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Stock Strategist

Industrials: An Uneven Start to 2016, but Compelling Values Remain

The industrials sector had a bumpy start to 2016, but the near- to midterm outlook remains positive, and we see value in some names.

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  • At the time of writing, the industrial names in our global coverage universe are trading at an aggregate 3% discount to their fair value. Earlier this year, the sector at one point traded at a 24% discount to fair value, but the recent market rebound has eliminated much of this gap, and industrials now appear close to fairly valued. Nonetheless, a handful of stocks present opportunities for investors.
  • Industrials continue to be affected by volatile energy prices and a strong U.S. dollar, but the recent increase in oil prices and a stabilizing dollar has alleviated some pressure. While the recent appreciation in the greenback has slowed, a strong dollar still presents a headwind to U.S. exporters and a tailwind for European and Asian manufacturers.
  • Indicators of manufacturing activity indicate some softness in the global economy, but we do not see anything to panic about quite yet. In February, the U.S. Institute for Supply Management (ISM) manufacturing index registered 49.5. This was the fifth consecutive reading below 50--less than 50 indicates a contraction in manufacturing--but it was still the highest reading since October 2015. Beyond the U.S., the euro area's Markit manufacturing PMI came in above 50 in February, signaling expansion. Chinese exports fell 25.4% in February, indicating a slowdown in activity, and the Chinese manufacturing purchasing managers index also dropped to 49 in February, but only slightly missed consensus forecasts.
  • Subsectors had an uneven start to the year, but the 2016 outlook for each area is generally positive. The aerospace and defense sector will experience top-line growth this year thanks to growing commercial aircraft deliveries coupled with increasing defense budgets, and airlines will achieve record profitability in 2016. Automakers should see modest growth, with Europe leading the way in light-vehicle demand. Although it had a weak start to the year partly as a result of bad weather, construction fundamentals remain sound, and we expect this sector to expand this year. Juxtaposed with all this good news sits the rail business, which remains mired in a downturn that will likely continue through 2016.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.