Like most of the stock market, industrial stocks have struggled over the last year as investors prepare for a recession. That makes sense, as the industrial sector, which includes manufacturing, transportation, and shipping, is one of the more cyclical industries, meaning it's sensitive to the overall strength of the economy.
However, smart investors know that sell-offs create buying opportunities for top companies. Keep reading to see why FedEx (FDX 0.59%) and Union Pacific (UNP 0.78%), which are down 41% and 25%, respectively, from all-time highs, both look like good buys now.
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1. FedEx has built a reliable logistics network
Parkev Tatevosian: FedEx's business (and its stock) got a nice bump during the worst parts of the COVID-19 pandemic. People stuck at home with fewer places to spend money (including those government stimulus checks) instead went shopping online. All these packages had to be delivered by someone. FedEx's revenue jumped by 21% in 2021 to $84 billion and 11.4% in 2022 to $93.5 billion. FedEx benefitted not only from an increased quantity of packages, but also from increased prices per package delivered. That boom in demand is fading now that consumers are freer to get out and about and spend on items and services that don't require delivery.
Still, over the last decade, FedEx has grown its revenue at a compound annual rate of 8.2%. Given the barriers to entry caused by the high capital investment required to build a large-scale logistics business, investors can reasonably expect FedEx to grow its top line at a similar rate over the next 10 years. More importantly, this expansion in sales has boosted profits for the global delivery company. FedEx's operating income increased from $5.1 billion in 2013 to $6.9 billion in 2022.
The company may experience a few quarters of slowing growth in the near term as consumers spend more money on experiences and less online. However, a greater percentage of goods will be purchased online in the long run. The advantages of online shopping are too numerous for brick-and-mortar to properly compete.
The headwinds related to changing consumer behavior mentioned earlier have created an opportunity for investors to buy FedEx stock at 40% below its mid-2021 peak. Those that buy now will also benefit from a dividend yield (2.27%) that is near all-time highs as well.
2. Union Pacific is a wide-moat railroad
Jeremy Bowman: Like other parts of the industrial economy, Union Pacific has seen some headwinds in demand over the past year. Carload growth in 2022 is only expected to be 3%, but the company made up for it with higher prices and a fuel surcharge. Operating revenue grew 18% to $6.6 billion in its third quarter, and adjusted operating income rose 13% to $2.7 billion.
As these numbers indicate, Union Pacific enjoys huge operating margins, generally in the 40% range, as the company essentially shares a duopoly in railroads in the western half of the U.S. with Berkshire Hathaway's BNSF.
Union Pacific also took some charges over new labor agreements, which could have a modest impact on profitability, but the company's margins speak for themselves, and few companies in any industry are able to produce operating margins in the 40% range.
The railroad is also one of the oldest publicly traded companies in the country and has paid a dividend for a whopping 123 consecutive years, showing its ability to turn a profit and remain stable even through two World Wars and the Great Depression, as well as more recent challenges.
While the slowing economy is expected to weigh on Union Pacific's growth in 2023, the business should bounce back once the company returns to expansion. Right now, the stock trades at a reasonable price-to-earnings valuation of 19 and offers a 2.4% dividend yield after shares fell 24% from its high last year.
For a stock that has proven itself through every business cycle for more than a century and converts 40% of its revenue into profits, this looks like a great entry point.
