There are 614 stocks within the Industrials sector. In this article, we present 3 examples of growing industries’ stocks to keep your eyes on. We’ve covered some other options in this older article here, but the market is dynamic and it keeps changing. The Industry sector has specific characteristics that are tied to several sectors of any economy like manufacturing, construction, production, and services.
According to Statista:
“In 2021, the finance, real estate, insurance, rental and leasing industry added the most value to the GDP of the United Stated. In that year, this industry added 4.88 trillion U.S. dollars to the national GDP.“
Industries are extremely relevant to the GDP. We need some criteria to choose our Top-3. There isn’t a clear way how to do this, so here is our proposal:
- Dividend Growth 5Y – Over 2%;
- Valuation Price/Cash Flow (TTM): < 12 (Sector Median is around 15);
- Revenue Growth 5Y – Over 10%;
- Profitability: Over 200M;
- LT Debt to Total Capital: Lower than 25%.
We’ll focus on companies capable of paying dividends (1), undervalued in relation to the median of the Price/Cash Flow indicator within the sector (2), growing their revenues over 10% a year in the last 5 years (3), net income over 200M (4) and Long-Term Debt less than 25% of total equity (5).
Top-3 Growing Industries
Stock #1: ARCB – ArcBest Corporation
According to its own website here, the company provides “innovative logistics solutions across industries and around the globe“. COVID has struck hard the supply chain and logistic companies had a considerable decrease in revenues.
The Q2 ’22 financial reports showed that the company has an asset-light model that has been delivering a Revenue CAGR (2012-2021) of 17,5% in comparison to the 9,5% from the market. The company is proving itself to be capable to deliver a value-added solution to the supply chain.
Let’s take a look at its metrics. Figure 1 shows the weekly price chart in comparison to the Total Revenue – FY:
The incredible growth of Total Revenue – FY it’s clear, but it looks like the market only woke up in early 2020. Revenue has gone up but the price took way to long to follow and still not following, as we can see in Figure 2:
P/CF has an ATH of 12 and right now lies around 5.5. This metric is much below the Industrial Sector Median of 15. In addition to this, not only the revenue but also the Free Cash Flow advanced strongly in the last years.
If the current price is around $76 and P/CF is 5.5, then we can conclude that the Total Cash Flow per stock is around $14. To be traded at least 12 of P/CF, the price would have to be adjusted for around $170. The ATH for this stock was around $122 (December 2021).
Stock #2: UFPI – UFP Industries, Inc.
(Industry: Building Products)
The UFP Industries is a “supplier of lumber to the manufactured housing industry (…) a multibillion-dollar holding company with subsidiaries around the globe that serve three markets: retail, industrial and construction“, according to its own website here.
The company is a leading supplier of wood. As you may already know, this is a basic raw material for almost everything. The majority of its revenues come from the United States (which is close to a recession or already in it) with smaller profitable branches in Mexico and Australia.
Even though the company has good metrics and upside, the risk of the combination of rising interest rates – inflation-housing market crisis must be well assessed. Let’s take a look at Figure 3:
This shows an analogous situation in comparison with our growing industry #1, ARCB. The Total Revenue has grown organically from 2013 to 2021 and the price has gone up 350%+ from December 2018 to January 2022.
BUT, Total Revenue is different than Total Cash Flow. The profit comes from the Income Statement. Profit isn’t CASH, but a promise of CASH in the future that may not be realized. If you sell a good for $10 today to receive 10 monthly payments of $1, then you must recognize $10 as your revenue at the time of the selling. Until you receive it, there is no cash.
Cash flow can only be recognized when the company effectively receives the money. As you may see, revenue and cash are completely different and must be assessed wisely. This is exactly what happens here. Let’s take a look at Figure 4:
The red dots represent negative cash flows. This can happen for a variety of reasons (debt, investment, equity disbursements). We can’t look at the P/CF ratio if the Free cash flow is negative. This is what happens with the P/CF ratio of $60 in early 2021.
Despite the negative outcomes (that must be well assessed to find out why it happened), the free cash flow has grown consistently over the years and now sums almost 300M. Considering the current P/CF ratio (~6) way below the Sector Median along with the company’s prospectus to keep expanding all fronts and margins, UFPI can be a good call with a nice upside.
Stock #3 – KNX – Knight-Swift Transportation Holdings Inc.
According to its website, the company is the “result of the merger between Knight Transportation, Inc (NYSE: KNX) and Swift Transportation Company (NYSE: SWFT). We are now the industry’s largest full truckload company. operating with an extensive fleet of roughly 19,000 tractors, 58,000 trailers, and employing 24,000 people“.
A merger happens when two companies combine their business to create a new company. Commonly, each company has specific advantages that can be very well combined to achieve better cost-effective production.
According to this news, the merger was approved by the board of directors on the 10th of April, 2017. The result was a “combined enterprise value of $6 billion.” Let’s take a look at what happened after the merger:
The company experienced an incredible increase in Total Revenues from $1.1B in 2017 to almost $6B in 2021. The board is so optimistic about the company’s future and undervalued stocks that it has announced a share buyback program of $350M in April of this year.
Let’s see what happened with the cash flow.
Similar to what happened to UFPI, there are also some negative free cash flows for KNX. On the other hand, there is no doubt that the company’s capacity to generate cash flow has grown exponentially after the merger.
Given the rapid expansion, stock buyback plan, increasing revenue, and cash flow along with the current P/CF of 5.3, KNX seems a top pick among the best-growing industry stocks.
Every bear market brings a great opportunity to buy shares of an undervalued business. As we have seen, the market can take a while until it realizes the potential of a company. In the meanwhile, investing while the market sleeps and holding until the market wakes up can be a simple but very effective technique. There are only two problems, as follows:
- You must know the basics of valuation;
- You need good analysis and data;
- You need to be patient.
By doing this you can try to do what Joel Greenblatt said here, to be right on average.