As the United States economy begins to face its next central inflection point or, put, a potential pivot into a lower gear, some industries begin to receive differentiated treatment from the market as a whole. Investors today can start to gauge where the new momentum and favoritism are focused and where it may be headed next to enable some lucrative 'before the move happens' potential investments.
The manufacturing areas in the economy, namely the machinery manufacturing niche, are seeing the bulk of the little growth during these economically challenging periods. Investors can rest assured, though, as these household names have been kicking other competitors out to the curb, a trend that suggests no end in sight so far.
Why Invest in this Space?
By following specific economic breakdown reports, such as the ISM manufacturing PMI report, investors can better understand why particular industries are ripe for investment. Taking the report for the month of July, where the machinery industry is taking the spotlight, participants can start to dig their way into winning stocks.
Within July’s report, investors can see what respondents are saying about the industry’s health, where the overall message in the machinery sector is of potential rises in new orders boosting production as a result. Speaking of which, the machinery space reported the highest production output in the economy and the most considerable increase in employment.
All of this activity and new employment to support the rising production levels, all due to new business knocking on the door, will likely trickle down in the form of increased earnings and valuations for the largest players in the industry.
Caterpillar (NYSE: CAT) is known as a global supplier of farming and construction machinery equipment, and this global presence has allowed for a swift market share grab by the name. As the company just reported a massively bullish second quarter of 2023, posting double-digit growth across the board and blowing past analysts' estimates, the stock is flirting with breaking through recent all-time highs.
Considering that the stock cleared an 81% increase in earnings per share over the past twelve months, and management remains optimistic about future demand trends, it is inappropriate for Caterpillar analyst ratings to land on a consensus 4% downside from today's prices.
The technical momentum is only the beginning for this stock, as management returned up to $2 billion to shareholders via stock buybacks and a dividend increase, suggesting that - despite recent stratospheric rallies - the stock may still be undervalued.
This time, markets agree with management's value proposition, as they reward the stock with richer valuation multiples relative to competitors. Carrying a 13.8x forward price-to-earnings ratio, which values the next twelve months of earnings rather than the past twelve, places Caterpillar stock amongst the top of the large-cap (stocks between $10 and $200 billion in size) category.
Deere & Company
While this stock has not had its quarterly release yet, as it is scheduled by mid-August, investors have a unique chance to consider getting in before Deere & Company (NYSE: DE) reports a highly probable earnings beat. There are many factors to consider before assuming a bullish report, though the trickle-down benefits coming from the sector are sure to leave some of the fun for good old Deere.
According to the latest financial results, Deere is also riding on the momentum wave that rewarded Caterpillar, reiterating that as the industry keeps pushing, these key players in the space will undoubtedly benefit from taking a piece of the growing pie.
Within the second quarter 2023 earnings presentation, investors will see a 30% advance in net sales over the year and a just as impressive 42% growth in earnings per share. Management also reported the repurchase of 11.6 million shares during the period, which will likely continue as financials move nowhere but up during an industry rebound.
While not as high and rich as Caterpillar's, Deere's forward P/E will still fall above the industry average at 13.3x, suggesting that markets are expecting nothing but growth and subsequent rallies in this name as well. Perhaps investors - as well as analysts - will be pleasantly surprised by the time the company reports its quarterly results coming up.
The best for last? Market favorite? Absolutely. Eaton (NYSE: ETN) stock takes the crown when it comes to these market valuation multiples, as investors can see this company selling for a 22.7x forward P/E; there must be something special brewing in the company ready to send the stock flying any day now.
Like Caterpillar, Eaton analyst ratings are pushing for a consensus downside of 3.3% from today's prices. Still, they, too, may be in for a rude awakening as the company blew their second quarter 2023 results out of the water. The stock is quickly returning on a rampant advance, looking to test and possibly break its recent all-time high as well.
Investors received a pleasant surprise during the latest earnings release from the company, where revenues were reported to have grown at a 13% annual rate, delivering record quarterly segment margins of 21.6% due to strong pricing power dynamics in the industry. Earnings per share ended quarterly at $2.21 for an 18% annual advance.
To Add or not to Add
Investors now have the tools necessary to form a proper opinion on these three key players of a growing industry. As the PMI keeps delivering favorable trends around the machinery sector, benefits will surely trickle down to boost sentiment and financials for these resiliently bullish stocks.