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3 Real-Deal Stocks to Buy Now

By Lee Samaha - Feb 29, 2020 at 12:26PM

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These three stocks offer investors the prospect of growth for many years to come.

Given the recent market malaise, it's time to start looking at some companies that -- even if they're being sold off now -- still have great long-term prospects. In this context, these companies are the real deal:

  • water-quality technology company Xylem (XYL)
  • food safety, clean water, and hygiene company Ecolab (ECL)
  • pilot training and aviation-simulator company CAE (CAE)

Let's take a look at why.

Aerial view of a water treatment plant

Image source: Getty Images.

Xylem

The case for buying Xylem is based on the need for utilities to maintain and improve water infrastructure, and for the industrial sector to treat water.

The company has been investing in and developing so-called advanced infrastructure analytics (AIA) solutions, which use web-enabled technologies and data analytics to improve how utilities monitor and deal with theft, leakages, metering, and the overall efficiency of their pipelines. Although adoption has been a bit slower than management previously envisioned, Xylem still reported double-digit growth in AIA orders in 2019, and long-term prospects look good.

The trend toward urbanization, and the need for developed economies to maintain water infrastructure and developing countries (Xylem generates around 28% of its revenue from outside the U.S. and Western Europe) to build out new networks, aren't going away anytime soon. With its collection of pumps, AIA solutions, turbines, heat exchangers, and water and wastewater treatment systems, Xylem is ideally placed to benefit.

Trading on a PE ratio of around 27 times current earnings, Xylem isn't the cheapest stock on the market, but a combination of mid-single-digit revenue growth and double-digit earnings growth means the company can easily grow into its valuation over time. 

Ecolab

Ecolab operates in the market for food safety, clean water, and hygienic environments. Restaurants, hotels, food-production plants, and industrial plants all need to ensure sanitation, cleanliness, and water quality -- a fact only emphasized by the recent coronavirus outbreak. Ecolab's customers include many of the major global food and beverage companies (like McDonald's, Nestle, Unilever, and PepsiCo), so Ecolab can grow as its customers expand their geographic presence.

The company has delivered earnings-per-share growth at a compound annual growth rate of 11% over the last 20 years. And given that management believes it only has a 10% market share in a $130 billion market, it looks like there's plenty of growth to come.

Like Xylem, Ecolab is set to benefit from the trend toward urbanization. Such changes usually bring increased demand for processed food -- notably proteins -- and a need for water-quality assurance in the public environment. This is where the company's cleaning solutions, food treatment solutions, and water and wastewater treatment solutions come in.

Turning to valuation matters, Ecolab trades on a PE ratio of 31 times current earnings. Again, this is not superficially cheap. However, Ecolab has a track record of double-digit earnings growth. Moreover, the removal of its upstream energy business -- to be combined with Apergy (APY) in 2020 -- will reduce the cyclicality of its earnings. Meanwhile, there's no lack of awareness of the need for public hygiene following the coronavirus outbreak. 

The cockpit of a jet as seen in an aircraft simulator

Image source: Getty Images.

CAE

Last but not least, CAE is the world's leading manufacturer of aircraft simulators, and is increasingly expanding its pilot-training services as well. The case for buying CAE is based on three favorable trends:

  • Thanks to a combination of underlying growth in civil aviation and an aging pilot demographic, CAE believes there's a need for 300,000 new business-jet and airline pilots over the next decade -- compared to 360,000 active pilots now.
  • A shortage of pilots could also lead to more airlines outsourcing training to companies like CAE; the company only has a third of the global market at present.
  • The increasing use of electronic assistance in commercial aviation (as seen with the Boeing 737 MAX) is putting pressure on pilots, and there's an increased stress on training standards.

CAE trades on a PE ratio of 27 times current earnings, but provided the civil aviation remains in growth mode, the company has a long runway of growth opportunity ahead. Throw in the possibility that a larger company may come along and decide to bid for it -- in line with the trend toward consolidation in the industry -- and CAE is an attractive stock for long-term investors.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Ecolab. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ecolab Inc. Stock Quote
Ecolab Inc.
ECL
Xylem Inc. Stock Quote
Xylem Inc.
XYL
CAE Inc. Stock Quote
CAE Inc.
CAE
ChampionX Corporation Stock Quote
ChampionX Corporation
APY

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