Buying a stock for the long term implies a high degree of confidence in the security of the underlying company's market position and growth prospects. In that context, General Electric's (GE -2.11%) breakup plans will leave investors with companies that are leading players in their fields. Likewise, Stanley Black & Decker's (SWK -0.52%) leadership in the tools and hardware market and its host of growth opportunities make it a very attractive stock, and coatings company PPG Industries (PPG 0.07%) has a leading position in a consolidating marketplace. Here's why all three are attractive stocks.
General Electric's breakup plans make sense
The plan to separate GE into three different companies makes sense on several fronts. First, a sum-of-the-parts analysis of GE suggests that, based on market valuations of its peers, the separate businesses will be worth more as stand-alone companies than they would as part of GE.
Second, the evidence from GE's industrial peers is that a more focused approach to running each separate business -- implied in the breakup plans -- does result in improved operating performance. In short, GE's companies will be more profitable.
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Third, all three companies will be leaders in their fields. For example, GE Aviation is responsible for engines that power two-thirds of commercial flight departures. In addition, GE Healthcare is one of the largest imaging companies globally, and the combined energy company (GE Power and GE Renewable Energy) contains two leading companies in gas turbines and wind power, respectively.
As such, investors could see significant upside from investing in GE ahead of a breakup in the coming years.
Stanley Black & Decker has plenty of growth prospects
If you can look beyond the company's problems with supply chain issues and raw material cost increases in 2021 -- and Stanley is undoubtedly not alone in this regard -- then investing in the stock could reap the rewards in the future.
The impact of the cost headwinds is significant this year, with management expecting full-year margins to decline across all three of the company's segments. Moreover, on the third-quarter earnings call management reduced its full-year organic sales growth outlook to 16%-17% from 17%-18% previously. Similarly, the full-year adjusted EPS guidance was reduced to $10.90-$11.10 from $11.35-$11.65.
In a nutshell, the company's commodity and supply chain cost headwinds are now forecast to be $690 million, compared to an earlier estimate of $300 million. Unfortunately, CFO Lee McChesney said on the earnings call that "we also are forecasting approximately $600 million to $650 million of carryover cost headwinds for 2022."
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That said, management also expects that a combination of pricing actions, cost cuts, and mid-single-digit volume growth will more than offset the carryover costs. Meanwhile, management will set about integrating the acquisitions of MTD and Excel (both lawn and garden equipment companies), which will help Stanley ramp revenue to above $20 billion in 2022 from $14.5 billion in 2020. Meanwhile, the company is investing in creating innovative products (cordless, improved batteries, etc.) in its leading tools brands.
Wall Street analysts forecast that the ongoing cost pressures will lead to a flat operating income margin in 2022. Still, the revenue increase of around $3 billion should translate into an improvement in adjusted EPS to $11.75 and a free cash flow of $1.96 billion, according to analyst estimates.
As such, the stock is trading at 16 times forward earnings and less than 16 times free cash flow. That looks cheap for a business set to grow sales and margin as the cost headwinds drop in the future and management increases the margin of its acquisitions.
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PPG Industries is in a great industry
The paint and coatings industry isn't the most exciting sector to invest in, but that should suit long-term investors just fine. The fact is that paint and coatings are an essential part of the global economy. From architecture to automotive, aerospace, packaging, and industry in general, all these assets need painting and coating. As such, growth in the sector tends to follow global growth patterns.
That's a good thing, as it tends to be an industry characterized by mid-single-digit profit margins and strong returns from shareholders' equity.
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Like Stanley, all the primary paint and coatings companies have had to lower expectations this year due to supply chain disruptions and cost increases. Still, these issues won't last forever, and PPG in particular stands well placed to benefit in the future due to a combination of global growth and cost headwinds dissipating.
In addition, a slew of acquisitions and mergers from the likes of Sherwin-Williams and PPG continues to consolidate an already lucrative market, and investors can hope this leads to long-term margin expansion in the future as the leading players build scale and eliminate competition.
