It's been a turbulent year for industrial stocks.
The COVID-19 pandemic shut down a significant chunk of the economy early in 2020, including disrupting supply chains and slowing manufacturing. But the sector proved more resilient than investors had feared, and the stocks have roared back in recent months as part of a broader market rally.
It's hard to know when the rally will end, but Wall Street still has high hopes for a number of industrial companies that have participated in the surge higher. Here's why analysts and investors are excited about General Motors (GM -1.18%), Boeing (BA -0.30%), and ExxonMobil (XOM -1.94%).
Boeing is finally airborne
Lou Whiteman (Boeing): Boeing was among the biggest losers as the pandemic intensified, with the stock losing nearly 75% of its value during a three-week period in March. The company was already struggling due to the grounding of its 737 MAX jet, and the prospect of COVID-19 wounding airlines and limiting sales of new planes sent investors running for the exits.
But Wall Street is now warming to Boeing again. The stock has received more than a half dozen upgrades since the beginning of November as the 737 MAX was cleared to fly again and on positive news about a COVID-19 vaccine. The return of the 737 MAX should help stem cash bleed that topped $15 billion in the first nine months of the year, and a vaccine hopefully marks the beginning of a commercial aerospace recovery.
The stock is up 50% since the beginning of November, but is still well below where it traded prior to the pandemic.
Wall Street is understandably excited the worst is over, but investors should remain cautious here. Boeing's debt ballooned during the crisis, and is four times the level it was prior to the 737 MAX grounding. The company in the next few years will be focused on paying down that more than $60 billion in debt, even if it means canceling employee raises and issuing new shares.
Boeing had more than 400 737 MAX planes during the grounding it now must place into a market where demand for planes is low and buyers are getting good deals. The company had hoped to be making more than 50 737 MAXs per month right now, but instead now has targeted 2022 to get back to a production level of more than 30 per month.
There is undeniable potential in Boeing's shares as a recovery takes hold, but investors should be warned it is likely to be a slow process with the potential for additional turbulence on the horizon. Boeing is best left for the patient investor with a very long time horizon for now.
This old automaker will soon use cutting-edge tech to boost its profits
John Rosevear (General Motors): It might come as a surprise if you haven't paid close attention, but General Motors -- yes, that General Motors -- has been getting a lot of love from Wall Street lately, and I think it's well deserved.
The thesis is that GM is on the cusp of several significant changes, not only in its products but in its revenue model as well. Why? Technology.
You might have heard that GM is going big on electric vehicles, that its new pickups are selling quite well despite the pandemic, and that its San Francisco-based subsidiary Cruise is getting closer and closer to launching a self-driving taxi fleet.
All of that is good, and all of it is bullish.
But what you might not have heard that GM is also gearing up to take a big step forward with services for its increasingly connected vehicles. As Morgan Stanley's future-focused auto analyst, Adam Jonas, said in a note on Dec. 17, GM appears to be moving toward a model of recurring, subscription-based revenue from its huge fleet of modem-equipped vehicles in the U.S. and China.
Jonas said that he sees "scope for a profound narrative change in 2021" as GM unveils its plans for connected services and its "Super Cruise" advanced driver-assist system. He maintained an overweight rating on GM's stock and boosted his price target to $57 from $53.
I've made fun of Jonas' future visions on occasion, but in this case I think he's on to something. CEO Mary Barra has promised some margin-boosting moves over the next couple of years, and there's a lot of potential to be unlocked.
But even if Jonas and I are wrong about GM's connected services, I think GM's stock still has significant upside potential over the next year or two, as the U.S. economy bounces back, as new electric models begin arriving at dealers, and as GM reinstates its solid dividend, likely in the second half of 2021.
Oil's not going away. Neither is Exxon.
Rich Smith (ExxonMobil): ExxonMobil hasn't been investors' favorite stock to own in 2020 -- and that's putting it mildly. With a combination pandemic-recession doing a number on oil demand by idling everything from airplanes to automobiles to cruise ships, global demand for oil has plummeted, and oil prices went negative earlier this year.
That's the bad news. Now here's the good. At prices approaching $48 a barrel this week, WTI crude oil is way off its lows of earlier this year. Oil's up 16% this month alone -- and Wall Street is starting to take notice.
This week, not one but two of the biggest investment banks in America -- Wells Fargo and Goldman Sachs -- upgraded shares of oil giant ExxonMobil.
Wells predicts that while oil prices will average something less than $50 a barrel in 2021, Exxon will continue to cut capital spending and operating costs to squeeze the most profit possible out of the actually not-so-bad prices -- and boost free cash flow simultaneously. And Goldman points out that Exxon has in fact already cut its costs, improved its free cash flow, and is generally "moving in the right direction."
Moreover, looking out a couple of years, past the end of the recession and into 2022, Goldman forecasts Exxon earning enough that its current share price values the stock at just 10.1 times 2022 profits -- versus a historical valuation closer to 15 times forward earnings -- and thinks that a 33% discount to historical valuation is cheap enough to justify buying the stock.
If you believe as I do that air travel, cruising, and commuting by car will all bounce back shortly after the pandemic is over, and that oil demand will bounce along with them, forecasts based on 2022 earnings seem like an acceptable way to value Exxon stock. To me, 10 times earnings on a stock expected to average 8.5% earnings growth over the next five years, and paying shareholders an 8.1% dividend yield, make Exxon stock a very tempting buy.