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Quarter-End Insights

Industrials: Valuations Stretched, but Opportunities Still Exist

The sector has outperformed in conjunction with several months of positive manufacturing and housing data, but we still see some compelling names.

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  • The industrials sector has outperformed the broader market since early February, and the sector was recently trading at a 2% premium to our fair value estimates. However, we think some stocks remain undervalued, including  BorgWarner (BWA),  Embraer (ERJ), and  Stericycle (SRCL).
  • U.S. manufacturing data has turned slightly positive in recent months, while manufacturing across the rest of the world has been challenged.  
  • New single-family home construction has been a bright spot, and we project new single-family starts will increase nearly 10% this year. We expect homebuilder and building materials companies to benefit from increased new-home demand.
  • We generally see improving conditions within auto manufacturing in certain geographic markets, particularly China and Europe. Until the U.K. referendum on European Union membership, global auto demand was on track to increase 2%-4% in 2016 led by a 10% and 7% year-to-date increase in the EU 28 member states and China, respectively. We also expect the aerospace and defense industry to benefit from a growing U.S. defense budget. The rail, trucking, and freight brokerage industries continue to navigate a difficult environment.  

 

Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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