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3 Growth Stocks for In-the-Know Investors

By Lee Samaha - Feb 17, 2021 at 6:31AM

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An aerospace company, an engineering consultancy, and a toolmaker make up three stocks with under-appreciated growth potential.

For their own reasons each of these three stocks has exciting growth prospects which the market may be missing, therefore granting investors a very interesting buying opportunity.   Aerospace and defense giant Raytheon Technologies (RTX 2.66%) stock will prove to be significantly undervalued if it meets management's expectations. Science and engineering consultancy Exponent (EXPO 3.20%) is a little-followed stock that gives investors exposure to growth in regulation and legal exposure facing companies in the future. And finally, toolmaker Stanley Black & Decker's (SWK 4.43%) underlying growth initiatives are being overlooked due the noise around its earnings.

Raytheon Technologies

Now, I know what you are thinking. However, instead of thinking about commercial aerospace as an industry to avoid due to the uncertainty around the timing of a recovery, why not think of it as one set to grow strongly from a very low base?

This point is likely to become clear when worldwide commercial flights start growing again on a year-over-year basis, probably in March.  I mention March because that's when air travel is coming up against the period when it slumped due to the COVID-19 pandemic spreading worldwide. Then again, growth is growth even if it's coming from a depressed base.

Planes in the air.

Image source: Getty Images.

It's a point made even stronger when considering that Raytheon's management expects its adjusted operating profit in its commercial aerospace-focused segments (Pratt & Whitney and Collins Aerospace) to increase from just $97 million in the second to fourth quarters of 2020 to $1.3 billion to $1.67 billion in the same period of 2021. For reference, the defense-focused businesses are expected to contribute around $2.8 billion in the same period.

CEO Greg Hayes is expecting around $5 billion in underlying free cash flow in 2021, ultimately growing to the $8 billion to $9 billion range expected at the time of the merger. With a current market cap of $110 billion, Raytheon looks like a very good value, provided the recovery to 2019 levels of traffic progresses as hoped over the next couple of years.

Exponent

If you believe there's an inexorable rise in regulatory requirements and legal exposures that companies are being forced to deal with, you probably agree that Exponent has very strong long-term growth prospects.

The science and engineering consultancy specializes in assessing risk, helping companies meet regulatory requirements, and supporting the advancement of new complex technologies. Meanwhile, its environmental and health segment specializes in helping companies meet health and safety regulations across the globe.

The company has had an astonishing rise over the last decade and management believes it can grow revenue in the high-single-digit to low-double-digit range over the long term.

Exponent can't be accused of being a cheap stock -- it trades at a forward price-to-earnings multiple of 55 times earnings -- but if you are looking for exposure to the investing theme of increasingly stringent regulatory requirements, then it might fit the bill.

Stanley Black & Decker

A host of external cost headwinds (foreign exchange, tariffs, and cost inflation) conspired to create extra costs of some $1 billion for Stanley Black & Decker between 2018 and 2020. Meanwhile, the stay-at-home measures imposed on the economy created a surge in demand for DIY tools in the second half of 2020.

These issues aren't new. Suffice it to say now that Stanley's earnings have been "noisy" in the last few years. Unfortunately, that's something that's obscuring its underlying growth potential.

Management has done a good job of consolidating the industry through acquisitions such as the tools business of Newell Brands and the Craftsman brand from Sears in 2017. However, the most exciting growth opportunity will come when Stanley takes up its option to buy the remaining 80% share of lawn and garden products company MTD. Management intends to do so in late 2021.

A man buying a lawn mower.

Stanley Black & Decker is moving into the lawn and garden care market with its intended acquisition of MTD. Image source: Getty Images.

MTD generated $2.6 billion in sales with a 6% operating profit margin, but Stanley's CEO Jim Loree believes he can get it up to 8% (assuming $3 billion in revenue) by the end of 2022, and ultimately to 15% over time.

Wall Street analysts have Stanley growing sales by 7.1% and 7.7% over the next couple of years, reaching $16.8 billion with $2.6 billion in operating profit. However, the addition of MTD with $3 billion in sales and an operating profit margin of 8% would take those figures up to $19.8 billion and $2.84 billion, respectively.

Throw in the potential to expand MTD margin even further over time, and the opportunity to leverage Stanley's existing brands into the lawn and garden category with MTD, and it's clear that Stanley has exciting growth prospects.

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Stocks Mentioned

Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$94.20 (2.66%) $2.44
Stanley Black & Decker, Inc. Stock Quote
Stanley Black & Decker, Inc.
SWK
$111.16 (4.43%) $4.72
Exponent, Inc. Stock Quote
Exponent, Inc.
EXPO
$91.84 (3.20%) $2.85

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

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