Three manufacturers to lead industrial renaissance

Despite the negativity surrounding the state of manufacturing, especially in Canada, things are beginning to look decidedly better, says John Stephenson, CEO of Toronto-based Stephenson & Company Capital Management Inc. A more competitive Canadian dollar, a resurgent North American car industry and an aerospace cycle that is ramping up have together provided a much-needed boost to the manufacturing sector.

The next leg for the bull market

With North American companies sitting on record stockpiles of cash and share buybacks having run their course, the next leg higher for the bull market will be fuelled by capital expenditures.  As manufacturers grow increasingly confident in their future, they will start increasing their investments in their factories and productive capacity and, in the process, will propel the industrial renaissance forward.

Despite improving fundamentals, the industrial sector trades below peak multiples and investor skepticism runs rampant. Many fret that things have come a long way in a short time; however, much of this pessimism misses the huge operating leverage that these business models possess.

What I recommend

One homegrown firm I like is CAE Inc. (TSX–CAE). It provides simulation and modeling technologies and integrated training services for civil and defense customers worldwide. And with new airlines sprouting up like dandelions in summer, CAE, a global leader in these fields, is well-positioned to help with pilot training.

The Montreal-based firm has had several quarters where it’s been restructuring and relocating flight simulators, but much of that work is now complete.

There’s increasing evidence the long-term drivers of CAE’s civil airline business (flight simulator equipment and training services) are picking up, driven by growing aircraft deliveries and pilot shortages, particularly in Asian and emerging markets. I rate the stock a “buy”, with a 12-month price target of $17.50.

Another company I like that also has a very strong dividend growth rate is Cummins Inc. (NYSE–CMI). It designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products. These include filtration and exhaust after treatment, fuel systems, controls, and air handling systems.

Cummins has a 2.3 per cent dividend yield and a pristine balance sheet, with nearly $700 million in net cash. I have a “buy” rating on the stock and a 12-month price target of $171.

Another name I like is Precision Castparts Corp. (NYSE–PCP).  A worldwide manufacturer of complex metal components and products, it provides investment castings, forgings and fasteners, as well as fastener systems for aerospace and various industrial applications, including industrial gas turbines.

With roughly 50 per cent of its sales going into the large aircraft original equipment manufacturer segment, Precision Castparts is well placed to benefit as Airbus and Boeing ramp up production over the next year.

The firm’s other business segment, which serves the power and energy sectors, represents about 25 per cent of sales.

While these are typically late-cycle areas, I expect to see a pick-up in customer demand later this year, with sales rising into next year.  I have a “buy” recommendation for Precision Castparts and a 12-month price target of $310.

 

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846