After outperforming the broader market last year, industrial stocks are underperforming this year.
That may have created buying opportunities. So have a look at this list of six stocks from Morningstar. They are part of the universe of 92 industrial stocks covered by the firm.
They all earned a wide moat rating from Morningstar, meaning it sees them retaining competitive advantages for at least 20 years. They all are substantially undervalued, based on Morningstar’s fair value estimates.
And they all have at least three (out of five) Morningstar stars. That rating is determined by a stock’s current price, Morningstar’s fair value estimate and the uncertainty level of that estimate.
Here’s the list (caution: two stocks on the list are financial services stocks rather than industrials by any common definition).
1. Equifax, Credit Reporting Bureau
Morningstar fair value: $290. Friday price quote: $203. Morningstar stars: four.
Along with TransUnion (TRU) – Get Free Report and Experian (EXPGY) – Get Free Report, Equifax is one of the big three credit bureaus. “Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue,” wrote Morningstar analyst Rajiv Bhatia.
2. TransUnion, Credit Reporting Agency
Morningstar fair value: $101. Friday price quote: $79. Stars: four.
“TransUnion has been able to generate meaningful margin expansion over the past several years,” Bhatia said.
“Its core business is selling credit reports to U.S. lenders, but as this business is the most mature, the company has sought other avenues of growth.”
3. Masco, a Home Improvement Products Maker
Morningstar fair value: $71. Friday price quote: $61.45. Stars: four.
“Through the first half of 2023, … profit margins have been much better than we expected,” wrote Morningstar analyst Brian Bernard.
“The firm is on track to realize solid margin expansion this year, and management is targeting a 16% adjusted operating margin.”
4. General Dynamics, Aerospace Defense Contractor
Morningstar fair value: $247. Friday price quote: $220.70. Stars: three.
“General Dynamics is an extraordinarily well-run and financially-disciplined company,” wrote Morningstar analyst Nicolas Owens.
“We give the team credit for delivering double-digit margins in business lines where competitors sometimes struggle to maintain even high-single-digit operating margins.”
5. Emerson Electric, Provider of Automation Products
Morningstar fair value: $103. Friday price quote: $91. Stars: four.
“Emerson Electric is the undisputed powerhouse in process manufacturing on the west side of the Atlantic,” wrote Morningstar analyst Joshua Aguilar. “We believe Emerson is poised for several years of positive organic growth after a slow recovery in early 2021.”
6. Otis Worldwide, the Largest Elevator/Escalator Maker
Morningstar fair value: $98. Friday price quote: $90. Stars: four.
“We’ve nudged up our fair value estimate by 3% to account for Otis’ newly-announced plan to strip an annualized $150 million from its cost base over the coming two years,” wrote Morningstar analyst Grant Slade.