Over the last year, the S&P 500 has fallen into the grips of a bear market. Bear markets can be challenging times for investors. However, markets like this give you an excellent chance to buy companies at once-in-a-decade, dirt cheap valuations.
Industrial companies are crucial to the global economy, producing machinery and other products that form the backbone of the economy. These well-established companies can be an excellent source of income as they pay out dividends regularly. Two beaten-down stocks that are ridiculously cheap right now are Stanley Black & Decker (SWK 1.91%) and 3M Company (MMM 1.64%). Here's why you should consider buying these industrial giants at today's prices.
Stanley Black & Decker hasn't been this cheap since the Great Recession
Stanley Black & Decker provides tools for individuals and businesses, and has strong brand recognition with its Dewalt, Craftsman, and, of course, Black & Decker products. It also has an excellent history of rewarding investors with ever-increasing dividend payouts. For 55 consecutive years, it has increased its dividend and earned its spot on the list of exclusive companies known as Dividend Kings.
The last few years have been a roller coaster ride for Stanley Black & Decker. When the pandemic initially emerged, things looked dicey for the cyclical stock. However, travel restrictions kept people confined to their homes, and low-interest rates encouraged them to buy new homes or borrow against their existing ones. Home improvement projects boomed, and customers rushed to purchase tools and other equipment.
Things have since cooled off, and inflation and supply chain bottlenecks have weighed on the business and sent the stock into a downward spiral. Since peaking in May 2021, Stanley Black & Decker stock has lost 58%.
The company had a significant debt burden following some acquisitions, and at one point its debt-to-equity rose to 1.2 -- a historically high level for the company. These factors have forced management to cut costs and streamline the business. It has paid down $3.3 billion in debt, dropping its debt-to-equity levels to a somewhat more reasonable 0.77. Management will look to complete its $1 billion cost-savings program (started in 2021) by the end of this year and restore margins from 19% in the fourth quarter to the more typical 35% it is used to.
Based on last year's earnings, Stanley Black & Decker trades around its cheapest valuation since the Great Recession, with a price-to-earnings (P/E) ratio of 13.5 and a price-to-sales (P/S) ratio of around 0.84.
SWK PE Ratio data by YCharts
The company expects 2023 earnings per share to come in around $1.00, giving the stock quite an expensive one-year forward P/E ratio of 90. However, baked into these estimates is a tough first half of the year, with analysts estimating a loss of $0.71 per share. A rebound is expected in the second half, with forecast EPS recovering to $0.82 and $0.90 by Q3 and Q4 of this year.
Stanley Black & Decker's turnaround will take time, and its earnings will be bumpy the next year. But for long-term focused investors, now could be an excellent time to begin investing in its recovery.
3M Company's valuation has also hit a decade-low level after a multi-year sell-off
Another company having a tough go of it in recent years is 3M Company. 3M faces legal and regulatory issues that have weighed on the business.
3M faces a class action lawsuit by veterans who used its allegedly defective earplugs manufactured by its subsidiary, Aearo Technologies, and ended up with noise-related hearing loss. 3M has set aside $1 billion to settle claims; in a worst-case scenario, the lawsuit could cost it tens of billions. So far, the company has lost 10 of the 16 cases that have gone to court, with plaintiffs being awarded about $265 million.
The company also faces legal issues related to its production of "forever chemicals" like fluoropolymers, fluorinated fluids, and polyfluoroalkyl substance (PFAS) based additive products. 3M announced it would exit the manufacturing of PFAS products and discontinue the use of PFAS in all its products by 2025. Bloomberg Intelligence estimates that long-term legal liabilities related to this could reach $30 billion.
With so much potential liability, why would an investor want to buy 3M? At the end of the day, 3M is a cash-generating machine. Last year its free cash flow (FCF), or cash left over after paying for operational and capital expenditures, was $3.8 billion. Over the past decade, its FCF has averaged $5 billion annually.
Not only that, but investors have taken 3M stock to the woodshed for these legal issues. Since 2018, 3M stock has lost 51% and trades at its cheapest valuation in a decade. The selling has its P/E ratio at its lowest since the great recession, while its P/S ratio is near multi-decade lows.
MMM PE Ratio data by YCharts
Investors buying today will be rewarded with a healthy dividend which currently yields 3.85%. With the stock already selling off significantly in recent years as investors price in pending litigation, 3M looks like a great value at today's prices for those willing to ride out the near-term headline risks.
