12 Best Industrial Stocks to Buy Now

“Builders FirstSource (BLDR) was one of the few bright spots in our 2020 results. BLDR shares appreciated by 60.6% as housing boomed and market sentiment turned bullish, but as usual, the ride was uneven. The share price approached $28 in late February…and then fell more than 65% over the next few weeks. From that spring low the shares more than quadrupled to close the year above $40 per share.

The company performed well despite very difficult operating circumstances. Demand whipsawed from strong to almost zero to booming in a matter of a few months. Gyrating commodity prices, constraints on labor, and stark regional disparities added to the complications. Solid financial results and plenty of cash flow also enabled the company to continue paying down debt.

With the acquisition of ProBuild in the rearview mirror and the balance sheet in good shape, BLDR announced in late August the all-stock acquisition of BMC Stock Holdings (BMCH). The two companies had been talking about a deal before the pandemic, and as the industry dynamics came into focus over the summer they decided to finalize a deal (which closed on January 4, 2021). The merger also solves the succession issue created by the pre-pandemic announcement that Chad Crowe, BLDR’s CEO and longtime executive, planned to retire. BMCH CEO Dave Flitman will take over as CEO of the combined company on April 1st .

BLDR was already the second-largest distributor in a fragmented industry, and the combined company will be almost as large as leader ABC Supply. As the industry recovers it is reasonable to expect further consolidation, and the savings and benefits from scale are real. It is also reasonable to expect some bumps in the road as the BMCH acquisition is integrated, just as BLDR experienced in the integration of its acquisition of ProBuild just a few years ago.

Unlike the leveraged acquisition of ProBuild, which left Builders’ balance sheet loaded with debt, the BMCH deal is all stock. Despite a pre-deal market capitalization of $3.3 billion for BLDR and $2.2 billion for BMCH, BLDR shareholders will own just 57% of the combined company and it’s not clear they got as much as they gave in this deal.

We sold a significant portion of our BLDR shares in the second half of 2020 as the price skyrocketed. We entered January with a small remaining position that may be sold this year. Unlike Armstrong, which has been a bigger investment and one that has seen very little buying or selling over the past five years, we’ve been more active with BLDR given the much larger price fluctuations. Our initial purchases were made in 2016, and some significant adjustments were made in late 2017 / early 2018 and again in late 2018 / early 2019. The shares sold in late 2020 had roughly tripled from their purchase price.

The company’s valuation today is discounting much of the potential upside in coming years but not much of the risk. Valuation is never the sole factor in a sell decision, and in this case the decision was a mix of market optimism, concerns about the pending integration of BMCH, the leadership succession, and tax implications.25 I also plan to follow the company closely, given its attractive attributes and history of performance. At a favorable price I would be glad to be a shareholder again.”

“Cintas Corp. provides U.S. businesses with uniform rental services and restroom cleaning, first aid, safety and fire protection goods and services. We re-initiated a short position in Cintas as we believe the stock price does not reflect the likelihood its results will be hard hit by increases in unemployment caused by the COVID-19 pandemic.”

“Illinois Tool Works is equally diverse and a company with a track record of strong management consistently driving revenue and earnings higher.”

“This quarter we are highlighting Honeywell (HON) as a relative yield example within Industrials. HON is a leading industrial conglomerate with an increasing focus on software and automation. We believe its global scale, history of innovation and strong culture focused on continuous operational efficiency create a sustainable competitive advantage. HON operates four segments including Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. These businesses serve diverse end markets including aerospace, U.S. defense contractors, e-commerce and oil and gas customers.

Our thesis on HON is that it will successfully leverage its software technology across its huge installed base of customers and products. Its installed base includes approximately 36,000 auxiliary power units, 25,000 engines, 20,000 wheels and brakes, 20,000 flight management systems and 10,000 units of communication hardware. Importantly, HON software technology is integrated into mission-critical operations of its customers including cockpit control in aircraft flights, warehouse automation in manufacturing and connected solutions in commercial buildings. We believe its technology advantage is due to above-average spending on research and development (R&D). For example, in key aerospace businesses, HON spends 4.5% of sales on R&D compared to 2-3% spending by most competitors.

The fund purchased HON in the quarter after it reached a reasonable valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the purchase price in the upper $160s, the stock traded for less than 20x estimated earnings expected over the forward 12 months. We believe this valuation can grow over time if HON continues to innovate and create new products, while its underlying end markets like aerospace recover over time. It also has an A rated balance sheet (as rated by S&P), an absolute dividend yield of 2.2%, and an attractive relative yield of 1.3x versus the S&P 500, which is the highest relative yield since 2012, as shown below. The company also has a history of dividend increases as it has grown dividends per share by 12.5% per year on average over the last five years.

Risks to the thesis include a prolonged economic downturn that results in sustainable declines in its key end markets like aerospace. We estimate about 40-45% of sales are exposed to these end markets. Other risks include lost market share if customers don’t like its evolving software offerings, and the risk the company makes a value-destroying acquisition. We think this last risk is relatively low as HON has a history of successful acquisitions.”

“Deere & Company manufactures and distributes equipment used in agriculture, construction, forestry and turf care in more than 30 countries. The company executed well in what has been a supportive environment for its products marked by strong pricing in agricultural commodities and robust crop yields. Notably, Deere successfully rolled out price increases in its Agriculture & Turf division, which improved its operating margins.”

“As its name implies, Rockwell has significant exposure to industrial automation, an arena that should provide a steadily growing market over the coming years.”