may well be due to speculation over its role in a potential round of mergers-and-acquisition activity in the HVAC industry, particularly as Carrier is being separated from United Technologies. A successful suitor for Lennox would immediately acquire a good-sized market footprint in the U.S.
While Lennox may well be buoyed by takeover speculation, Ingersoll-Rand looks like a good value on its earnings trends alone:
Aerospace is still running hot
Lennox's performance is likely based on exposure to a sweet spot in the industrial sector, which goes to prove that there are areas of the industrial economy that are outgrowing the overall rate of the sector -- U.S. industrial production growth looks set to slow to 2.6% in 2019 from 4% last year.
The same argument applies to the commercial aviation market, which is where HEICO and TransDigm come in. In particular, both companies have high exposure to the high-margin commercial aviation aftermarket. It's a great market to be in because the need to get parts certified by agencies such as the Federal Aviation Administration (FAA) creates a natural barrier to entry for companies wishing to enter the industry.
HEICO claims to be the largest independent provider of "FAA-approved aircraft replacement parts," while the aftermarket contributes more than three-quarters of TransDigm's earnings.
Moreover, as long as growth in passenger numbers remains strong -- the International Air Transport Association (IATA) expects air passenger traffic to grow at a 3.5% compound annual growth rate over the next 20 years -- -- then aftermarket sales growth is expected to be strong. It's a favorable environment for the aerospace industry.
Can their strong runs continue?
Barring some kind of recession, Zebra Technologies, HEICO, and TransDigm all should continue to benefit from favorable end market -- all three look like buys if you believe in the proliferation of EAI and growth in air passenger traffic.
Danaher's core end market in life sciences and diagnostics also seems capable of growth, but much depends on the successful integration of GE's biopharma business. Lennox's stock appears to have something of a premium built in, possibly to reflect the possibility of a takeover. As such the last two stocks appear to carry relatively more risk.