The industrial manufacturing sector should witness solid momentum in the upcoming years, buoyed by an unparalleled upswing in worldwide industrial activities, relentless consumer demand for superior quality products, and significant technological advancements.
Given the sector’s robust prospects, quality industrial manufacturing stocks Badger Meter, Inc. (BMI), Kennametal Inc. (KMT), and Watts Water Technologies, Inc. (WTS) could be wise portfolio additions now.
Despite the unstable geopolitical climate and the Fed's unfaltering effort to mitigate sky-high inflation through frequent interest rate hikes, the industrial sector displays impressive tenacity. The robustness can be attributed to the escalating worldwide economic activities, positioning the industry to sustain its vigor.
In August, industrial production in the United States surged 0.2% year-over-year. Concurrently, the swift industrialization in the Asia-Pacific region stands to bolster the sustained growth trajectory of the global industrial manufacturing sector.
Additionally, supportive governmental policies like the Inflation Reduction Act, Bipartisan Infrastructure Law, and the CHIPS and Science Act are expected to provide the necessary impetus to energize domestic manufacturing. As per Statista, manufacturing market output is projected to reach $71.68 trillion in 2023 and grow at a 14.2% CAGR between 2023 and 2028.
Additionally, the proliferation of tech advancements injects supplementary benefits into the industry. Manufacturers are progressively adopting groundbreaking technologies, including the Internet of Things (IoT), AI, data analytics, and robotics, to maximize productivity and optimize efficiency in industrial manufacturing.
The global smart manufacturing market is poised for a favorable growth trajectory, expected to reach $787.54 billion by 2030, growing at a 14.9% CAGR.
Given the industry tailwinds, it's time to examine the fundamentals of the three stocks to watch in the A-rated Industrial - Manufacturing industry, starting with the third in line.
Stock #3: Badger Meter, Inc. (BMI)
BMI manufactures and markets flow measurement, quality, control, and communication solutions in the United States, Asia, Canada, Europe, Mexico, the Middle East, and internationally. It offers mechanical or static water meters, related radio and software technologies, services to municipal water utilities, and flow instrumentation products.
On September 8, BMI paid its shareholders a quarterly common stock dividend of $0.27 per share, an increase of 20% from $0.225 per share. The company has a record of paying dividends for 29 consecutive years.
BMI pays an annual dividend of $1.08 per share, translating to a dividend yield of 0.71%. Its four-year average yield is 0.85%. The company’s dividend payouts have grown at a CAGR of 11.1% over the past three years and 11.8% over the past five years.
BMI’s trailing-12-month cash from operations of $94.28 million is 56.9% higher than the industry average of $60.08 million. Also, the stock’s trailing-12-month EBITDA and net income margins of 20.21% and 12.28% are 120.9% and 503.6% higher than the industry averages of 9.15% and 2.03%, respectively.
Its revenue grew at 14.9% and 8.7% CAGRs over the past three and five years, respectively, whereas its total assets grew at CAGRs of 14.5% and 10.5% over the same periods, respectively.
For the fiscal second quarter that ended June 30, 2023, BMI’s net sales stood at $175.86 million, up 27.6% year-over-year, while its operating earnings stood at $29.50 million, up 33.6% from the year-ago quarter.
The company’s net earnings and earnings per share stood at $22.49 million and $0.76, up 35% and 33.3% year-over-year, respectively. As of June 30, 2023, BMI’s total current assets stood at $388.59 million, compared to $347.83 million as of December 31, 2022.
Street expects BMI’s revenue and EPS to increase 21.1% and 32.6% year-over-year in the fiscal third quarter ending September 2023 to $179.29 million and $0.81, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 62.8% over the past year to close its last trading session at $152.60. Over the past six months, the stock gained 30.3%.
BMI’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an A grade for Quality and a B for Growth and Momentum. In the A-rated Industrial-Manufacturing industry, it is ranked #13 out of the 35 stocks.
To see additional POWR Ratings for Value, Stability, and Sentiment for BMI, click here.
Stock #2: Kennametal Inc. (KMT)
KMT develops and applies tungsten carbides, ceramics, and super-hard materials and solutions for metal cutting and extreme wear applications, enabling customers to work against corrosion and high-temperature conditions worldwide. The company operates through two segments: Metal Cutting and Infrastructure.
On September 5, KMT joined the ranks as a new NASCAR Competition Partner. The program, initiated by the internationally renowned auto racing company, aims to spotlight innovations from top-tier automotive performance suppliers. KMT's commitment to the initiative will involve providing its industry-leading precision metal cutting solutions, specifically deployed in enhancing NASCAR's Next-Gen cars. This should bode well for the company.
The company returned $114 million to shareholders in the fiscal year 2023, comprising $49 million in share repurchases and $65 million in dividends. It paid its shareholders $16 million in cash dividends during the quarter. It has a long history of consistently paying dividends to shareholders since its listing on the New York Stock Exchange in 1967.
It paid a quarterly dividend of $0.20 per share on August 22, 2023. KMT pays an annual dividend of $0.80 per share, translating to a dividend yield of 3.27%. Its four-year average yield is 2.71%.
KMT’s trailing-12-month cash from operations of $257.94 million is 6.2% higher than the industry average of $242.86 million. Also, the stock’s trailing-12-month gross profit and EBITDA margins of 31.11% and 16.03% are 2.7% and 18.5% higher than the industry averages of 30.30% and 13.53%, respectively.
Its revenue and EBITDA grew at 3.3% and 6.3% CAGRs over the past three years, whereas its levered free cash flow grew at CAGRs of 34.1% and 9.5% over the past three and five years, respectively.
For the fiscal fourth quarter that ended June 30, 2023, KMT’s sales stood at $550.23 million, up 3.8% year-over-year, while its gross profit grew 3.5% from the prior-year quarter to $175.67 million. The company’s adjusted net income and EPS stood at $41.68 million and $0.51, respectively.
KMT’s free operating cash flow stood at $168.59 million, up 97.3% year-over-year. As of June 30, 2023, its total current liabilities stood at $433.98 million, compared to $485.65 million as of June 30, 2022.
Through fiscal year 2027, the company expects its organic sales growth at 4% to 6% CAGR, adjusted EBITDA margin between 20% and 23%, and adjusted earnings per diluted share to grow at 20% to 25% CAGR.
Street expects KMT’s revenue and EPS to increase 2.5% and 6.9% year-over-year in the fiscal first quarter ending September 2023, to $507.23 million and $0.36, respectively. The company surpassed consensus revenue estimates in three of the trailing four quarters.
Over the past year, the stock gained 12.4% to close its last trading session at $24.45. Moreover, it has gained 1.6% year-to-date.
KMT’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
KMT has an A grade for Value and a B for Momentum and Quality. Within the same industry, KMT is ranked #9.
Beyond what we’ve stated above, we have also rated the stock for Growth, Stability, and Sentiment. Get all ratings of KMT here.
Stock #1: Watts Water Technologies, Inc. (WTS)
WTS manufactures and provides residential and commercial flow control and protection products; heating, ventilation, air conditioning, and gas products; and drainage and water reuse products. The company operates primarily in the Americas, Europe, the Asia-Pacific, the Middle East, and Africa.
Last month, WTS acquired Bradley Corporation for $303 million, the net transaction value being approximately $268 million after adjusting for the estimated net present value of expected tax benefits of about $35 million.
The strategic acquisition underscores the company's commitment to enhancing comfort, safety, and quality of people’s lives globally. Moreover, it would enhance its water solutions portfolio diversification by incorporating a complementary strategic platform that fosters potential for additional growth. It would also escalate its presence in commercial and industrial markets, promoting value creation through greater scale and significant cost synergies at a sustained rate.
On September 15, WTS paid its stockholders a quarterly dividend of $0.36 per share on each outstanding share of the company’s Class A and Class B common stock.
WTS pays an annual dividend of $1.44 per share, translating to a dividend yield of 0.83%. Its four-year average yield is 0.80%. The company’s dividend payouts have grown at a CAGR of 4.6% over the past three years and 3.1% over the past five years.
WTS’ trailing-12-month cash from operations of $279.60 million is 15.1% higher than the industry average of $242.86 million. Also, the stock’s trailing-12-month ROCE and ROTC of 20.60% and 14.65% are 51.5% and 115.8% higher than the industry averages of 13.60% and 6.79%, respectively.
Its revenue and EBITDA grew at 9.6% and 18.1% CAGRs, respectively, over the past three years, whereas its levered free cash flow grew at CAGRs of 10.4% and 15.1% over the past three and five years, respectively.
For the fiscal second quarter ended June 25, 2023, WTS’ net sales stood at $532.80 million, up 1.2% year-over-year. Its adjusted operating income grew 6.5% from the year-ago quarter to $103.90 million.
Its adjusted net income and earnings per share stood at $78.40 million and $2.34, up 10.4% and 10.9% year-over-year, respectively. Moreover, as of June 25, 2023, its total current assets stood at $1.02 billion, compared to $950.60 million as of December 31, 2022.
Street expects WTS’ revenue and EPS to increase 2% and 2.1% year-over-year in the fiscal third quarter (ending September 2023) to $497.40 million and $1.83, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters and revenue estimates in three of the trailing four quarters.
The stock has gained 19.2% year-to-date to close its last trading session at $174.31. Over the past year, the stock gained 35%.
WTS’ robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
WTS has an A grade for Quality and a B for Momentum, Stability, and Sentiment. It is ranked #5 within the same industry.
Click here for the additional POWR Ratings for WTS (Growth and Value).
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WTS shares were trading at $173.69 per share on Friday morning, down $0.62 (-0.36%). Year-to-date, WTS has gained 19.47%, versus a 14.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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