There are a cornucopia of reasons a company's stock can slide. It's important for long-term investors to identify whether those stock declines are merited. Many times, an unwarranted stock slide can be a very opportune time to build a position in a great company that you plan to hold for years.
So we asked three of our contributors to each call out a stock in the industrial or manufacturing sector that has taken an unwarranted beating from the market recently. Here's what they had to say.
Just about any company with a tinge of exposure to the energy sector has taken it on the chin over the past year or so, and one company hit particularly hard in the downturn is Chart Industries (NASDAQ:GTLS). The company manufactures cryogenic equipment to treat gases for the energy, industrial, and healthcare sectors. The one component investors seem to cling to, though, is its exposure to the energy sector, as it manufactures equipment for liquefying natural gas for export, as well as for petrochemical processing.
In all likelihood, this segment of the business will wane a little as natural gas growth wanes and existing energy infrastructure can handle it. Looking over the long term, though, natural gas demand is poised to grow at a clip twice as fast as oil, and the increased need to transport and export natural gas will require Chart's equipment. Sprinkle in the fact that it still has several levers to pull in its industrial and healthcare offerings, and the fears that energy demand will pull this company down seem a bit overstated.
Chart has maintained a rather solid balance sheet over the past several years, with a net debt-to-EBITDA ratio of less than 1. This means the company has enough cash and has generated enough EBITDA in the past 12 months to pay off all long-term debt outstanding -- and plenty of cash to ease any short-term liquidity issues. With shares trading at less than 2 times tangible book value, Chart looks extremely cheap today and may be worth looking into.
I'm going with a deep-value dividend pick, global mining equipment and maintenance service operator Joy Global Inc. (NYSE:JOY). Joy has been absolutely crushed by the popping of several commodity bubbles in recent years and has seen its shares crash 84% from their late 2010 highs, even as it began raising its dividends over the past two years and hit an all-time-high yield of around 5% today.
An unsustainable dividend isn't worth much, and the way the market has been treating Joy, it appears that Wall Street is worried that the global commodity crash could drag down Joy's business to such hellish lows that the payout might need to be suspended.
However, I think Joy Global's business is healthier than Wall Street is giving it credit for. Not only do I think the company will survive this downturn, but I think so will its dividend, meaning enormous potential profits for courageous and patient long-term income investors. In its most recent quarter, 75% of Joy Global's business came from its services segment, which provides steadier maintenance-based revenue -- which declined 4% year over year versus the 22% decline in its products segment.
Since miners can only defer maintenance so long before equipment breaks down, Joy's services segment should be able to provide a reasonably secure base of revenue and cash flow to help it weather the commodity crash while also preserving the dividend. In fact, over the past 12 months, Joy Global was able to generate $154 million in free cash flow, which covered its $78 million dividend twice over.
Nothing has gone right for Caterpillar (NYSE:CAT) in the past year. Commodity prices have plunged, China's economy is slowing, and the energy business is a mess at the moment. That made Caterpillar reduce revenue estimates for 2015 by $1 billion, to $48 billion, and announce a $1.5 billion cost-reduction plan.
The news threw the market into a frenzy, and shares of Caterpillar sold off. But this is the normal course of business for a company like Caterpillar. Its revenues and profits explode when the economy and commodities are strong, and it struggles when the economy and commodities are weak. But long-term, the company always finds a way to get by. That's what it's doing with the recent restructuring, and it will come out a stronger company.
Look at the long-term net income growth for Caterpillar and the tremendous gains investors have enjoyed over that time. But nothing about either goes up in a straight line.
The weakness in Caterpillar's end markets won't last forever. The company makes equipment that's needed in everything from mining to construction to oil and gas extraction, and there are very few competitors in such large-scale equipment. Weakness that we're seeing from the company should turn around, and this beaten-down stock should provide nice returns for investors willing to hold long-term. In the meantime, a 4.4% dividend yield isn't a bad consolation prize while we wait for the share price to move higher.