The industrial sector looks poised for significant growth driven by factors such as increased focus on domestic manufacturing, government initiatives, easing and localization of supply chains, growth of consumer demand, and the adoption of advanced technologies.
Amid this backdrop, it could be wise to buy fundamentally strong industrial stocks Clearwater Paper Corporation (CLW) and Steel Connect, Inc. (STCN). However, not all industrial stocks are likely to capitalize on the sector’s tailwinds. Therefore, avoiding Uranium Energy Corp. (UEC) could be prudent.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industrial sector’s prospects.
The U.S. industrial production rose 0.1% sequentially and 1% year-over-year in December. Manufacturing output rose 0.1% in December, but utilities declined 1% last month. The index for mining rose 0.9%. In addition, capacity utilization remains unchanged in December at 78.6%.
Despite the softness of industrial production last year, the surge in economic activities, increased digitalization, easing of supply chains, and the rise in demand for manufactured goods and services are expected to boost the industrial sector’s prospects.
Moreover, Industry 4.0 is revolutionizing the way companies manufacture and distribute their products. Factories are becoming smarter by adopting technologies like artificial intelligence (AI), the Internet of Things (IoT), cloud computing, and machine learning.
Integrating these technologies into their processes has helped manufacturers increase automation, improve productivity and quality, streamline operations, collect and analyze data that enable data-driven decision-making, provide tools for more effective and predictive maintenance, etc.
With the recovery in economic activities, the push to boost manufacturing will drive the demand for industrial services. The global industrial services market is expected to reach $40.75 billion by 2027, expanding at a CAGR of 5.2%. Moreover, there is a heightened demand for packaging paper and board due to the rise of online shopping. The demand for container boards is projected to reach 226 million tons by 2032.
The containerboard market is anticipated to grow at a CAGR of 2.1% to reach $162.63 billion by 2029.
Furthermore, the muted demand for metals is expected to continue, with the World Bank expecting metal prices to fall 5% this year, following the nearly 10% decline in 2023. The prices for metals are expected to take a hit due to weaker-than-expected demand from China and advanced economies or significant disruptions to production. Also, if the conflict in the Middle East escalates, prices could remain subdued.
Given this backdrop, let’s assess the fundamentals of the featured industrial stocks.
Stocks to Buy:
Clearwater Paper Corporation (CLW)
CLW is a manufacturer and supplier of bleached paperboard and consumer and parent roll tissue operating through two segments: Pulp and Paperboard and Consumer Products.
In terms of forward non-GAAP P/E, CLW’s 5x is 68.4% lower than the 15.79x industry average. Its 3.68x forward EV/EBITDA is 54.2% lower than the 8.04x industry average. Likewise, its 0.28x trailing-12-month Price/Sales is 76.9% lower than the 1.20x industry average.
CLW’s net sales for the third quarter ended September 30, 2023, came in at $519.90 million. Its adjusted EBITDA rose 4.3% over the prior-year quarter to $80.60 million. The company’s adjusted income increased 18.6% year-over-year to $37 million. Its adjusted income per share came in at $2.19, representing an increase of 19.7% year-over-year. In addition, its free cash flow rose significantly year-over-year to $74 million.
For fiscal 2023, CLW’s EPS is expected to increase 88.2% year-over-year to $6.83. Over the past six months, the stock has gained 5.3% to close the last trading session at $34.13.
CLW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked first out of 9 stocks in the B-rated Industrial – Paper industry. It has an A grade for Value and a B for Growth and Quality. Click here to see CLW’s ratings for Momentum, Stability, and Sentiment.
Steel Connect, Inc. (STCN)
STCN provides supply chain services in the U.S., Mainland China, the Netherlands, and internationally. It offers product configuration and packaging, kitting and assembly of components and parts into finished goods, and value-added processes, such as product testing, radio frequency identification tagging, language settings, and packaging design services. It provides fulfillment services, warehousing, and inventory management services.
In terms of trailing-12-month EV/Sales, STCN’s 0.34x is 80.8% lower than the 1.76x industry average. Its 6.03x trailing-12-month EV/EBITDA is 51.8% lower than the 12.50x industry average. Likewise, its 9.48x trailing-12-month EV/EBIT is 44.3% lower than the 17.01x industry average.
For the fiscal first quarter, which ended October 31, 2023, STCN’s net revenue came in at $41.34 million. Its adjusted EBITDA stood at $3.31 million. The company’s cash, cash equivalents, and restricted cash, at the end of the period, rose 330% year-over-year to $278.65 million. Also, its net income attributable to common stockholders and EPS came in at $3.90 million and $0.15, respectively.
Over the past six months, the stock has gained 13.2% to close the last trading session at $9.74.
STCN’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
Within the A-rated Industrial – Services industry, it is ranked #18 out of 83 stocks. It has an A grade for Growth and Value and a B for Sentiment. To see the other ratings of STCN for Momentum, Stability, and Quality, click here.
Stock to Avoid:
Uranium Energy Corp. (UEC)
UEC engages in the exploration, pre-extraction, extraction, and processing of uranium and titanium concentrates in the U.S., Canada, and Paraguay. It owns interests in the Palangana mine, Goliad, Burke Hollow, Longhorn, and Salvo projects.
In terms of forward EV/Sales, UEC’s 37.97x is significantly higher than the 1.94x industry average. Its 144x forward GAAP P/E is considerably higher than the 10.06x industry average. Likewise, its 38.57x forward Price/Sales is significantly higher than the 1.29x industry average.
UEC’s sales and service revenue for the first quarter ended October 31, 2023, declined significantly year-over-year to $108 thousand. Its gross profit decreased substantially over the prior-year quarter to $18 thousand. Similarly, its loss from operations came in at $11.39 million, compared to income from operations of $3.59 million in the year-ago quarter.
Street expects UEC’s revenue for the quarter ending January 31, 2024, to decline 66.6% year-over-year to $16 million. Its EPS for fiscal 2024 is expected to remain negative. Over the past month, the stock has gained 22.6% to close the last trading session at $7.92.
UEC’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It is ranked last out of 34 stocks in the Industrial – Metals industry. It has an F grade for Value, Stability, and Quality and a D for Growth. Click here to see the other UEC ratings for Momentum and Sentiment.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
UEC shares were trading at $7.64 per share on Friday morning, down $0.28 (-3.54%). Year-to-date, UEC has gained 19.38%, versus a 0.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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