Valuation Dashboard: Industrials – Update
Summary 4 key fundamental factors are reported across industries in the Industrial sector. They give valuation status of an industry relative to its historical average. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Industrials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is named with a prefix “D” before the factor’s name (for example D-P/E for the price/earnings ratio). It is measured in percentage for valuation ratios and in absolute for ROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, much less for ETF investors. Industry valuation table on 11/25/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Aerospace&Defense 22.02 18.02 -22.20% 1.19 1.02 -16.67% 21.02 21.28 1.22% 7.89 9 -1.11 Building Products 28.48 20.14 -41.41% 1.28 0.64 -100.00% 33.72 22.38 -50.67% 9.91 6.07 3.84 Construction&Engineering 23.7 18.3 -29.51% 0.43 0.48 10.42% 18.32 19.81 7.52% 2.76 5.98 -3.22 Elec.Equipment 21.46 18.31 -17.20% 1.51 1.64 7.93% 27.36 21.88 -25.05% -8.4 -3.3 -5.1 Ind. Conglomerates 41.07 20.45 -100.83% 2.54 1.3 -95.38% 33.63 29.98 -12.17% 1.88 12.12 -10.24 Machinery 19.26 18.25 -5.53% 1.09 0.9 -21.11% 27.38 21.81 -25.54% 9.65 8.72 0.93 Trading Companies&Distri 15.36 17.14 10.39% 0.6 0.7 14.29% 12.99 25 48.04% 9.18 8.61 0.57 Commercial Services&Supplies 22.1 20.86 -5.94% 1.17 1.03 -13.59% 24.19 19.84 -21.93% 2.15 3.99 -1.84 Professional Services* 23.25 24.04 3.29% 1.46 1.22 -19.67% 21.24 17.43 -21.86% 7.36 3.09 4.27 AirFreight&Logistics 23.07 21.06 -9.54% 0.66 0.57 -15.79% 21.72 32.87 33.92% 11.93 11.12 0.81 Airlines 12.46 15.18 17.92% 0.97 0.41 -136.59% 19.15 12.37 -54.81% 34.11 3 31.11 Marine** 12.92 14.04 7.98% 0.81 1.41 42.55% 15.89 23.27 31.71% -15.58 6.05 -21.63 Road&Rail 16.88 19.17 11.95% 1.22 0.86 -41.86% 34.67 36.17 4.15% 16.97 9.43 7.54 Transport Infrastructure** 7.01 23.6 70.30% 1.06 1.19 10.92% 5.37 20.8 74.18% -1.33 -3.22 1.89 *Professional Services: Avg since 2008. **Factors may vary a lot for some industries with a low number of stocks or a lot of outliers. Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLI ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Industrials have slightly out-performed the broad market in the last 3 months, but underperformed it in the last 6 months. The 5 most prominent S&P 500 industrial companies in the recent rally have been General Electric (NYSE: GE ), Southwest Airlines (NYSE: LUV ), Norfolk Southern Corp (NYSE: NSC ), Raytheon (NYSE: RTN ), United Rentals (NYSE: URI ). LUV and RTN have hit new all-time highs, GE is close to its 2008 top. At industry level, Trading Companies and Transport Infrastucture are the only 2 industries with the 3 valuation ratios pointing to underpricing, and a quality level above the historical average. The industries with an improvement in valuation factors since last month are Trading Companies, Commercial Services and Supplies, Marine. There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Industrials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.