Small stocks haven’t rounded into favor yet this year, but they will eventually and industrials like
EnPro Industries (NYSE:NPO) look poised to lead.
Think of EnPro as a mini-version of General Electric (NYSE:GE), making a wide variety of electronic and industrial components under numerous labels. EnPro added $160 million in sales through 23 acquisitions since 2003 — an impressive sum considering it posted a total of $803 million in revenue last year.
Most of EnPro businesses would never strike you as exciting, but they are essential to modern life. U.S. factory orders posted increases in the last two months of 2010 — a positive sign for a company that has its hand in manufacturing and transportation.
Five businesses account for 95% of company sales: Fairbanks Morse has more than 100 years of experience in diesel engine production; Stemco specializes in heavy-duty truck wheel systems; Garlock, also with 100 years of experience, specializes in industrial seals and gaskets; GGBproduces high-performance bearings; Compressor Products International makes parts for reciprocating compressors.
Fairbanks Morse engines range in size, and are able to power a midsized sports car or a turbine at your local utility. They are also used as part of generator sets in ships and nuclear power plants. The division is the largest supplier of medium diesel engines to the U.S. Navy and supplies emergency power sets to 60% of U.S. nuclear power plants. Basically, its engines are at work protecting the country, making power and helping commuters.
As a provider of wheel, break, and suspension systems, Stemco is relied upon by truck fleets across the country. The firm makes screws for axles of semi-trucks, odometers for dashboards, and sealant that holds tires together. It specializes in making products that ensure smooth and safe travel in tough physical conditions and climate extremes.
Garlock sells gaskets and other parts used in hydraulic and compression machines. Most of its offerings are used in intense processes like oil refining, mining, and chemical processing — tasks that humans cannot directly be involved in at all stages. Its gaskets and gasket sealants are necessary in hydroelectric dams where the force of flowing water makes the electricity. A breakdown in a gasket would mean big problems for power supply and for the safety of the dam itself.
GGB is the top producer of self-lubricating bearings, which are found in common items ranging from power tools to copiers as well as tractors and cranes. Bearings help two joined metal parts rotate against each other in a constrained way. They allow axles to rotate efficiently, for instance, ensuring that the load of a vehicle is balanced and as friction-free as possible.
Compressor Products International makes parts for reciprocating compressors. These compressors look like large engines and are found in refineries, chemical plants, and natural gas processing plants. Among the uses are the production of plastic used for food and beverage containers, as shapes are created that prevent worry of contamination and shape irregularities.
The company has main offices in North Carolina, Texas, New York, Wisconsin, and France, as well as 43 manufacturing plants in 11 countries. Because it provides products to many industries, it has tended to be less effected by recessions than peers — 60% of sales come from long-term maintenance contracts.
EnPro has exceeded earnings estimates by a convincing 28% during the last five quarters. Analysts expect the company to earn $3.84 a share in 2011, up from $3.08 in 2010. This prices the company at 11x forward earnings. However, I expect the stock will trade closer to its five-year P/E average of 14.5. That puts my 12-month target at $53.75, which is nearly 30% higher than the current quote. Keep holding.
For more insights like this, check out Jon Markman’s daily short-term newsletter, Trader’s Advantage, and long-term investment letter, Strategic Advantage.
