Investing with confidence for the long-term requires buying stocks with a high degree of certainty in their earnings prospects. In this vein, I think electrical products maker nVent (NVT 0.86%), paint and coatings company Axalta Coating Systems (AXTA 0.99%), specialty chemicals distributor Univar Solutions (UNVR +0.00%), data center REIT Equinix (EQIX +0.42%), and building systems and heating ventilation and air conditioning (HVAC) company Johnson Controls (JCI 1.49%) are worth picking up. Here's why.
1. nVent Electric
A maker of electrical connection and protection products, nVent is a backdoor way to play the long-term trend of electrification in the economy. Cars are becoming electric, data center investment is booming, buildings are becoming connected, manufacturing is becoming automated, and renewable energy is driving growth in electrical transmission and distribution investment.
Image source: Getty Images.
Everything points to an economy that's becoming electrified, and that's good news for a bread-and-butter play on electrification like nVent. The company's enclosures protect electrical equipment, while its fastening and thermal management systems are also an essential part of customers' equipment requirements. Moreover, its products are relatively low-ticket and necessary to meet regulatory and safety requirements.
Finally, nVent's valuation -- based on the Wall Street analyst consensus for free cash flow -- places it firmly in the group of value stocks on this list.
Data source: marketscreener.com, author's analysis.
2. Axalta Coating Systems
As you can see in the chart above, Axalta is not an expensive stock. The reason? It mostly comes down to the company's exposure to the auto markets -- it's no secret that global auto production has been weak in recent years, and Axalta's light-vehicle sales primarily go to the automotive original equipment market.
That said, global auto production will recover from the pandemic. Meanwhile, Axalta's refinish sales largely depend on the number of miles driven in the economy, and therefore collisions. So that's a relatively stable low-growth long-term market.
As such, a cyclical recovery in Axalta's light vehicle, commercial vehicle (trucks, off-road vehicles, rail, bus, etc.), and industrial (general industrial and building products) should combine with underlying growth in the refinish market. The result should be a multi-year expansion of sales, and hopefully, a change in sentiment regarding the sector.
Data source: Axalta presentations.
3. Univar Solutions
The third value option is the boring (but essential) company Univar Solutions. Nothing is exhilarating about specialty chemicals distribution. However, Univar's earnings growth plans should excite investors. In a nutshell, Univar is a company in the throes of a transformation to concentrate the company on core chemical distribution. The company is also opening digital sales channels while divesting less profitable businesses.
The plan began with the $1.8 billion acquisition of Nexeo Solutions in Feb. 2019. It continued with a series of divestitures, including a plastics distribution business, environmental services businesses, and a thermoplastics distributor.
The ultimate aim is to reach earnings before interest, taxation, depreciation, and amortization (EBITDA) margin of 9% by the end of 2022, compared to just 7.7% in 2020. Management believes it's on track to hit that target, and if so the stock will look very cheap.
4. Equinix
There's little doubt that demand for data will grow over the next decade. The trend is already decisively in that direction, but throw in the explosion of new sources of demand from 5G connectivity, the internet of things (IoT), and the massive amounts of data created by buildings, factories, and machines in general and the outlook is even brighter.
Image source: Getty Images.
Data center real estate investment trust (REIT) Equinix stands to benefit from solid increases in demand. Moreover, the company has a strong history of improving its key metrics. The number to follow with REITs is the adjusted funds from operations (AFFO). AFFO is calculated from EBITDA after interest, tax, and recurring capital expenditures are taken out. As you can see below, AFFO continues to grow at a mid-teens annual percentage rate.
In addition, Equinix's recurring capital expenditures are equivalent to around 3% of its revenue. With a 47% adjusted EBITDA margin, there's plenty of cash left to pay interest and taxes and fund expansionary capital spending. As such, investors can expect earnings, and dividend growth (current yield of 1.4%), for many years to come.
5. Johnson Controls
A leading HVAC and building controls company, Johnson Controls is a play on corporate commitments to reducing carbon emissions, specifically the movement toward net-zero carbon emissions. At the same time, there's a heightened awareness of the need to ensure healthy, clean, and well-ventilated buildings.
Image source: Getty Images.
Johnson Controls is also expanding its digital solutions offerings to lead the smart buildings revolution. Management recently held an investor day, and guided investors to a compound annual growth rate (CAGR) in revenue of 6%-7% to 2024, with an earnings per share (EPS) CAGR of 18%-21%.
All told, a combination of mid-single-digit revenue growth driven by strong underlying markets and margin expansion through selling more high-value services will lead to earnings expansion over the next decade.
