2 highly profitable manufacturers – GuruFocus.com

The industrial sector was one of the worst performers over the past year. The iShares US Industrials ETF (IYJ, Financial) has lost 9.6% so far in 2022, against a 6.7% drop in the S&P 500 index.

In my view, investors looking to acquire high-quality names in a struggling sector may well be interested in industrial stocks. This article will look at two highly profitable industrial stocks that offer a dividend yield above the 1.3% average yield of the S&P 500 Index.

Cummins

The first is Cummins Inc. (CMI, Financial), a leading designer and manufacturer of truck engines. The $28 billion company has annual revenue of $24 billion.

Cummins is one of the biggest names in its industry and offers engine solutions for heavy, medium and light trucks. The company has five segments: Engines, Timing, Components, Power Systems and New Energy. Across these segments, Cummins offers complete solutions to its customers.

With increasing pressure to reduce emissions, Cummins is in an advantageous position to meet the needs of its customers due to the strength of its emissions solutions business. The New Power segment, which is small compared to other segments as it only generated $34 million in revenue in the last quarter, is expected to experience strong growth in the coming years as the power industry truck manufacturing is turning to more electric vehicles.

Cummins’ business has had strong long-term performance as revenues have grown at a compound annual growth rate (CAGR) of 3.7% over the past decade. Earnings per share grew by 7.1% annually over the same period. A lower number of shares helped results, but net income still improved by 4.1% during this period.

Due to its business performance, Cummins ranks well on its GuruFocus profitability ranking.

Cummins receives an 8 out of 10 from GuruFocus on its profitability ranking. The best performance is that of return on equity, which exceeds 94% of the 2,629 companies in the industrial products industry. It’s also near the top of the company’s 10-year median.

Other areas where Cummins performs well are return on capital and return on assets, which are above 86% and 82% of its peer group, respectively, but close to the company median. The net margin is in the upper third of the competition and very close to the high end of the last decade.

The company has weak spots, including three-year revenue growth, which is only above 57% of the industry and right in the middle of Cummins’ own history. Three-year earnings per share growth without one-time items is below 53% of peers and is at the low end of the 10-year range.

Cummins used its highly profitable business to return capital to shareholders. In addition to cutting its share count by nearly 3% a year over the past decade, Cummins has increased its dividend by 10.7% over the period. In total, the company has increased its dividend for 16 consecutive years. The shares are yielding 3%, which compares favorably with the stock’s 10-year average return of 2.4%, according to Value Line.

The stock is down more than the sector ETF as stocks have fallen 10.8% year-to-date. Shares of the stock appear to be trading below their fair value according to the GF Value chart.

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Cummins closed the last trading session at $195.94. With a GF value of $221.97, the stock has a GF price-to-value ratio of 0.88. Achieving GF value would result in a return of over 13% before the dividend is factored in. The stock hasn’t traded this far below GF value since the middle of 2020. Cummins receives a slightly undervalued rating from GuruFocus.

snap-on

The next industry name to consider is Snap-On Incorporated (ANS, Financial), a leading name in the tooling industry. The company has a market cap of $11.3 billion and annual revenue of $4.3 billion.

Snap-On is the world’s leading manufacturer of common and specialty tools as well as diagnostic equipment, software and service solutions for professional customers. Among the products in the company’s portfolio are hand and power tools, storage systems, information systems and workshop equipment. The company also produces equipment and tools used by vehicle repair centers.

Perhaps the company’s main competitive advantages are its high-quality product portfolio and strong customer appeal. Customers depend on the tools and equipment to complete repairs on time and on budget, which makes the higher costs of Snap-On products worth the extra expense.

Revenue growth has been 4.2% per year since 2012, but where the company really shines is on its bottom line. Earnings per share have nearly tripled over the past decade, driving earnings CAGR north of 12%. The number of shares fell somewhat over the period, but the net profit margin improved from 10.4% in 2012 to 19.3% last year. Snap-On has become extremely effective at turning sales into long-term profits.

Considering this, it’s no surprise that the company performs so well in terms of profitability.

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Snap-On scores an almost perfect 9 out of 10 on profitability from GuruFocus. The company is better than the vast majority of its peers on almost every metric. Return on capital, operating margin, net margin and return on assets account for 96%, 95%, 95% and 91% respectively of the industrial products industry. These scores are also at the top of the company’s 10-year performance.

The three-year revenue growth is right in the middle of the last decade’s results, but still beats nearly two-thirds of the competition. Other areas of concern would be the three-year Ebitda growth rate and the three-year earnings per share growth rate without non-recurring items, as these scores are only about half above that. of the industry has produced. They are also equal to or lower than the median of the historical performance over 10 years. That said, Snap-On’s profitability rankings are overwhelmingly above most of its peer group on nearly every metric.

The income investor should also find the company attractive. Snap-On has only increased its dividend for 12 years, but the pace of increases has been steady. Snap-On’s dividend has a CAGR of 15.8% for the past decade. Growth has not slowed much over the medium term as the five-year dividend CAGR is 14.7%. Snap-On reported 2.7% on Thursday. For context, the average return is 2% for the past decade.

Snap-On has held up much better than the sector ETF, losing just 1% year-to-date, likely due to its strong business model. Therefore, the stock does not offer a discount to its GF value.

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Snap-On has a current stock price of $211.16 and a GF value of $193.24, which equates to a GF price-to-value ratio of 1.09. The shares would fall 8.5% if they were to return to the GF value. That being the case, Snap-On hasn’t traded this close to its GF value since late 2020. The stock is considered fairly priced by GuruFocus.

Final Thoughts

The industrials sector has been a major weak spot so far this year, with the iShares sector ETF down nearly 10%. For investors looking to dig through the rubble, there are several extremely profitable high-quality names. This could allow them to outperform their weaker counterparts in the long run.

Cummins and Snap-On are two examples. Both companies rank highly among their peers on several metrics. Cummins stocks offer the potential for double-digit returns by my estimates, while Snap-On is just ahead of its GF value. Each stock also offers a return greater than twice the average return of the S&P 500 Index.

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