Here are three stocks that anyone interested in the industrial sector should look closely at. They are attractive stocks for different reasons. Carpenter Technology (NYSE: CRS) is a company firing on all cylinders with significant momentum behind it. Delta Air Lines (NYSE: DAL) has good momentum, too, and it’s likely to climb a wall of worry over its debt in 2024. Finally, while 3M (NYSE: MMM) is far from a perfect company, it does represent a good value option.
Carpenter Technology: An aerospace stock to buy
The case for buying the specialty alloy products company is relatively simple. Its primary end market (aerospace) is in an ongoing recovery mode, and the company is set to continue revenue growth and significant margin expansion, leading to a sharp increase in profitability.
As a manufacturer with relatively high fixed costs, Carpenter cannot cut costs significantly in a revenue downturn, such as after the lockdowns, so its operating profit margin tends to collapse when revenue falls. On the other hand, when revenue recovers, it flows through into strong margin expansion. That’s exactly what’s happening now as flight departures lead to more aftermarket demand, and increasing airplane production improves original equipment component demand — Carpenter serves both markets.
Carpenter’s sales and margin trends are so strong that management recently told investors it would hit its medium-term target of $460 million to $500 million in adjusted operating income in 2026 rather than the previous target of 2027.
Trading at slightly less than 20 times Wall Street’s estimates for free cash flow (FCF) in 2026, Carpenter may appear to be fully valued. Still, all it will take is a relatively small increase in revenue to drop into margin expansion. Given the improving aerospace environment, there’s plenty of potential to surprise on the upside.
Delta Air Lines, the best airline stock to buy
Speaking of commercial aerospace, Delta Air Lines is another rapidly recovering company. Trading at just 7.5 times its estimated 2024 earnings and 9.2 times the midpoint of management’s FCF guidance, the stock appears to be the bargain of the century.
That said, there’s obviously a reason the market is affording it such a low valuation, and that comes down to its adjusted debt of $29 billion at the end of 2023 — a massive figure when compared with its current market cap of $32.2 billion.
Still, as you can see below, Delta’s recovering earnings are converting to FCF, enabling it to reduce debt. At the same time, its growing earnings before interest, taxation, amortization, and rent (EBITDAR) mean its adjusted debt-to-EBITDAR multiple is set to fall into levels generally regarded as acceptable for investment-grade debt.
Metric | 2022 | 2023 | 2024 Estimated |
|---|---|---|---|
Free cash flow | $244 million | $2 billion | $3 billion to $4 billion |
Adjusted debt to EBITDAR | 5 times | 3 times | 2 times to 3 times |
Data source: Delta Air Lines presentations.
Meanwhile, as previously discussed, Delta isn’t just a play on a commercial aerospace recovery; it’s also heavily exposed to spending trends of higher-income customers through its loyalty schemes and c-branded Delta American Express credit cards. As such, it’s set to outperform in an aerospace recovery, and unless something comes along to derail growing flight departures and Delta’s cost structure, the stock looks like a good value.
3M stock looks like an excellent value
The industrial giant isn’t everyone’s favorite company. A history of missing guidance, lackluster growth, unimpressive portfolio restructuring, and costly legal settlements has hung over the investment case for the stock. It’s all led to a 28% decline in the stock over the last five years, and the company has recently cut its dividend.
That said, share prices don’t have memory, and if new CEO William Brown succeeds in turning the company around, he could generate significant value for shareholders.
He has an opportunity. The dividend cut frees up cash resources for restructuring. Meanwhile, 3M’s ongoing restructuring program appears to be delivering margin expansion. In addition, some of its key end markets, like semiconductors and electronics, are on track to return to growth in 2024. Finally, while this might be controversial, I think 3M is better off without its healthcare business, now spun off as Solventum.
The midpoint of management’s estimate for earnings per share (EPS) puts 3M at less than 14 times earnings for 2024. With the prospect of a return to sales growth in 2024, margin expansion in tow, and Brown yet to outline his vision for the company, there’s potential for improvement in 3M’s prospects and share price.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M, Delta Air Lines, and Solventum. The Motley Fool has a disclosure policy.
3 Industrial Powerhouse Stocks to Buy Hand Over Fist in June was originally published by The Motley Fool
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