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Summary 4 key fundamental factors are reported across industries in the GICS Industrial sector. They can be used to assess the valuation status of an industry relative to its historical average. They can also be used as a reference for picking quality stocks at a reasonable value. This article is part of a series giving a valuation dashboard by sector of companies in the S&P 500 index (NYSEARCA: SPY ). The idea is to follow up a certain number of fundamental factors for every sector and to compare them to historical averages. This article is going down at industry level in the GICS classification. It 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. A link to a list of individual stocks to consider is provided at the end. 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 measured in percentage and named with a prefix “D” before the factor’s name (for example D-P/E for the price/earnings ratio). 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 10/29/2015 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 19.64 18.02 -8.99% 1.15 1.02 -12.75% 22.45 21.28 -5.50% 7.31 9 -18.78% Building Products 27.98 20.14 -38.93% 1.3 0.64 -103.13% 37.43 22.38 -67.25% 11.96 6.07 97.03% Construction&Engineering 19.89 18.3 -8.69% 0.4 0.48 16.67% 15.75 19.81 20.49% 3.86 5.98 -35.45% Elec.Equipment 23.15 18.31 -26.43% 1.53 1.64 6.71% 25.31 21.88 -15.68% -7.83 -3.3 -137.27% Ind. Conglomerates 36.65 20.45 -79.22% 2.44 1.3 -87.69% 29.48 29.98 1.67% 2.59 12.12 -78.63% Machinery 17.84 18.25 2.25% 1.04 0.9 -15.56% 25.17 21.81 -15.41% 10.34 8.72 18.58% Trading Companies&Distri 17 17.14 0.82% 0.58 0.7 17.14% 14.47 25 42.12% 8.39 8.61 -2.56% Commercial Services&Supplies 22.99 20.86 -10.21% 1.22 1.03 -18.45% 26.12 19.84 -31.65% 3.9 3.99 -2.26% Professional Services* 21.91 24.04 8.86% 1.5 1.22 -22.95% 19.53 17.43 -12.05% 6.51 3.09 110.68% AirFreight&Logistics 23.45 21.06 -11.35% 0.65 0.57 -14.04% 23.49 32.87 28.54% 12.44 11.12 11.87% Airlines 12.02 15.18 20.82% 0.96 0.41 -134.15% 24.97 12.37 -101.86% 25.32 3 744.00% Marine** 16.02 14.04 -14.10% 1.13 1.41 19.86% N/A N/A N/A -13.74 6.05 -327.11% Road&Rail 16.71 19.17 12.83% 1.15 0.86 -33.72% 28.74 36.17 20.54% 16.39 9.43 73.81% Transport Infrastructure 7.7 23.6 67.37% 1.07 1.19 10.08% 5.48 20.8 73.65% 16.51 -3.22 612.73% *Professional Services: Avg since 2008 **P/FCF currently outlier for Marine 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 Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF (NYSEARCA: XLI ) with SPY. (click to enlarge) Conclusion Industrials have underperformed the broad market in the last 6 months. At the industry level, Transport Infrastucture, Road & Rail are the only 2 industries with at least 2 of 3 valuation ratios pointing to underpricing, and a quality level above their respective historical averages. However, 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. You can choose the “real-time” option if you want to be instantly notified. Scalper1 News
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