Industry Review Machinery

The Best Companies of the Machinery Industry – August 2015

Copy of Best Companies of the Machinery IndustryWhile ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the machinery industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 550 companies reviewed by ModernGraham, 23 were identified as being closely related to the machinery industry.  Of those, only four are suitable for the Defensive Investor, nine are suitable for the Enterprising Investor, and the remaining ten are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 107.28% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 21.19.  The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Deere & Company (DE)

Deere & Company performs very well in the ModernGraham model and is suitable for both Defensive and Enterprising Investors. In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $4.68 in 2011 to an estimated $7.30 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 2.11% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 11.25% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

Cummins Inc. (CMI)

Cummins performs well in the ModernGraham model and is suitable for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PB ratio while the Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $5.78 in 2011 to an estimated $8.88 for 2015. This is a strong level of demonstrated growth, which is well above the market’s implied estimate of 3.74% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged over 10.7% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

Parker-Hannifin Corporaiton (PH)

Parker Hannifin Corporation is suitable for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned by the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.71 in 2011 to an estimated $7.00 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 4.29% annual earnings growth over the next 7-10 years and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.  (See the full valuation)

Snap-on Inc. (SNA)

Snap-on Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.63 in 2011 to an estimated $6.72 for 2015.  This level of demonstrated earnings growth surpasses the market’s implied estimate of 8.1% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.  (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

W.W. Grainger Inc. (GWW)

W.W. Grainger passes the initial requirements of the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $7.12 in 2011 to an estimated $11.09 for 2015. This level of demonstrated growth supports the market’s implied estimate for annual earnings growth of 6.22% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 11.14% annually. The ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, but still returns an estimate of intrinsic value within a margin of safety relative to the current price, indicating that W.W. Grainger is fairly valued at the present time.  (See the full valuation)

AGCO Corporation (AGCO)

AGCO Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend record, insufficient earnings stability over the last ten years, and the low current ratio.  The Enterprising Investor has no initial concerns.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.58 in 2011 to an estimated $4.32 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 2.33% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.  (See the full valuation)

Fastenal Corporation (FAST)

Fastenal Company is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $0.94 in 2011 to an estimated $1.60 for 2015.  This level of demonstrated growth supports the market’s implied estimate of 9.02% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling within a margin of safety relative to the price.  (See the full valuation)

Rockwell Automation Inc. (ROK)

Rockwell Automation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $3.90 in 2011 to an estimated $5.74 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 6.3% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 9.4%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating Rockwell Automation is fairly valued at the present time.  (See the full valuation)

Roper Industries (ROP)

Roper Industries is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned with the level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.

From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.43 in 2011 to an estimated $5.97 for 2015.  This level of demonstrated growth supports the market’s implied estimate of 10.4% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling within a margin of safety relative to the price.  (See the full valuation)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AGCO AGCO Corporation E 8/8/2015 $63.80 $54.66 85.67% 12.65 0.88%
AME AMETEK, Inc. S 10/28/2014 $77.72 $56.68 72.93% 28.06 0.64%
CAT Caterpillar Inc. S 7/21/2015 $82.62 $78.50 95.01% 13.33 3.92%
CMI Cummins Inc. D 5/25/2015 $218.22 $128.05 58.68% 14.42 3.05%
DE Deere & Company D 6/19/2015 $185.14 $94.34 50.96% 12.92 2.54%
DHR Danaher Corporation E 8/13/2015 $79.86 $90.92 113.85% 25.12 0.59%
DOV Dover Corp S 5/29/2015 $76.51 $63.95 83.58% 13.99 2.63%
ETN Eaton Corp plc S 5/19/2015 $81.74 $59.97 73.37% 14.77 3.67%
FAST Fastenal Company E 5/22/2015 $46.74 $40.21 86.03% 25.13 2.79%
GWW W W Grainger Inc E 7/15/2015 $279.48 $224.78 80.43% 20.27 2.08%
IPG Interpublic Group of Companies Inc S 4/8/2015 $34.16 $21.15 61.91% 23.76 2.27%
IR Ingersoll-Rand PLC S 1/30/2015 $103.13 $61.55 59.68% 22.97 1.88%
JOY Joy Global Inc. D 8/4/2015 $14.35 $25.40 177.00% 6.58 3.15%
NLSN Nielsen NV S 7/15/2015 $62.91 $48.51 77.11% 29.76 2.31%
PH Parker-Hannifin Corporation D 6/5/2015 $162.05 $113.67 70.15% 16.24 2.22%
PLL Pall Corporation E 8/11/2015 $114.40 $126.71 110.76% 34.81 0.96%
PNR Pentair plc. Ordinary Share S 11/18/2014 $18.92 $61.67 325.95% 32.63 2.08%
RBC Regal Beloit Corp S 6/16/2015 $22.48 $72.52 322.60% 21.65 1.27%
ROK Rockwell Automation E 7/21/2015 $129.46 $116.17 89.73% 20.24 2.24%
ROP Roper Technologies Inc E 6/1/2015 $182.90 $169.73 92.80% 28.43 0.59%
SNA Snap-on Incorporated E 8/7/2015 $228.75 $168.07 73.47% 25.01 1.26%
SWK Stanley Black & Decker, Inc. S 12/4/2014 $115.34 $105.41 91.39% 24.23 2.09%
XYL Xylem Inc E 5/25/2015 $29.45 $33.70 114.43% 20.42 1.66%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AGCO AGCO Corporation E 8/8/2015 $54.66 0.88%
AME AMETEK, Inc. S 10/28/2014 $56.68 0.64%
CAT Caterpillar Inc. S 7/21/2015 $78.50 3.92%
CMI Cummins Inc. D 5/25/2015 $128.05 3.05%
DE Deere & Company D 6/19/2015 $94.34 2.54%
DHR Danaher Corporation E 8/13/2015 $90.92 0.59%
DOV Dover Corp S 5/29/2015 $63.95 2.63%
ETN Eaton Corp plc S 5/19/2015 $59.97 3.67%
FAST Fastenal Company E 5/22/2015 $40.21 2.79%
GWW W W Grainger Inc E 7/15/2015 $224.78 2.08%
IPG Interpublic Group of Companies Inc S 4/8/2015 $21.15 2.27%
IR Ingersoll-Rand PLC S 1/30/2015 $61.55 1.88%
JOY Joy Global Inc. D 8/4/2015 $25.40 3.15%
NLSN Nielsen NV S 7/15/2015 $48.51 2.31%
PH Parker-Hannifin Corporation D 6/5/2015 $113.67 2.22%
PLL Pall Corporation E 8/11/2015 $126.71 0.96%
PNR Pentair plc. Ordinary Share S 11/18/2014 $61.67 2.08%
RBC Regal Beloit Corp S 6/16/2015 $72.52 1.27%
ROK Rockwell Automation E 7/21/2015 $116.17 2.24%
ROP Roper Technologies Inc E 6/1/2015 $169.73 0.59%
SNA Snap-on Incorporated E 8/7/2015 $168.07 1.26%
SWK Stanley Black & Decker, Inc. S 12/4/2014 $105.41 2.09%
XYL Xylem Inc E 5/25/2015 $33.70 1.66%

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Disclaimer:
 The author held a long position in Deere & Company (DE) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logos taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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