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Aug. 18, 2015, 12:18 p.m. EDT

10 high-margin industrial stocks with big potential

These companies don’t grab headlines, but they can make you plenty of money

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By Philip van Doorn, MarketWatch


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Mobile Mini boosted second-quarter sales per share by 25%, and analysts forecast 34% upside for the company’s stock over the next 12 months.

When Berkshire Hathaway CEO Warren Buffett discussed his company’s agreement to acquire Precision Castparts, there were probably many people who read about the $32 billion transaction who weren’t familiar with the Portland, Ore.-based maker of metal parts.

Let’s face it: Industrial companies don’t usually make for titillating headlines. But that doesn’t mean you shouldn’t consider them as long-term investments, especially if they have fat profit margins.

Buffett didn’t follow his typical practice of discussing cash flow or other nuts-and-bolts aspects of the target company’s financial performance. When talking about Berkshire Hathaway Inc.’s /zigman2/quotes/200060694/composite BRK.B +0.71%  decision, he said he had admired Precision Castparts Corp. “for some time,” and that “it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.”

That’s it.

So from his limited comments, it would seem Buffett was most interested in Precision Castparts as a long-term strategic play, and not as an underpriced value.

Read: Precision Castparts a ‘perfect fit’ for Warren Buffett’s Berkshire Hathaway, analyst says

Not a big bargain

Berkshire Hathaway agreed to pay $235 a share in cash for Precision Castparts, so it was no surprise to see the shares rise 19% on Aug. 10 to close at $230.92.

But if we go back one day, we see that the target company’s shares had underperformed over the previous five years. The stock was down 19% year-to-date through Aug. 7, with declining commodity prices hurting the company’s sales and profit margins. Then again, its 10-year return was very strong:

Total return - YTD through Aug. 7 Total return - 3 years through Aug. 7 Total return - 5 years through Aug. 7 Total return - 10 years through Aug. 7
Precision Castparts -19% 22% 57% 332%
S&P 1500 Industrials -3% 58% 97% 121%
Source: FactSet

Despite this year’s decline through Aug. 7, Credit Suisse analyst Stephen Levenson said shares of Precision Castparts still carried “valuation multiples at a premium of 20% or more to [its] peer group.”

So it would appear that Buffet was willing to pay quite a bit for precision Castparts, even if some investors might be disappointed that the $235 takeout price was well below the stock’s 52-week high of $249.12 on Sept. 19.

One reason Buffett agreed to the significant premium, according to Levenson, was its “superior operating margin.”

The company’s EBITDA margin over the past four quarters has been 30.28%, the highest among the 26 aerospace and defense stocks included in the S&P Composite 1500 Index.

Buffett said Berkshire wouldn’t enter into another large M&A deal for a while, since the company needs to rebuild its cash holdings, but he did say he would consider smaller acquisitions over the next six months.

/zigman2/quotes/200060694/composite
US : U.S.: NYSE
$ 209.38
+1.47 +0.71%
Volume: 3.05M
Oct. 15, 2019 4:10p
P/E Ratio
17.81
Dividend Yield
N/A
Market Cap
$509.65 billion
Rev. per Employee
$637,113
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