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5 Undervalued Predictable Industrial Stocks That May Profit From Infrastructure Projects

Summary

  • The bill includes $550 billion for projects related to clean energy as well as road and rail construction.
  • Screener criteria is based on predictability, DCF and discounted cash flow.

The Biden administration-backed infrastructure bill cleared another key hurdle as the Senate voted to advance it late on Wednesday.

The bill includes $550 billion in new spending for projects related to moving the U.S. toward clean energy reliance as well as building roads and rails and expanding internet access. While it still has a way to go before being signed by President Joe Biden, investors may already be looking for good value opportunities among undervalued industrial sector companies with predictable performances that will potentially benefit from these projects.

GuruFocus’ Undervalued Predictable Screener, a Premium feature, determines whether a stock is undervalued or overvalued based on two methods: discounted cash flow and discounted earnings.

According to both methods, companies with a discount higher than zero are considered undervalued, while discounts below zero are considered overvalued. The companies’ predictability rates are then determined based on historical performance over the past decade.

Based on these criteria, the screener found stocks that met these criteria as of July 30 included Snap-on Inc.
SNA
(SNAFinancial), Lennox International Inc. (LII
LII
Financial), Griffon Corp. (GFFFinancial), P.A.M. Transportation Services Inc. (PTSIFinancial) and CSX
CSX
Corp. (CSXFinancial).

Snap-on

Shares of Snap-on (SNAFinancial) are currently trading 72% below its DCF value of $786 and 43% below its discounted earnings value of $384.

The Kenosha, Wisconsin-based manufacturer of high-end tools and equipment for professional use in the transportation industry has an $11.81 billion market cap; its shares were trading around $218.84 on Friday with a price-earnings ratio of 15.24, a price-book ratio of 2.95 and a price-sales ratio of 2.68.

The GF Value Line
VALU
suggests the stock is modestly overvalued currently based on historical ratios, past performance and future earnings projections. The valuation rank of 6 out of 10 leans more toward undervaluation, though.

GuruFocus rated Snap-on’s financial strength 6 out of 10. Although the company has issued approximately $382.1 million in new long-term debt over the past three years, it is still at a manageable level as a result of adequate interest coverage. The high Altman Z-Score of 5.24 also indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. It is creating good value while growing as well, since the return on invested capital surpasses the weighted average cost of capital.

The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin, strong returns on equity, assets and capital that outperform a majority of competitors and a high Piotroski F-Score of 7, implying business conditions are healthy. On the back of consistent earnings and revenue growth, Snap-on has a predictability rank of four out of five stars. According to GuruFocus, companies with this rank return an average of 9.8% annually over a 10-year period.

Of the gurus invested in Snap-on, John Rogers (TradesPortfolio) has the largest stake with 1.92% of outstanding shares. Other guru shareholders include the T Rowe Price Equity Income Fund (TradesPortfolio), Pioneer Investments (TradesPortfolio), Richard Pzena (TradesPortfolio), Joel Greenblatt (TradesPortfolio), Mairs and Power (TradesPortfolio), Ken Fisher (TradesPortfolio), Jeremy Grantham (TradesPortfolio) and Mario Gabelli (TradesPortfolio).

Lennox International

Shares of Lennox International (LIIFinancial) are trading 57% below its DCF value of $768 and 34% below its discounted earnings value of $502.

Headquartered in Richardson, Texas, the company, which manufactures climate control products for the heating, ventilation, air conditioning and refrigeration markets, has a market cap of $12.38 billion; its shares were trading around $332.55 on Friday with a price-earnings ratio of 25.6 and a price-sales ratio of 3.08.

According to the GF Value Line, the stock is modestly overvalued currently, an assessment which the valuation rank of 4 out of 10 aligns with.

Lennox International’s financial strength was rated 5 out of 10 by GuruFocus on the back of a comfortable level of interest coverage as well as a robust Altman Z-Score of 7.65. The ROIC also significantly exceeds the WACC, indicating good value creation is occurring.

The company’s profitability fared better, scoring a 9 out of 10 rating. In addition to an expanding operating margin, Lennox is supported by returns that outperform a majority of industry peers, a high Piotroski F-Score of 8 and steady earnings and revenue growth. It also has a four-star predictability rank.

With a 0.38% holding, Jim Simons (TradesPortfolio)’ Renaissance Technologies is the company’s largest guru shareholder. Ray Dalio (TradesPortfolio), Pioneer, Paul Tudor Jones (TradesPortfolio), Steven Cohen (TradesPortfolio) and Lee Ainslie (TradesPortfolio) also have positions in Lennox.

Griffon

Shares of Griffon (GFFFinancial) are currently trading 43% below its DCF value of $41 and 14% below its discounted earnings value of $27.

The New York-based conglomerate, whose businesses manufacture garage doors, non-powered landscaping products and surveillance and other defense-related electronics, has a $1.33 billion market cap; its shares were trading around $23.45 on Friday with a price-earnings ratio of 13.02, a price-book ratio of 1.74 and a price-sales ratio of 0.44.

Based on the GF Value Line, the stock appears to be modestly overvalued currently. The valuation rank of 8 out of 10 favors undervaluation, however.

GuruFocus rated Griffon’s financial strength 4 out of 10. In addition to weak interest coverage, the Altman Z-Score of 2.45 indicates the company is under some pressure since revenue per share growth has slowed over the past 12 months. The WACC also eclipses the ROIC, indicating it struggles to create value.

The company’s profitability scored a 7 out of 10 rating. In addition to an expanding operating margin, Griffon has strong returns that outperform over half of its competitors, a Piotroski F-Score of 8 and 4.5-star predictability rank. GuruFocus says companies with this rank return an average of 10.6% annually.

Gabelli is the company’s largest guru shareholder with a 6.8% stake. Other guru investors are Chuck Royce (TradesPortfolio), Grantham, Simons’ firm, Hotchkis & Wiley and Barrow, Hanley, Mewhinney & Strauss.

P.A.M. Transportation

Shares of P.A.M. Transportation (PRSI) are trading 40% below its DCF value of $105 and 48% below its discounted earnings value of $121.

The irregular route over-the-road trucking company, which is headquartered in Tontitown, Arkansas, has a market cap of $359.38 million; its shares were trading around $62.76 on Friday with a price-earnings ratio of 7.64, a price-book ratio of 2.03 and a price-sales ratio of 0.63.

The GF Value Line shows the stock is modestly overvalued currently. The valuation rank of 6 out of 10, however, points to undervaluation.

P.A.M. Transportation’s financial strength was rated 4 out of 10 by GuruFocus. Despite having sufficient interest coverage, the Altman Z-Score of 2.29 indicates it is under some pressure since assets are building up at a faster rate than revenue is growing. The WACC has also fallen below the ROIC, indicating value is being created.

The company’s profitability fared a bit better, scoring a 7 out of 10 rating on the back of margins and returns that outperform over half of its industry peers. P.A.M. Transportation also has a moderate Piotroski F-Score of 5, suggesting operations are stable, but revenue per share growth has slowed over the past year. It has a 4.5-star predictability rank.

Simons’ firm is the sole guru invested in the stock with 6.15% of its outstanding shares.

CSX

Shares of CSX (CSXFinancial) are currently trading 19% below its DCF value of $40 and 13% below its discounted earnings value of $37.

The Jacksonville, Florida-based company, which provides rail-based freight transportation in the U.S. , has a $72.55 billion market cap; its shares were trading around $32.18 on Friday with a price-earnings ratio of 21.75, a price-book ratio of 5.4 and a price-sales ratio of 6.52.

According to the GF Value Line, the stock appears to be modestly overvalued currently. The valuation rank of 1 out of 10 aligns with this assessment.

GuruFocus rated CSX’s financial strength 4 out of 10. Despite having sufficient interest coverage, the Altman Z-Score of 2.83 indicates the company is under some pressure. The ROIC is above the WACC, however, indicating value is being created.

The company’s profitability scored a 9 out of 10 rating, boosted by an expanding operating margin, strong returns that outperform a majority of competitors and a perfect Piotroski F-Score of 9 out of 9. Steady earnings and revenue growth also contributed to a four-star predictability rank.

CSX’s largest guru shareholder is Ken Fisher (TradesPortfolio) with a 0.73% stake. PRIMECAP Management (TradesPortfolio), Pioneer and Simons’ firm also have significant positions.

Additional opportunities

Other stocks that made the screener were MYR Group Inc. (MYRG), Cintas Corp
CTAS
. (CTASFinancial), CBIZ Inc. (CBZFinancial), Quanta Services Inc
PWR
. (PWRFinancial), Avery Dennison Corp
AVY
. (AVYFinancial), Canadian Pacific Railway Ltd. (CPFinancial), Copart Inc.
CPRT
(CPRTFinancial), Saia Inc.
SAIA
(SAIAFinancial), Marten Transport Ltd. (MRTNFinancial) and Old Dominion Freight Line Inc
ODFL
. (ODFLFinancial).

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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