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3 No-Brainer Stocks to Buy in the Industrial Sector

By Lee Samaha - Sep 4, 2020 at 9:03AM

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All these stocks have strong near- and long-term growth prospects.

With the markets seemingly taking a positive view on the prospects for the economy, it's becoming harder and harder to find good value stocks. In such an environment, it makes sense to look for stocks that might not be on everyone else's radar. In this vein of thought, heating, ventilation, air-conditioning, and refrigeration (HVACR) company Carrier (CARR 0.32%), pool and water treatment specialist Pentair (PNR 0.44%), and industrial software company PTC (PTC -0.08%) are all good value buys. Here's what the market may be missing about these no-brainer stocks.

Carrier

The investment case for buying Carrier is based on a combination of three interrelated factors.

First, profits should increase significantly due to a substantive cost-cutting program in place. The plan involves cutting $600 million in annual costs by 2022. To put this figure into context, the company generated around $2.6 billion in adjusted operating profit in 2019, so the cuts are significant.

Gradually higher stacks of cash

Image source: Getty Images.

Second, the separation from the former United Technologies looks set to enable management to restructure its portfolio of businesses. The HVACR is highly fragmented and widely believed to be ripe for consolidation. Furthermore, management may pursue a disposal of non-core businesses such as its fire and security business, Chubb. 

Third, the company has a long-term demand trend in place thanks to increasing urbanization, particularly in developing countries. As more people live in cities, temperatures tend to rise, and so does demand for air-conditioning among the middle classes.

Putting it all together, Wall Street analysts have Carrier earning $2.18 in earnings per share in 2022 (the year when the current cost-cutting program is to be completed), meaning it trades on less than 14 times 2022 estimates. That's a good value for a company with mid-single-digit revenue growth prospects, and the opportunity to improve profitability through self-help initiatives.

Pentair

Pentair's aim is to be the leading "residential and commercial water treatment company." Pentair is a pure play water company and sells pool equipment, accessories, filtration systems, and water pumps. Around 60% of its revenue comes from the residential market, with the rest pretty evenly split between the commercial and industrial end markets.

As such, it's a play on the increasing awareness of water quality issues and the desire for households and businesses to spend on pools. One customer, Pool Corp (POOL 0.88%), is responsible for around 15% of sales.

The case for buying Pentair is based on the idea that it operates in attractive long-term end markets. In addition, there's reason to believe that it's set for a near-term boost from burgeoning sales of residential pool equipment. For example, Pool's sales rose 14% in the recent second quarter and are also up 14% in the first half, with stay-at-home restrictions spurring interest in leisure activities at home. That strength is likely to feed through into Pentair's sales as Pool Corp, and others, will need to replenish their inventories.

Meanwhile, Pentair's commercial and industrial sales should improve as the economy opens up. Wall Street analysts have Pentair trading on 18.6 times 2021 earnings. That's a good valuation for a company exposed to some attractive long-term end markets.

PTC

Trading on 39 times 2020 earnings estimates, this industrial software stock is definitely not cheap on a superficial basis. However, if you believe that the Internet of Things (IoT) revolution is real, then the stock is worth picking up.

Person in factory controlling robotic arm with tablet

PTC is a play on the growth of the digital factory. Image source: Getty Images.

PTC's core activity is computer aided design (CAD) and product lifecycle management (PLM) software, but the really exciting growth opportunity comes from its IoT and augmented reality (AR) solutions. 

IoT allows companies to better manage their physical assets (say a gas turbine or a bottling plant) by being able to digitally monitor, analyze, and guide their performance through the use of web-enabled devices. Meanwhile, AR allows them to simulate and service equipment remotely.

As the use of automation and robots grows, it's highly likely that spending on IoT and AR will grow too. Moreover, the COVID-19 pandemic, despite producing near-term headwinds, is possibly going to end up strengthening the resolve of manufacturers to spend on digital solutions in the future.

If management hits its aim of $700 million to $900 million in free cash flow (FCF) by 2024, then it will trade on 11.7 times to 15.1 times FCF in 2024. Both ends of the range would make the stock look cheap. Admittedly, there's a long way to go before then, but if you are looking for exposure to the digital revolution in manufacturing, then PTC is a very good option.

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

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Stocks Mentioned

Pentair plc Stock Quote
Pentair plc
PNR
$50.67 (0.44%) $0.22
Pool Corporation Stock Quote
Pool Corporation
POOL
$390.05 (0.88%) $3.42
PTC Inc. Stock Quote
PTC Inc.
PTC
$122.37 (-0.08%) $0.10
Carrier Global Corporation Stock Quote
Carrier Global Corporation
CARR
$44.27 (0.32%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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