Industrial Sector in 2022: The Complete Investors Guide

The industrial sector is a segment of the economy that is made up of companies that manufacture and distribute goods, transportation services, or the provision of commercial services and supplies.  Some of the industries within the sector include: Aerospace & Defense, Building Products & Services, Marine Shipping, and Railroads.

In 2021, the industrial sector rallied 21%, underperforming the S&P 500’s 26.89% gains.  In 2022, the economy and stock market are facing some headwinds from heightened geopolitical tensions and a hawkish Fed, overall trends still remain supportive of growth as business spending will increase, which will drive the need for equipment, machinery, and supplies. This could make it a great time to invest in industrial stocks. 

However, not all stocks in the sector are great investments. This is why investors should consider the top stocks in the sector such as ABB Ltd. (ABB), Union Pacific (UNP), Atkore (ATKR), Emerson Electric Co. (EMR), and Crane (CR).

But first, I’ll provide you with an overview of the industrial sector.

About the Sector

The industrial sector includes stocks of companies that produce capital goods used in construction and manufacturing. These businesses make and sell machinery, equipment, and supplies. Companies in the industry perform based on the supply and demand for building construction in the commercial, industrial, and residential segments of the market. The demand for manufactured products also plays a role.

The sector is considered the backbone of the economy since it plays a central role in the manufacturing and distribution of capital goods such as products and machinery. Companies are also involved in providing construction and engineering services and commercial and professional services.

The sector is capital intensive as companies need to invest money to expand their operations. Because of this, industrial companies tend to borrow money to buy new capital equipment or build new manufacturing facilities.

History

Before the Industrial Revolution, most people in this country lived off the land in farming communities. Money was made through selling crops such as tobacco or products like lumbar. However, there were also skilled laborers earning a living as a blacksmith or even a baker. But everything changed in 1790 when Samuel Slater built the first industrial cotton mill in Rhode Island.

The mill sped up the process of cotton being spun into yarn—this was a spark for the industrial revolution. Soon technology would change the way products were made and how people worked. Instead of working on a farm, many people soon became factory workers and moved to more urban areas. Eventually, the U.S. became the world’s industrial capital, creating vast wealth for industry leaders and investors.

Economics

Industrial stocks are highly sensitive to fluctuations in the economy. When the economy contracts, industrial companies produce fewer goods and postpone any expansion plans. This is due to lower demand for industrial goods and services. Industrial stock prices tend to falter during this time.

On the other hand, during an economic recovery, the sector performs well in the early phase of a business cycle. There is more demand for industrial products and services. So capital expenditures are likely to increase as the economy improves. The sector tends to outperform during these times.

Industries

The industrial sector is made up of several industries. Three of the main industries include machinery, manufacturing, and construction. The sector also includes electric equipment, transportation, defense, and aerospace companies

Machinery

These companies manufacture and sell industrial machineries such as tractors, cranes, and bulldozers. Without these items, there would be no buildings, streets, and bridges.

Manufacturing

These companies provide basic materials that are used in the manufacturing of goods. Think of all the materials needed to create electronic devices such as televisions and microwaves.

Construction

These companies provide the basic materials used in construction. This includes items such as bricks, concrete, and wires. These are all needed to construct buildings and offices.

Electrical Equipment

These companies produce electrical components and equipment used in all types of products.

Aerospace and Defense

These companies manufacture civil or military aircraft and defense products. This includes weaponry and vehicles.

Transportation Infrastructure

These are companies that manage roads, tunnels, and marine ports. They are vital for the transportation of labor and products.

Industrial Stocks to Buy in 2021

ABB Ltd. (ABB)

ABB is a global supplier of electrical equipment and automation products. The company is the number-one or number-two supplier in all of its core markets and the number-two robotic arm supplier globally. In automation, it offers a full suite of products for both discrete and process automation and robotics.

Automation is considered the fastest growing area in the industrial space, and ABB is one of the best-positioned companies to benefit from industrial automation. The company has a strong base of robotics and automation customers that sets the company for success as the Industrial Internet of Things (IoT) takes root. Both its industrial and robotics controllers have a leading market share. The company’s electrification products should also aid growth.

ABB has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. A-rated stocks have posted an average annual return of 31.1% which compares favorably to the S&P 500’s average annual 8.0% gain. ABB has a Quality grade of B given its generous 2.75% dividend, rock-solid balance sheet with low debt, and nearly $3 billion in cash which is more than 10% of its market cap.

We also grade ABB based on Momentum,Growth, Industry, Value, Stability, Sentiment, and Quality. You can find those grades here. ABB is also ranked #4 in the A-rated Industrial – Machinery industry. You can find other top stocks in that industry by clicking here. 

Union Pacific (UNP)

UNP operates in the railway and freight transportation business in the U.S. It provides transportation services for grain products, food, refrigerated products, fertilizers, animal feeders, construction products, industrial products, ethanol products, plastics, sand, metals, forest products, and finished automobiles.

Currently, it is the second-largest railroad in North America behind Warren Buffett’s Burlington Northern Santa Fe. The overall climate is very positive for railroads given strength in commodities, inflationary pressures, and a more uncertain economic and monetary environment which leads to inflows in higher dividend and defensive sectors like railroads.

In 2021, UNP reported $21.8 billion in sales and $9.95 in earnings per share. These were an 11.8% and a 26% improvement from last year. In 2022, analysts are forecasting $23.6 billion in revenue and $11.55 in earnings per share which represent an 8% and 16% increase, respectively. 

UNP is also a standout when it comes to dividend payments. Currently, it pays a 1.8% dividend yield. And, the company has a track record of consistent increases. In recent years, it’s hiked the dividend by 10%. Over the last 10 years, its dividend payout has increased by 257%. 

UNP’s POWR Ratings reflect these positive fundamentals. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. It also rates stocks by various components to give investors additional insight.

In terms of component grades, UNP has a B for Quality. This is due to its dominant market position in a sector with favorable fundamentals. Rising energy prices also increase rail traffic. To see the complete POWR Ratings for UNP, click here.

Atkore (ATKR)

ATKR was founded in 1959 and is one of the top industrial suppliers in the US. It produces and sells a variety of products including electrical conduits and fittings, metal framing and fittings, mechanical pipes, modular support structures, etc. It offers its products under the sub-brands: Allied Tube & Conduit, AFC Cable Systems, Heritage Plastics, Unistrut, Power-Strut, Cope, Calpipe brands, etc.

The company has a dominant market share in several of its categories which is helping it thrive in an inflationary environment, where the company has pricing power. ATKR makes products that are essential for nearly any type of engineering, industrial, or construction project but make up small portions of the budget. This means that its customers have no choice but to absorb higher prices. 

2021 was a strong year for ATKR, with its stock price gaining more than 150% but this gain pales to its EPS growth of nearly 300%. In 2022, analysts expect these gains to sustain although growth is forecast to slow to a 7% rate. However, this means the stock remains very cheap in terms of a forward P/E of 11 which is almost half of the S&P 500. 

Demand for ATKR’s products should remain strong due to the housing shortage and infrastructure spending. Another factor is that businesses are expected to increase CAPEX spending over the next decade. The pandemic revealed that our supply chains are quite fragile and haven’t kept up with the world’s population growth. This is evident in multiple areas such as energy, semiconductors, and autos. ATKR will be a major beneficiary as companies invest in increasing and maintaining capacity. 

ATKR is rated a B according to the POWR Ratings. In terms of component grades, it has a B for Value and Growth which is consistent with its impressive EPS growth and low P/E. ATKR also has an A for Quality due to its strong balance sheet, market leadership, and attractive and growing margins. To see more of ATKR’s POWR Ratings, click here.

Emerson Electric Co. (EMR)

EMR is a multi-industrial conglomerate that operates under two business platforms: Automation Solutions and Commercial and Residential Solutions. The automation solutions segment is known for its process manufacturing solutions, such as measurement instrumentation and valves, and actuators. Its commercial and residential solutions include climate technologies, such as HVAC and refrigeration products and services. Its tools and home products include tools and compressors.

The company is a dominant force in process manufacturing. It holds either first or second market share in multiple product categories. EMR should benefit from fewer available experts than can address in-demand automation services and its installed base, which will allow the company to benefit from long-term higher-margin aftermarket revenue. For instance, the company should see higher growth in the Asia-Pacific region, where it has a large installed base.

EMR has an overall grade of B or a Buy Rating in our POWR Ratings system. It also has a Stability Grade of B, which means both its price returns and growth figures are stable. The company has a Quality Grade of B, which means it has a solid balance sheet and low debt

To access the rest of EMR’s grades (Growth, Value, Momentum, and Sentiment), click here. EMR is ranked #26 in the B-rated Industrial – Equipment industry. You can find other top-ranked stocks in this industry by clicking here.

Crane (CR)

CR is a diversified manufacturer of highly engineered industrial products. The company has four business segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. Its major customers are found in a variety of industries including chemicals, oil & gas, power, automated payment solutions, banknote design and production, aerospace & defense markets, along with a wide range of general industrial and consumer related end markets.

As a provider of essential inputs for a wide variety of industries, CR is a major beneficiary of the current industrial recovery and inflationary environment. This is evident from the company’s recent financial performance which shows that its revenue is now about 4% below pre-pandemic levels but earnings and free cash flow are higher by 65% and 40%, respectively. 

This is an indication of pricing power and operational improvement. In 2021, CR had $6.55 in EPS and $3.2 billion in sales which was a 141% and 10% improvement from 2020. In 2022, analysts are forecasting $7.47 in EPS and $3.4 billion in revenue. This results in a very attractive forward P/E of 12 especially coupled with the company’s growth and 1.7% dividend.

It is no surprise that CR has an overall A grade, which equates to Strong Buy in our proprietary rating system. CR has strong component grades across the board including a B for Sentiment. Currently, 3 out of 5 analysts covering the stock have a Strong Buy rating with none rating it a sell. CR also has a B for Quality due to its recent margin improvement and history of dividend payouts and increases. Click here to see CR’s complete POWR Ratings, click here.

UNP shares were unchanged in after-hours trading Monday. Year-to-date, UNP has gained 4.29%, versus a -11.69% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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