At this point, people who use the phrase "economic reopening" may want to change that to "the reopening of the reopening" to reflect the many issues nations around the world are facing as they attempt to get their economies back to firing on all cylinders.
The latest steep resurgence of the COVID-19 pandemic due to the spread of the omicron coronavirus variant is just one of the headwinds. That said, if you're taking a positive view of the situation and believe that the recovery will continue through 2022 -- albeit at an uncertain pace -- then you may want to consider adding Autoliv (ALV 0.38%), Stanley Black & Decker (SWK -1.16%), and Raytheon Technologies (RTX -0.10%) to your portfolio.
The specific investment cases for these stocks vary considerably:
- Autoliv is a reopening play based on the potential for global light vehicle production to bounce back in 2022.
- Stanley Black & Decker will benefit as high raw material costs moderate and supply chain issues get resolved.
- Raytheon Technologies' commercial aerospace businesses will improve as global flight departures grow.
Autoliv: A recovery play in the auto sector
This automotive safety company generates 65% of its sales from airbag and steering wheel products, with the rest coming from seat belt products. It's the dominant player in its niches, with a 42% market share in passive safety products and a 44% share in seat belts.
By winning market share and increasing its content per vehicle with new technologies as the auto industry adopted new safety features, Autoliv grew its sales at an annualized rate of 4.4% from 1997 through 2020. That compares to an annualized growth rate of just 1.3% for light vehicle sales over the same period.
In short, Autoliv has demonstrated a consistent ability to grow at a faster rate than its end market. Assuming the semiconductor shortage eases, auto industry observers expect high-single-digit percentage growth in global light vehicle production in 2022, and a multiyear recovery after that. Autoliv is well-placed to benefit from that rebound, and trading at just 16 times estimated free cash flow (FCF) for 2022, it looks like an excellent value stock to buy now.
Stanley Black & Decker: An underrated value stock
I've written about the investment case for Stanley Black & Decker at length elsewhere. But, simply put, the tool and hardware company will end in 2022 in a lot better shape than it began it.
Unfortunately, when it delivered its third-quarter results in late October, management was forced to reduce its full-year adjusted earnings per share guidance from a range of $11.35 to $11.65 to a new range of $10.90 to $11.10. The reason for that change came down to sharp increases in its costs.
To put this into context, management started 2021 expecting just $75 million in full-year inflation and cost headwinds. It increased that estimate to $690 million by the third quarter. For reference, Wall Street analysts estimate Stanley's sales will be $17.2 billion in 2021, so the increase in cost headwind expectations represents 3.6% of its sales.
But here's the thing. Management is implementing price increases and productivity actions which it expects to lead to a progressive increase in profit margins through 2022. Meanwhile, the company is integrating an exciting growth business. For example, its recently completed acquisition of MTD (lawn and garden equipment) will significantly boost its sales and presence in the outdoor category.
In addition, management expects that it will be able to significantly increase MTD's margin profile. Finally, any improvement in underlying cost conditions will drop straight down to the bottom line.
There's plenty of reason to believe Stanley Black & Decker's fortunes will improve throughout 2022, and with the stock trading at less than 16 times Wall Street analysts' consensus estimate for 2022 FCF, it looks an excellent value.
Raytheon Technologies: An aerospace play for 2022
Like many other companies exposed to the commercial aerospace industry, Raytheon Technologies had a frustrating 2021. Despite increasing its earnings and FCF guidance through the year, and raising its synergy guidance from the merger in 2021, investors were left somewhat disappointed.
The stock's 20% gain in 2021 lagged the S&P 500 index's gain of 27%, but it would probably have outperformed the market if the commercial aerospace recovery had taken place as expected. It's no secret that the recent resurgence of COVID-19 cases has negatively impacted flight departures. That's bad news for commercial aviation aftermarket equipment sales -- fewer flights means less demand for aftermarket equipment. Unfortunately, it's also bad news for airline profitability, and declines on that front usually lead to reductions in aircraft orders, which means fewer sales of the engines and original equipment that Raytheon manufactures.
The latest wave of the pandemic is the reason why the aerospace sector sold off in the last few months. That said, the sector's recovery will continue. Moreover, Raytheon's management continues to target annual FCF of $10 billion by 2025. That's a year when both the narrowbody and widebody markets should, at least, be back to 2019 levels.
Although that target is three years away, based on today's market cap of $129 billion, Raytheon is trading at less than 13 times 2025's FCF goal. So if you can look beyond its short-term troubles, this stock could be very attractive for long-term holders.