For different reasons, Delta Air Lines (DAL -2.62%), industrial technology company Trimble (TRMB -0.30%), infrastructure software company Bentley Systems (BSY 0.04%), oil equipment and services company Baker Hughes (BKR -1.00%), and industrial giant Siemens (SIEGY -0.41%) are all attractive stocks to look at in 2023. Let's briefly examine why they all have something to offer investors.
1. Delta Air Lines
Anyone advocating buying airline stocks in the face of a cyclical slowdown, particularly one led by a slowdown in consumer discretionary spending, usually deserves some questioning. However, the repercussions of the policy decisions made due to the pandemic are still with this economic cycle, which isn't a normal one.
The travel industry is still recovering from the ravages wrought upon it in 2020, and according to Delta's latest earnings presentations, its industry backdrop has never been more constructive. Its advance bookings for the March quarter are ahead of the same period of 2019, and higher-margin corporate travel is coming back.
Delta plans to restore its network to levels comparable with 2019 by the summer and generate $2 billion in free cash flow in 2023, followed by $4 billion in 2024. Put another way, if Delta hits management targets, it will generate a quarter of its $24 billion market cap in free cash flow over the next two years. Of course, Delta is not without risk, and a severe economic slowdown will hurt the indebted airline. Still, if the economy avoids that, Delta will have significant upside potential in 2023.
2. Trimble
This industrial technology company is best known for its positioning hardware used in precise mapping, and for things like fixing precise points on construction and infrastructure projects. However, thanks to the ongoing revolution in digital technology and advanced analytics, it's increasingly moving toward becoming what management describes as an "integrated work process."
This means Trimble is embedding more and more application software in its hardware to link data from customers' operations (a crop farmer in the field, a trucking fleet, or machinery on an infrastructure project) with analytics capability to produce actionable insights. So, for example, the crop farmer can apply insecticide and fertilizer more precisely, the trucking fleet can have routes optimized, and waste and inefficiency can be reduced on an infrastructure project.
The shift to higher-margin software implies margin and cash flow improvement over the long term, and the sell-off in the stock over the last year is creating a buying opportunity in a long-term growth story.
3. Bentley Systems
Sticking with the theme of infrastructure technology stocks, Bentley is a pure-play infrastructure software stock. Its solutions help customers develop digital models, or so-called "digital twins," which are used to design and plan the construction of an infrastructure project. However, the work doesn't stop there. Infrastructure projects (roads, bridges, water and wastewater, etc.) have multi-decade lifespans and require constant maintenance -- something the digital twin can model and simulate to improve servicing.
Considering the vast amounts of information traditionally held separately with myriad contractors and consultants on a major infrastructure project, the ability to collate and fully utilize that data via a digital twin can bring about significant cost savings for infrastructure owners in the planning, construction, and lifecycle of the asset.
4. Baker Hughes
The oil services and equipment company continues to enjoy favorable end-market conditions. After all, with all the talk of recession, the price of oil is still above $80 a barrel at the time of this writing. That's a level conducive to investment in oil equipment and services.
There's a reason to favor Baker Hughes over its peers. Specifically, it has a self-help initiative that could trim $150 million off annual costs. The company is moving from four reporting segments to two and streamlining its operations as it does so.
As an equipment provider, Baker Hughes suffered alongside many other companies in 2022 with component shortages and supply chain inefficiencies. Hopefully, those issues will resolve through 2023, leading to margin expansion. It all points to an opportunity to grow profits significantly in 2023.
5. Siemens
Investors often overlook this German industrial giant, due to concerns over the prospects for the European economy in light of the effect of sanctions imposed on Russia. However, it's worth noting that Siemens generates 29% of its revenue in the Americas and 25% in Asia. It also owns a clutch of businesses positioned in industries containing stocks with significantly higher valuations than Siemens.
The company has a history of generating weak return on invested capital (ROIC) over the last decade, but this is largely a consequence of previous investments in oil & gas and wind energy businesses (now spun-off and part of Siemens Energy). Meanwhile, it's pivoting towards growth industries such as industrial automation, industrial software, and smart infrastructure (see below). Consequently, analysts are forecasting its net income will almost double in the next couple of years (so ROIC should improve notably), and Siemens tends to convert earnings into cash flow at a good rate.
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In the digital industries segment (3.9 billion euros in profit in 2022), it owns the world's leading automation and industrial software companies, competing with the likes of ABB, Emerson Electric, Rockwell, and PTC. In smart infrastructure (2.2 billion euros), it competes with Honeywell, ABB, and Johnson Controls in providing building management controls and systems and electrification products. Its mobility segment (800 million euros) offers rail infrastructure and competes with Alstom. It also owns 75% of Siemens Healthineers (3.4 billion euros), competing with GE HealthCare (in imaging) and Abbott (diagnostics).
Sporting a 3% dividend yield in the U.S. listing, Siemens represents a value option for income-seeking investors.
