The industrial sector can be highly cyclical, so when the global economy slows, that usually takes a toll on industrial profits. That's a concern going into 2022, as central banks appear poised to lift rock-bottom interest rates to fight rising inflation, which could tap the brakes on global growth.
However, even with that macroeconomic uncertainty ahead, there are still some industrial companies set up to perform well and continue winning in 2022 and beyond. Three of our contributors' favorite industrial stocks for the coming years are Lockheed Martin (LMT 1.42%), Waste Management (WM 2.50%), and Nucor (NUE 0.44%). Here's why this trio stands out.
A tough year ahead, but then growth
Reuben Gregg Brewer (Lockheed Martin): When defense industry giant Lockheed Martin discussed its third-quarter earnings, it warned investors that 2022 would be less than inspiring. Management expects sales will fall slightly next year, then pick up again in 2023, and increase steadily through 2026. That near-term negativity helps explain why Lockheed Martin's price-to-sales, price-to-earnings, price-to-book-value, and price-to-cash flow ratios are all below their 5-year averages right now.
It all suggests that this stock is on sale. And at current share prices, its dividend yield is a generous 3.2% -- more than twice the 1.3% yield you'd get from an S&P 500 Index fund.
What's most interesting here, however, is that Lockheed Martin has its fingers in some of the biggest and most important military contracts around, such as the F-35 Joint Strike Fighter. These government contracts will provide reliable streams of income over very long periods of time. In fact, as of the end of the third quarter, Lockheed Martin had a backlog of work to be done that totaled nearly $135 billion. Sure, its yearly results may ebb and flow, but this is not a company that's struggling, nor one that has a questionable future.
Given the outlook for 2022 sales, there's probably no particular rush for investors to buy Lockheed Martin. However, given its valuation metrics, it might be worth it to take a deep dive sooner rather than later. At some point, Wall Street will start pricing this well-positioned industrial giant with the understanding that the coming top-line decline will be a temporary condition.
Steadily turning trash into cash
Matt DiLallo (Waste Management): Waste Management is a perennial winner. The waste collection and recycling specialist has delivered total annualized returns of 21% over the past decade, easily outpacing the S&P 500's nearly 17% annualized total return. While the company faces some near-term headwinds, it seems likely to continue producing attractive returns in 2022 and beyond.
One factor driving Waste Management's success is its ability to turn trash into cash. The company is on track to generate between $2.5 billion and $2.6 billion in free cash flow this year, and it's returning a substantial chunk of that to investors via share repurchases and its steadily rising dividend. The company recently boosted its dividend by 13% and authorized an additional $1.5 billion in stock buybacks. Since 2019, Waste Management has returned more than $3.5 billion to shareholders.
Those rising cash returns will help the company continue pleasing its shareholders in the coming years. In addition, it should benefit from the ongoing investments it's making in expanding its operations. Late last year, it closed its $4.6 billion acquisition of Advanced Disposal, and is on track to invest $700 million by the end of next year into expanding its recycling capabilities. These moves are helping Waste Management offset inflationary pressures as the Advanced Disposal deal is expected to result in cost savings of $150 million annually.
While waste collection might not be the most exciting business, Waste Management has a long history of producing strong returns. That should continue in 2022 and beyond, making Waste Management a great industrial stock to buy and hold for the years ahead.
Hard to ignore this steelmaker's growth catalysts
Neha Chamaria (Nucor): Investor sentiment around the industrial sector this year has been heavily impacted by President Joe Biden's infrastructure bill. Congress finally passed that legislation and Biden signed it into law some weeks ago, but some industrial companies have been minting money for a while now. And those are the kinds of stocks I'll be keeping my eye on in 2022 and beyond under the Biden administration. Case in point: Nucor.
Nucor, the largest producer of steel in the U.S., has delivered record quarter after record quarter this year. And on Dec. 15, management said it expects that Q4 will be a record-breaker too, as steel demand and steel prices remain strong. In fact, demand is so strong in key end markets like non-residential construction that the company is expanding capacity, and management has stated that it expects "another year of strong year profitability" in 2022.
Yet despite all this, Nucor is trading at remarkably cheap valuations, with a price-to-earnings ratio of around 7. This month, it also increased its dividend for the 49th consecutive year and announced a share repurchase program worth $4 billion to replace its existing $3 billion program. It's a win-win for shareholders, and once the new federal spending on infrastructure kicks off, Nucor could become even more generous toward shareholders. In short, this stock is a must-watch for 2022 and beyond.