Here are three stocks that anyone interested in the industrial sector should take a close look at. They are attractive stocks for several reasons. Carpenter technology (NYSE: CRS) is a company firing on all cylinders with significant momentum behind it. Delta Airlines (NYSE: DAL) also has good momentum and will likely climb a wall of debt concerns in 2024. 3M (NYSE: MMM) is far from a perfect company, but it does represent a cost-effective option.
Carpenter Technology: An Aerospace Stock to Buy
The arguments for buying the specialty alloy products company are relatively simple. The primary end market (aerospace) is in an ongoing recovery process and the company will continue to drive revenue growth And significant margin expansion, leading to a sharp increase in profitability.
As a manufacturer with relatively high fixed costs, Carpenter cannot significantly reduce costs when sales decline, as they did after the lockdowns, so operating profit margins tend to collapse when sales decline. On the other hand, when sales recover, this translates into strong margin expansion. That’s exactly what’s happening now, as flight departures lead to more aftermarket demand, and increasing aircraft production improves demand for genuine parts. Carpenter serves both markets.
Carpenter’s revenue and margin trends are so strong that management recently told investors it would achieve its medium-term target of $460 million to $500 million in adjusted operating income in 2026, rather than the previous target of 2027.
Trading at just under 20 times Wall Street’s 2026 free cash flow (FCF) estimates, it appears Carpenter is fully valued. However, only a relatively small increase in turnover is needed to increase the margin. Given the improving aerospace environment, there are plenty of opportunities to positively surprise.
Delta Air Lines, the best airline stocks to buy
Speaking of commercial aerospace, Delta Air Lines is another fast-recovering company. At just 7.5 times estimated 2024 earnings and 9.2 times the midpoint of management’s FCF guidance, the stock appears to be the bargain of the century.
That said, there’s obviously a reason why the market has valued it so low, and that equates to adjusted debt of $29 billion at the end of 2023 – a huge amount compared to the current market cap of $32.2 billion.
Still, as you can see below, Delta’s recovering earnings are converting into free cash flow, allowing Delta to reduce debt. At the same time, growing earnings before interest, taxes, depreciation and rent (EBITDAR) mean the adjusted debt/EBITDAR multiple will decline to levels generally considered acceptable for investment-grade debt.
|
Metric |
2022 |
2023 |
2024 estimated |
|---|---|---|---|
|
Free cash flow |
$244 million |
$2 billion |
$3 billion to $4 billion |
|
Debt adjusted to EBITDAR |
5 times |
Three times |
2 times to 3 times |
Data source: Delta Air Lines presentations.
Meanwhile, as previously discussed, Delta is not just an attempt at the recovery of commercial aerospace; it is also highly exposed to the spending trends of higher-income customers through its loyalty programs and c-branded Delta American Express credit cards. As such, the stock is expected to outperform in an aerospace recovery, and unless something happens to derail Delta’s growing number of flights and cost structure, the stock appears to be a good value.
3M stock looks like an excellent value
The industrial giant is not everyone’s favorite company. A history of missing guidance, lackluster growth, unimpressive portfolio restructuring and costly legal settlements hang over the investment case for the stock. It’s all led to a 28% decline in the share price over the past five years, and the company recently cut its dividend.
That said, share prices have no memory, and if new CEO William Brown manages to turn the company around, he could generate significant value for shareholders.
He has a chance. The dividend cut frees up money for restructuring. Meanwhile, 3M’s ongoing restructuring program appears to be boosting margins. Moreover, some of its key end markets, such as semiconductors and electronics, are on track to return to growth in 2024. While this may be controversial, I think 3M is better off without its healthcare business, which has now been spun off as Solvent.
At the midpoint of management’s earnings per share (EPS) estimate, 3M comes in at less than 14 times 2024 earnings. With the prospect of a return to sales growth in 2024, margin expansion in tow, and Brown to still outline his vision for the company. there is potential for improvement in 3M’s prospects and stock price.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M, Delta Air Lines and Solventum. The Motley Fool has a disclosure policy.
3 Industrial Powerhouses to Buy in June with Hand Over Fist was originally published by The Motley Fool
