Manufacturing stocks tend to be a harbinger of both a growing and a slowing economy. The reason behind this is that manufacturing activity is a leading indicator of ongoing trends that may not be noticeable to retail investors. That’s why this is a good time to look at undervalued manufacturing stocks.
Several manufacturers have reported this earnings season, and the news has been good. Earnings are up and, more importantly, the outlook for future earnings continues to improve. That means some high-quality manufacturing stocks may be trading at a significant discount, but maybe not for long.
Manufacturing companies are frequently mature companies that have been through many economic cycles. They have sound fundamentals that allow them to manage through tough times and reward shareholders in better times. Here are three undervalued manufacturing stocks that may be appealing buys heading into what may be a brighter year for the sector in 2024.
Simpson Manufacturing (SSD)
Few things say manufacturing stocks like structural connectors for wood, but that’s one of the signature products made by Simpson Manufacturing (NYSE:SSD). The company has a portfolio that touches every stage of the commercial construction process. Simpson’s stated goal is to be a leader in building technology in each category in which it does business.
Likely due to infrastructure spending, Simpson Manufacturing has continued to beat on revenue on a year-over-year (YOY) basis. And in the last two quarters, earnings have started to grow on a YOY basis as well.
Arguably, an investment in SSD stock comes with the belief that commercial and residential building demand will remain strong. For its part, the company estimates that there is a shortage of approximately 2 million homes in the United States.
And that’s just one lever that the company can pull. Another expected area of growth is the company’s building technology strategy which allows the company to leverage its integrated, digital offerings to its customers.
Investors can buy SSD stock for just 16x forward earnings and at a time when analysts are forecasting stock price growth of over 43% in the next 12 to 18 months.
General Electric (GE)
One of the strongest earnings reports in the early days of the third quarter earnings season came from General Electric (NYSE:GE). The company beat on the top and bottom lines and raised its full-year guidance for the third consecutive quarter.
This continues to show that chief executive officer Larry Culp’s strategic plan to make GE a “simpler, more focused company” is working. The company completed the spinoff of its healthcare business earlier this year. The remaining two segments, GE Aerospace and GE Vernova beat revenue estimates.
And investors who follow the company know that GE is going to get leaner still. The company announced it’s on track to complete the spinoff of GE Vernova in the first half of 2024.
This should give investors a much clearer picture of a manufacturing company that is seeing strong demand for its jet engine parts. One of the highlights of the quarter was the delivery of the first two GE Aerospace T901 flight test engines to the U.S. Army.
GE stock currently trades at 13x earnings. Arguably, it is trading at 48x forward earnings. But with earnings expected to grow by over 85%, the company may very well prove that valuation is correct.
This isn’t the first time I’ve written about undervalued manufacturing stocks. And each time I do, I’m surprised to find that Caterpillar (NYSE:CAT) continues to offer investors tremendous value.
The company’s signature bulldozers, backhoes and other earth-moving equipment have been in demand as infrastructure spending continues to make its way into the economy. And as a recent headline reminded me, it’s not the company’s only market. “Israel’s Armored Caterpillar Bulldozers Will Be Active in Gaza” is a reminder that there are many avenues of growth for the company.
Caterpillar reports earnings on October 31, 2023. The company has beaten on the top and bottom lines for eight consecutive quarters. That pattern is likely to continue. And investors get a piece of a dividend aristocrat that has increased its dividend for 31 consecutive years. The 2.08% yield won’t wow many investors, but the annual payout of $5.20 per share is hard to ignore for a stock that trades at just 12x forward earnings.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.