Thanks to strong growth in demand for manufacturing products, many U.S. stocks in the sector are enjoying a surge in revenues. This growth is driving global manufacturing expansion even as consumer spending – that accounts for about 70% of GDP growth – continues to lag as incomes drop and food and fuel prices rise.
Among manufacturing stocks in the industrial sector, output rose 8% in the first quarter – four times faster than the 2% estimate for U.S. GDP growth, according to the Wall Street Journal. So is it too late to invest in the companies that profit from this growth? Maybe not. Candidates include Eaton (NYSE: ETN), United Technologies (NYSE: UTX) and Paccar (NYSE: PCAR).
Behind the manufacturing growth are two powerful global economic trends. The first is strong investment in so-called infrastructure projects in emerging markets. According to the Journal, countries such as China, Latin America, India and Africa are rife with such projects. And these projects are leading to sales of cars and heavy-duty trucks, as well as exports of goods like building, farming and mining equipment.
And behind many of these projects is the second trend — commodity price inflation for items such as oil, iron ore and food crops. These soaring prices are partly a result of rising demand in emerging markets and they’re making it profitable for farmers and miners to plant more crops and dig more holes in the ground. Moreover, the weaker dollar is making U.S. manufactured goods more price competitive than those made by vendors in countries with stronger currencies.
The companies I mentioned above put in strong first quarter earnings performance, but the question for investors is which ones, if any, have further to rise. To address that one, we can use the Price/Earnings to Growth (PEG) ratio — a stock’s Price/Earnings ratio divided by the company’s earnings growth rate — that helps measure whether a stock is cheap or expensive compared to its earnings growth. I think a PEG of 1.0 is fair value — less than that and you have something of a bargain.
Based on this, here’s my assessment of the three companies from the lowest to highest PEG:
- Paccar 0.34. On Monday, this truck maker raised its 2011 industry-wide sales forecast 10% for the U.S. and Canada to a range between 200,000 and 220,000 heavy-duty trucks — the highest sales since 2006. Earlier this week, Paccar (NYSE: PCAR) reported a 179% earnings jump to 53 cents a share — four cents more than analysts expected — along with a 47% sales leap to $3.28 billion. Its 2010 EPS was $1.24. Paccar’s P/E is 33.7 and PCAR earnings are expected to grow 99% to $2.47 in 2011.
- Eaton 0.43. This maker of electrical and hydraulic parts for industrial, construction and agricultural machinery enjoyed an 85% pop in first quarter earnings to $0.83 a share on 23% sales growth to $3.8 billion. Eaton (NYSE: ETN) raised its 2011 forecast to a range of $3.66 to $3.96, up 15 cents from its previous projection. Its 2010 EPS was $2.73. Eaton has a P/E of 17.2 and if it makes the midpoint of the range, its earnings will grow 40% in 2011.
- United Technologies 2.93. This maker of elevators, helicopters, and air conditioning equipment recorded a 17% EPS jump to $1.11 per share; revenue was up 11% to $13.34 billion and it raised its 2011 earnings forecast a nickel a share to a range between $5.25 and $5.40 a share. United Technologies (NYSE: UTX) 2010 EPS was $5.02. United Technologies’ P/E is 17.6 and if it makes the midpoint of the range, its earnings will grow 6% in 2011.
Paccar and Eaton are clearly the best of this bunch.
Peter Cohan has no financial interest in the securities mentioned.