2 Top Industrial Stocks To Watch After Strong Earnings
During the coronavirus pandemic, industrial stocks were particularly hard hit. Industrial stocks, as represented by the Industrial Select Sector SPDR ETF (NYSEARCA: XLI), have underperformed the broader market in the past year. Considering the industrial sector is the backbone of any economy, it’s worth watching closely how they are faring even though they may not post stellar gains like those in technology.
Even ordinary people who don’t invest in the stock market know the names General Electric (NYSE: GE) and 3M (NYSE: MMM). You may have come across GE when you took a flight and the 3M branding when you were looking at N95 masks during the pandemic. You have to understand that these products are only one of the many essentials they offer. And that further signals their credibility and importance of their presence. But hey, knowing just the company’s name isn’t a good enough reason to buy their stocks. Now, both companies have just reported their fourth-quarter earnings this week. It’s imperative that we dig deeper into the financials of these two companies before making any decision.
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General Electric: Missed Earnings Expectations, But Stock Rose Anyway
General Electric reported worse than expected fourth-quarter earnings on Tuesday. But thankfully its earnings per share number isn’t the number investors will likely focus on. Yes, the pandemic may have dented General Electric’s balance sheet during the pandemic as the aviation business came to a standstill, but it’s not all bad news from the company.
In fact, it has reported a surge in cash flow from other divisions. This helped the company end the 2020 financial year on a much firmer footing. What’s more, the company’s cash flow guidance for 2021 was solid. This is a clear indication that the company believes the momentum generated in the current quarter will carry over into the new year.
“We had a strong finish with respect to orders that helped us from a cash perspective, both in power and particularly in renewables, but it was very hard to call as to whether those orders would indeed happen inside the calendar year,” – Chief Executive Larry Culp
Improved Profitability & Cash Performance Despite Difficult Macro Environment
The company booked $4.4 billion in fourth-quarter cash flow, beating its own projection and ending 2020 with a bang. A large portion of the cash generated is from health care sales. But the upside was driven by surprisingly robust renewable and power order books. If there was a disappointment from the latest quarterly report, it was the aviation unit, but this is expected. After all, COVID-19 is still a pressing issue globally. There is no doubt the aviation unit continues to be under pressure in the near term. As many have been saying, vaccinations will take months if not years. On the bright side, that presents a turnaround opportunity for the aviation segment when the pandemic does come to an end. In any case, looking at GE stock price movement, GE shareholders seem to be cheering on the company’s progress.
While orders in GE’s beleaguered aviation unit fell 41% compared with a year ago, Jim Cramer said he was encouraged that it was not down even more. “If you adjust the baseline it’s surprising that they didn’t have a dramatic fall-off versus last year, which was an amazing quarter.”
3M: Earnings Were Good But Stock Relatively Flat
The industrial conglomerate 3M reported a better than expected fourth-quarter report. In it, earnings and sales surpassed the consensus estimate by 8.7% and 1.1% respectively.
This came after strong demand for its healthcare products during the coronavirus pandemic. No doubt, 3M’s healthcare unit has been the best performer among its four divisions. Surely, that demand has to come from disposable respirators and products such as hand sanitizers.
“3M is now firing on all cylinders, in our view, and will see healthy revenue growth and margin expansion in 2021 as vaccines further revive industrial output,” said a report Tuesday from Colin Scarola, an analyst at CFRA Research.
Favorable Policy In Favor Of 3M’s Businesses
3M started the year in good shape with all its segments now generating some underlying growth. Moreover, analysts expect 3M to benefit from a recovery in the economy leading to 6% sales growth in 2021. To top it all off, president Joe Biden has talked of further using the Defense Production Act to boost vaccine development and production. That’s besides increasing output of personal protection equipment (PPE) such as respirators. This is clearly a positive sign for the company as the company’s PPE products are regarded as the gold standard for combating the pandemic.
“We have had productive conversations with the Biden administration,” Roman told analysts Tuesday without specifically mentioning the Defense Production Act. “We look forward to working with the Biden administration and congressional leaders.“
GE probably has more turnaround potential once the aviation business recovers. GE stock could be poised for a rally in the post-pandemic world once the aviation unit picks up pace. Unlike a pure-play epicenter stock, GE has other business units that are doing well financially. More specifically, the company’s strong growth in renewables unit orders is worth the mention. Especially so when President Joe Biden is more concerned with combating climate change than his predecessor.
Admittedly, 3M probably doesn’t have the same upside potential and is dealing with its own headwinds. Nevertheless, the strength of its business and the historically high yield may appear to be the safer bet, but maybe not an exciting one. The high demand for its PPE products such as disposable respirators may not be sustainable going forward. And when that happens, its other units would have to continue to generate value for 3M shareholders.
All in all, the latest quarterly earnings from GE may not have surpassed analysts’ expectations. But GE’s progress in its long, ambitious turnaround is what excites me the most. Not to mention the company has made big strides in lowering its debt levels. While MMM stock has a lot going for it, I’m going to let you decide which industrial stock is a better buy right now.