The Investment Reporter regularly monitors 10 top industrial stocks on “The Back Page”, a weekly feature that examines the market outlook with a focus on a particular industry. Here are eight industrial stocks to buy that offer capital gains potential over the next few years.
Since we published our March 6 issue, the top 10 industrial stocks we regularly monitor are up by an average of 3.7 per cent. This beats the corresponding 3.2 per cent drop in the S&P/TSX Composite index.
Key stocks Finning International (TSX─FTT), 3M Co. (NYSE─MMM) and Toromont Industries (TSX─TIH) remain buys for gains and rising dividends. Key stock Bombardier Inc. (TSX─BBD.B) remains a hold, if you need no dividends.
(N.B. Key stocks in The Investment Reporter are selected by its Investment Planning Committee, and are recommended in the monthly supplement The Investment Planning Guide, as the main building blocks of your portfolio. Key stocks are not all buys at all times, but they are always attractive enough to hold for long-term income or appreciation. When a Key stock loses that degree of attraction, the Investment Planning Committee recommends it be sold and it is removed from The Investment Planning Guide.)
Strongco Corp. (TSX─SQP) remains a buy. While it pays no dividends and has high debt, it trades far below its book value and has an attractive P/CF ratio of 1.4. Former U.S. Key stock Teleflex Inc. (NYSE─TFX) remains a buy for gains and rising dividends. Wajax Corp. (TSX─WJX) remains a buy for gains and high dividends. Winpak Ltd. (TSX─WPK) remains a buy for gains and small, flat, dividends. ZCL Composites (TSX─ZCL) remains a buy for gains and dividends—if you can accept buying a stock that we rate ‘Speculative’.
Industrial stock downgraded to ‘hold’
We’ve reviewed and downgraded Black Diamond Group (TSX─BDI) to a hold. Since we published our March 6 issue, this industrial stock’s shares have jumped by 21 per cent. This reduces their gains potential. On the positive side, the company pays generous dividends. On balance, we’ve now downgraded Black Diamond from a buy to a hold.
Black Diamond rents and sells portable workforce-accommodation and modular workspaces to businesses in Canada, the U.S. and Australia. The company also supplies field rentals to the oil and gas industries in Canada and the U.S. It writes, “From twenty locations around the world, we serve multiple sectors including oil and gas, mining, power, construction, engineering, military, government and education.”
Business conditions are poor in the oil, gas and mining industries. This is hurting Black Diamond’s results. In 2015, its earnings are expected to drop by over 37 per cent, to 79 cents a share (all figures converted to loonies). Based on this estimate, the shares trade at an excessive price-to-earnings, or P/E, ratio of 21.7 times.
Next year, Black Diamond’s profit is expected to partly recover, to 97 cents a share. Based on this estimate, the P/E ratio improves to 17.7 times. But this industry is cyclical and the company faces powerful competitors such as Key stock Atco Ltd.
Industrial stock with a high dividend
Black Diamond has raised its dividend in at least each of the past five years (excluding a special dividend in 2011). As a result, it’s what’s known as a ‘dividend aristocrat’. The current dividend of 96 cents a share yields an attractive 5.6 per cent, which is high, but not too high. With a net debt-to-cash-flow ratio of 1.4 times, we expect the company to at least maintain its dividend.
Black Diamond’s price-to-cash-flow ratio is 4.3 times. This meets our preferred ratio of five times or less.
Due to the run up in Black Diamond’s shares, we’ve downgraded it to a hold. It holds particular attraction to income-seeking investors.
The Investment Reporter, MPL Communications Inc.
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