Although the stock market is near all-time highs, there's still a lot of questions surrounding the COVID-19 pandemic, especially when it comes to industrial stocks that depend on a growing global economy.
Over the summer, many companies will report earnings for the second quarter, a quarter that is expected to produce the worst results for the year. Here are three top industrial stocks whose results and predictions are worth paying attention to in July.
Image source: Getty Images.
FedEx
FedEx (FDX 1.37%) investors finally got a win on Wednesday after the shipping giant beat expectations for its fiscal fourth-quarter 2020 earnings. It reported earnings per share (EPS) of $2.53 and revenue of $17.4 billion versus expectations of $1.52 EPS on revenue of $16.5 billion. The stock finished up over 11% on the day.
The earnings beat was a much-needed reprieve from quarter after quarter of earnings disappointments. In fact, for the eight quarters between the third quarter of fiscal year 2018 to the second quarter of fiscal year 2020, FedEx stock had fallen the day after. Every. Single. Time.
|
Fiscal Quarter |
Expected EPS |
Actual EPS |
Percentage Stock Price Change The Following Day |
|---|---|---|---|
|
Q4 2020 |
$1.52 |
$2.53 |
11.71% |
|
Q3 2020 |
$1.43 |
$1.41 |
4.97% |
|
Q2 2020 |
$2.79 |
$2.51 |
(10.03%) |
|
Q1 2020 |
$3.17 |
$3.05 |
(12.92%) |
|
Q4 2019 |
$4.81 |
$5.01 |
(0.53%) |
|
Q3 2019 |
$3.10 |
$3.03 |
(3.50%) |
|
Q2 2019 |
$3.94 |
$4.03 |
(12.16%) |
|
Q1 2019 |
$3.81 |
$3.46 |
(5.53%) |
|
Q4 2018 |
$5.72 |
$5.91 |
(2.70%) |
|
Q3 2018 |
$3.08 |
$3.72 |
(1.18%) |
Data Sources: FedEx and Yahoo Finance.
In late May, I mentioned that the integration of TNT Express and growth in FedEx Express thanks to seven-day shipping could make the stock a nice turnaround play, especially since FedEx was priced at a discount of more than 50% to where it was two years ago. What FedEx needed, and finally got, was a few good quarters to get its bearings and redefine its brand.
Although FedEx's commercial volumes were down for the quarter, the company touted strong growth in residential deliveries. If FedEx can continue to deliver even decent results throughout the year, it will help give the company some stability moving forward. It's not out of the woods yet, but it's definitely a stock to watch in July and throughout the rest of the year.
Caterpillar
Caterpillar (CAT -0.55%) is known as an economic bellwether due to its global footprint in construction, mining, oil and gas, marine, defense, and other infrastructure business segments. Its earnings have been somewhat mediocre the past few years as Caterpillar has dealt with the trade tensions between the U.S. and China, and now, a global pandemic.
|
Revenue by Segment |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|---|---|
|
Construction Industries |
$5,873 |
$6,467 |
$5,289 |
$5,020 |
$4,306 |
|
Energy and Transportation |
$5,210 |
$5,486 |
$5,452 |
$5,949 |
$4,349 |
|
Resource Industries |
$2,727 |
$2,800 |
$2,311 |
$2,395 |
$2,084 |
|
All other Segments |
$121 |
$125 |
$111 |
$143 |
$109 |
|
Corporate Items and Eliminations |
($1,207) |
($1,207) |
($1,189) |
($1,121) |
($934) |
|
Total Machinery, Energy, and Transportation |
$12,724 |
$13,671 |
$11,974 |
$12,386 |
$9,914 |
Data in millions of dollars. Data source: Caterpillar Inc.
Most well known, and making up the largest percentage of revenue, is Caterpillar's construction business, which tends to boom and bust with trends in infrastructure projects and real estate. Less known, and nearly tied for revenue in 2019, is its energy and transportation business. Although it's been a strong segment for Caterpillar the past few years, prolonged lower oil and natural gas prices could negatively affect Caterpillar's well service, power generation, reciprocating engine, and other oil and gas-related businesses that Caterpillar is a leader in.
To its credit, Caterpillar has proved that it can get through economic cycles. In fact, Caterpillar has increased its dividend for 25 consecutive years, earning it a place among the coveted class of Dividend Aristocrats. Its low P/E ratio indicates that some of the pessimism may be already baked into the stock price. That said, Caterpillar's debt-to-equity and debt-to-capital ratios -- two key financial metrics -- have been on the rise the past few years.
Caterpillar will be a company to watch in July, especially when it reports second-quarter earnings later in the month. Its earnings, as well as its forecasts, could provide an indication of just how bad the second quarter was for the economy, as well as if Caterpillar sees transitions to working from home and lower fossil fuels prices as just a result of the pandemic, or an indication of longer-term trends.
Southwest Airlines
Like Caterpillar, Southwest Airlines (LUV 1.10%) reports earnings in late July. Its results should tell investors the severity of the decrease in air traffic, as well as if Southwest is seeing any improvements to its business as several states that were in the process of reopening now find themselves closing businesses once more.
Southwest Airlines is not only one of the largest U.S. airlines, but it is also widely considered to be one of the healthiest from a balance sheet perspective. The company was right in the middle of dealing with the Boeing 737 MAX crisis before facing the onset of the COVID-19 pandemic. If management can get through this one, it will be yet another feather in its cap.
Without a doubt, Southwest Airlines is a risky stock. But it's a premier airline stock that is on sale right now. This upcoming quarter will be one of the most important in a while.
On the lookout
FedEx, Caterpillar, and Southwest Airlines are three industrial stocks that have all had their share of challenges. As industry leaders, their results speak volumes about how core parts of the economy are doing. Even if you're uninterested in the stocks themselves, these leading transportation, construction, and airline stocks are worth paying attention to in July.
