Given the uncertainty in the markets and the economy now, it makes sense to start looking at some under-the-radar stocks with growth prospects that don't rely strongly on the economy.
That's the case for buying stocks like infrastructure and vegetation management equipment company Alamo Group (ALG -0.56%), aviation services company AAR (AIR 1.26%), and electrical products company nVent Electric (NVT 1.68%). All three have solid growth prospects that should tide them through a difficult economy. Here's why.
1. Alamo Group: Don't forget it
It's no secret that the industrial sector has battled surging prices in raw materials and logistics over the last few years, and Alamo Group is not immune to these factors. Moreover, supply chain disruptions and labor shortages have hurt Alamo's ability to deliver products.
For reference, Alamo operates in two divisions. Its vegetation management business supplies mowers and cutters to governmental, agricultural, and commercial turf markets. The industrial equipment division provides infrastructure-maintenance equipment (for snow- and ice-clearing, road sweepers, and the like). As such, Alamo is a play on the need to maintain infrastructure and public spaces.
The key to the investment case for the stock rests on the idea that its end-market demand is likely to hold up relatively well in an economic slowdown. Meanwhile, its cost and supply chain pressures will ease if a slowing economy alleviates stress on the supply chain.
That argument is strengthened by Alamo Group's $1 billion backlog as of the end of the year -- a figure equivalent to 63% of the $1.6 billion in revenue that Wall Street analysts expect for 2023.
Meanwhile, a combination of mid-single-digit sales growth and margin expansion leads Wall Street to expect double-digit earnings growth for the next few years. Trading at 17.6 times earnings estimates for 2023, Alamo Group looks to be an excellent value.
2. AAR keeps flying higher
Alamo Group stock is up 18.8% over the last year, and AAR is only slightly behind at 15%. AAR's move has been driven by an ongoing recovery in its aviation services to commercial customers as flight departures recover from the restrictions placed on travel in recent years.
Sales to commercial customers rose by 28% in the last reported quarter, more than offsetting the 3% decline to government (primarily military) customers -- resulting in a 15% increase.
AAR's 10.1% revenue growth in 2022 is all the more impressive considering the loss of work related to military contracts in Afghanistan. Moreover, management has done an excellent job raising the operating profit margin to 5.9% in 2022 -- a figure ahead of the 5.5% reported in the pre-pandemic year of 2019.
As commercial flight departures continue to play catch-up and airlines require more maintenance, repair, and operations (MRO) services and parts supply, AAR's revenue and profit margins will likely grow. Throw in a rebuild of military revenue, and the company is in a good place to grow for years to come.
3. nVent Electric and the electrification of everything
While the market froths with excitement over electric-vehicle, Internet of Things, and renewable energy stocks due to their importance in the clean-energy transition and the modern economy, it's worth noting all these powerful industrial megatrends imply growth in electrification in the economy. In other words, the "electrification of everything."
There are more-glamorous ways to play the theme than buying shares of nVent Electric, a manufacturer of electrical-connection and protection products. But there aren't many better value options than nVent, which is trading at 16 times estimated 2023 earnings. Moreover, management has acquired a good reputation for beating and raising its earnings guidance.
NVT revenue (TTM) data by YCharts; TTM = trailing 12 months.
After a couple of years of solid growth, Wall Street has nVent growing revenue in the mid single digits for the next few years, with ongoing margin expansion and free cash flow growth. Given the long-term trend of electrification in the economy, nVent's growth prospects continue to look excellent.
