5 Ways to Profit From Rising Industrial Production

by Aaron Levitt | January 22, 2014 11:21 am

5 Ways to Profit From Rising Industrial Production

After a few years of really slogging it out, it seems that the U.S. economy may have finally righted itself. Since the depths of the Great Recession, the United States has been battling it out between stagnating economic growth and high unemployment.

smokestack industrial manufacture plant 185 5 Ways to Profit From Rising Industrial Production[1]
Source: www.flickr.com/photos/paul_everett82/

However, it seems that things are finally moving in the right direction.

U.S. employment numbers continue to make gains as businesses have been adding new jobs. Unemployment now sits at just 6.7%. Meanwhile, manufacturing surveys are reporting strong output and business investment appears strong. For all of 2013[2], industrial production managed to grow by 3.7%, rising 0.9%, while manufacturer’s capacity utilization rates finished the year up at 79.2%. All in all, it seems like the U.S. economy could be finally on the cusp of breaking out of its doldrums.

All of this recent bullish data continues to support the industrials and durable goods stocks. For investors, the sector could offer strong dividends and outperformance in the months ahead as companies remain confident about the U.S. economy.

Here are five of the best ways to play industrial sector.

Vanguard Industrials ETF

Vanguard 5 Ways to Profit From Rising Industrial Production[3]If you’re looking to add a wide swath of industrial might to a portfolio, skipping the more popular Industrial Select Sector SPDR (XLI[4]) and going with the Vanguard Industrials ETF (VIS[5]) could be the best choice. Unlike the more concentrated XLI, the Vanguard Industrials features a wider range of industrial firms in its portfolio.

Tracking the MSCI US Investable Market Industrials 25/50 Index, VIS spreads its $1.6 billion in assets among 348 different industrial firms — including stalwarts like 3M (MMM[6]) and Emerson Electric (EMR[7]). That’s versus just 64 stocks for the XLI. That broader focus — which includes mid- and small-cap industrial firms — has helped the VIS outperform the XLI by roughly 2% during 2013 and has given it a slight edge over the popular ETF over longer time periods.

Also adding to those returns is Vanguard’s commitment to low-cost investing. VIS once again beats the XLI — this time on the cost front.

VIS only costs 0.14% — or $14 per $10,000 to own. That compares to the 0.18% for the SPDR. Over long periods of time, costs do add up and zap returns. Add in VIS’s slightly higher dividend yield and winner for investors is clearly the Vanguard ETF.

iShares Industrials Bond ETF

iShares185 5 Ways to Profit From Rising Industrial Production[8]Want to participate in the strength of America’s returning industrial might, but still unsure about just how far the stock market has risen over the last year or so? Then the iShares Industrials Bond ETF (ENGN[9]) could be for you.

Cute ticker aside, ENGN is a unique offering from BlackRock’s (BLK[10]) iShares unit that hones in on bonds issued by various American industrial firms — nearly 278 bonds in total.

Those 278 bonds are all rated investment grade. Perhaps more importantly, ENGN’s effective duration is near the sweet spot — around 5 to 6 years. Analysts estimate that a duration of 5 to 6 provides the best combination of current yield and compensation for potentially rising interest rates. Since bond prices have a negative correlation to rising interest rates, the longer the duration, the more the bond will fall when interest rates rise.

ENGN currently has a monthly distribution yield of 3.05%. Expenses for the ETF run just 0.30%.

General Electric

GeneralElectric 5 Ways to Profit From Rising Industrial Production[11]After getting trounced in the Great Recession, General Electric (GE[12]) is beginning to look like the GE of old — an industrial powerhouse.

GE has already made progress shrinking its financial arm, GE Capital. Those efforts continue as the company announced back in November[13] that it would be spin off its North American consumer finance/credit card unit through a transaction that will include both a tax-free spin-off to existing shareholders and an IPO. The key is that GE plans to use the proceeds of the sale to strengthen its industrial operations.

GE CEO Jeffery Immelt has already pledged to make industrial operations a bigger piece of GE’s earnings and profits. That shift in strategy seems to be working as GE’s industrial operations have continued to add more to the firm’s bottom line in recent quarters. General Electric’s fourth quarter operating earnings saw a 20% bump versus the prior year’s quarter. The driver was expanding margins at its oil & gas, power and aviation businesses.

With GE’s focus now back to basics, the time has never been better to own GE stock. With a forward P/E of 14 and dividend of 3.0%, GE stock is still looking pretty cheap.

Eaton Corporation

Eaton 185 5 Ways to Profit From Rising Industrial Production[14]While it was lauded at the time, Eaton’s (ETN[15]) 2012 purchase of Cooper Industries was even smarter than people realized. With the $12 billion buy, Eaton managed to nearly its doubled sales as well as transform its business mix so that revenues continue to come in no matter what stage in the business cycle we’re in. Additionally, the buy put ETN into the forefront of some pretty high-tech and high-growth markets such as energy efficiency, oil & gas and waste-water operations.

Those businesses complement its more traditional aviation, electrical grid and hydraulic offerings.

Eaton’s sales mix is now almost evenly split between U.S. and international operations, making ETN a great play on the overall strengthening economy. The firm has already seen boost confirming that fact. Overall orders across the bulk of its business lines during the third quarter ticked up. Analysts expect that trend to continue when the firm releases its fourth quarter numbers in early February.

Currently, ETN shares are trading a forward P/E of 15.75 and dividend yield of 2.2%. However, Eaton has managed to grow that dividend around 16% annually and is expected to grow profits around 18% in 2014. That makes its valuation quite nice for investors.

Illinois Tool Works

IllinoisToolWorks185a 5 Ways to Profit From Rising Industrial Production[16]The vastness of Illinois Tool Works’ (ITW[17]) product catalog has helped it weather the recession better than most firms. The company makes everything from those plastic six-pack rings and welding equipment to decorative counter tops and fasteners for cars. Recent plans at ITW are only making its manufacturing might even stronger.

Last year, ITW’s management unveiled a new strategic plan, in which the firm will simplify its business structure in order to gain operational synergies and drive organic revenue growth. This past year was the first year of the five year plan, and it seems to be working so far. ITW say its third quarter operating margins leapt 19% as these operating initiates have taken hold.

That vastness of products coupled with its newfound focus on operational efficiencies could make ITW the best industrial players out there for the rising global economy.

Shares of Illinois Tool Works currently trade for a P/E of 16 and pay a 2% dividend.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/10/smokestack-industrial-manufacture-plant-185.jpg
  2. For all of 2013: http://www.marketwatch.com/story/industrial-production-edges-up-03-in-december-2014-01-17?link=MW_home_latest_news
  3. [Image]: http://investorplace.com/wp-content/uploads/2011/12/Vanguard.jpg
  4. XLI: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLI
  5. VIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIS
  6. MMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMM
  7. EMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMR
  8. [Image]: http://investorplace.com/wp-content/uploads/2012/10/iShares185.jpg
  9. ENGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ENGN
  10. BLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=BLK
  11. [Image]: http://investorplace.com/wp-content/uploads/2011/12/GeneralElectric.jpg
  12. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  13. announced back in November: http://finance.yahoo.com/news/ge-plans-finance-arm-spin-134002710.html
  14. [Image]: http://investorplace.com/wp-content/uploads/2014/01/Eaton-185.png
  15. ETN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETN
  16. [Image]: http://investorplace.com/wp-content/uploads/2012/06/IllinoisToolWorks185a.jpg
  17. ITW: http://studio-5.financialcontent.com/investplace/quote?Symbol=ITW

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