3 High-Quality Industrial Stocks to Invest in 2023

Demand for industrial goods has been increasing as economic activity returns to pre-pandemic levels. Despite supply chain challenges, raw material inflation, and labor shortages, total industrial production rose 2.5% year-over-year in November 2022.

Moreover, the bipartisan infrastructure bill is expected to drive demand for industrial products through multiple projects. The Biden administration announced $185 billion in investment and over 6,900 projects, including 2,800 bridge repair and replacement projects.

Furthermore, according to a Business Research Company report, the industrial machinery market is expected to grow at a CAGR of 5.8% until 2026. Investors’ interest in the industrial sector is evident from the Vanguard Industrials ETF’s (VIS) 14.1% returns over the past six months.

Given the industry’s promising outlook, it could be wise to add fundamentally strong industrial stocks Honeywell International Inc. (HON), Caterpillar Inc. (CAT), and Tennant Company (TNC) to your portfolios in 2023.

Honeywell International Inc. (HON)

HON is a diversified technology and manufacturing company providing services worldwide. It operates in four segments, Aerospace; Honeywell Building Technologies; Performance Materials and Technologies; and Safety and Productivity Solutions.

On November 1, 2022, HON and Aramco announced the signing of a joint venture agreement to provide a set of end-to-end business process automation solutions under the Aramco Namaat Industrial Investments Program.

Digital delivery expertise, coupled with HON’s proven experience in industrial software and big data analytics solutions, should unlock tremendous value for the industry.

HON has paid dividends for 20 consecutive years. Over the last three years, HON’s dividend payouts have grown at a 5.7% CAGR. While HON’s four-year average dividend yield is 2.30%, its current dividend translates to a 1.95% yield.

HON’s net sales came in at $8.95 billion for the third quarter that ended September 30, 2022, up 5.6% year-over-year. Its net profit came in at $1.55 billion, up 23.5% year-over-year, while its EPS came in at $2.28, up 26.7% year-over-year.  

Analysts expect HON’s revenue to increase 3.7% year-over-year to $36.86 billion in 2023. The stock’s EPS is estimated to grow 4.7% year-over-year to $9.16 in 2023. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained 22.9% to close the last trading session at $211.34.

HON’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. 

HON has a B grade for Growth, Stability, and Quality. Within the B-rated Industrial – Machinery industry, it is ranked #15 out of 80 stocks. Click here for the additional POWR Ratings for Value, Momentum, and Stability for HON.

Caterpillar Inc. (CAT)          

CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company operates through its five segments: Construction Industries; Resource Industries; Energy & Transportation; Financial Products; and All Others.

On January 6, 2022, CAT announced an investment in Lithos Energy, Inc., a battery technology company based in the United States that manufactures lithium-ion battery packs. This should help accelerate the development of CAT’s electrified product portfolio.

Also, on December 15, 2022, CAT announced a collaboration with Luck Stone, the nation’s largest family-owned and operated producer of crushed stone, sand, and gravel.

President of Resource Industries at CAT, Denise Johnson, said, “Caterpillar has a long-standing relationship with Luck Stone, and we look forward to working together to bring the demonstrated benefits of increased safety and productivity to the quarry industry.”

CAT has paid dividends for 33 consecutive years. Over the past three years, CAT’s dividend payouts have grown at a 6.9% CAGR. While CAT’s four-year average dividend yield is 2.46%, its current dividend translates to a 1.92% yield.

CAT’s total sales and revenues came in at $15 billion for the third quarter that ended October 2, 2022, up 20.9% year-over-year. Its operating profit came in at $2.43 billion, up 45.7% year-over-year, while its EPS came in at $3.87, up 48.8% year-over-year.  

Street expects CAT’s revenue to increase 6.2% year-over-year to $62.22 billion in 2023. The stock’s EPS is estimated to grow 9% year-over-year to $15.15 in 2023. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained 40.21% to close the last trading session at $250.51.

It’s no surprise that CAT has an overall B rating, equating to a Buy in our POWR Ratings system.

It has a B grade for Sentiment. CAT is ranked #17 in the same industry. To see additional POWR Ratings for CAT (Stability, Growth, Momentum, Value, and Quality), click here.

Tennant Company (TNC)

TNC designs, manufactures, and markets floor-cleaning equipment worldwide. The company offers products, aftermarket parts and consumables, equipment maintenance and repair services, specialty surface coatings, and asset management solutions.

On October 27, 2022, Dave Huml, President and CEO, said, “Our third quarter results reflect our commitment to maintaining profitability in the current operating environment. Macroeconomic headwinds, including foreign currency volatility, persisted during the quarter, and we anticipate this environment will continue to impact results.”

TNC has paid dividends for 50 consecutive years. Over the past three years, TNC’s dividend payouts have grown at a 4.9% CAGR. While TNC’s four-year average dividend yield is 1.33%, its current dividend translates to a 1.63% yield.

TNC’s current liabilities came in at $244.2 million as of September 30, 2022, compared to $290.3 million as of December 31, 2021. Its total liabilities came in at $578.6 million, compared to $626.6 million for the same period.

For 2023, TNC’s revenue is expected to increase by 4.6% year-over-year to $1.14 billion. Its EPS is estimated to grow 16.9% year-over-year to $4.5 in 2023. Over the past three months, the stock has gained 13.9% to close the last trading session at $65.22.

TNC has an overall rating of B, equating to a Buy in our POWR Ratings system. It is ranked #13 in the same industry. Get all POWR Ratings for TNC (Growth, Value, Stability, Momentum, Sentiment, and Quality) here.

HON shares were trading at $210.29 per share on Wednesday morning, down $1.05 (-0.50%). Year-to-date, HON has declined -1.87%, versus a 2.72% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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