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Philip van Doorn

Oct. 30, 2021, 9:38 a.m. EDT

Why increased capital spending is setting up this select group of industrial stocks to outperform in the next few years

By Philip van Doorn

The U.S. economy has changed. Besides years of very low interest rates and the pandemic recession, the new reality seems to be extended labor shortages despite big wage increases. But there’s no shortage of demand for goods and services.

Meanwhile, there’s a good chance that the fiscal policy that’s helping to drive demand will continue, even if Congress passes a slimmed-down version of the “Build Back Better” legislation that President Biden wants.

What do companies do when demand is increasing, especially when they expect the labor market to remain tight? They increase spending on industrial capacity, automation and distribution networks. That means higher capital spending.

Below is an analysis of capital goods companies in the S&P 500 Index (S&P:SPX) , showing which ones are expected to increase sales the most over the next several years.

The upswing in capital spending has already started, as you can see in this chart shared by LPL Financial chief market strategist Ryan Detrick:

Screen of capital goods stocks

In the S&P 500, there are 11 sectors, including the industrial sector, which itself can be broken down using Global Industrial Classification Standard (GICS) industry groups: Capital Goods, Transportation, and Commercial and Professional Services.

There are 46 companies in the S&P 500 Capital Goods GICS industry group.

The group trades at a weighted forward price-to-earnings ratio of 20.6, which is a bit lower than the full S&P 500’s forward P/E of 21.3, according to FactSet. The two groups typically trade at similar P/E ratios. The full index has traded slightly higher, on average, over the past three years, but the Capital Goods group has traded a bit higher per the 5-year, 10-year, 15-year and 20-year average valuations.

The current discount for the Capital Goods group may be of interest because the group is expected to increase sales at a faster compound annual growth rate (CAGR) over the next two years (which is as far out as FactSet’s aggregate data goes):

2021 2022 2023 Expected two-year sales CAGR
Estimated sales per share – S&P 500 Capital Goods $372.21 $407.20 $428.76 7.33%
Estimated sales per share – Full S&P 500 $1,541.45 $1,642.76 $1,720.82 5.66%
Source: FactSet

Three tables of capital goods stocks

We will break down the 46 S&P 500 companies in the Capital Goods GICS category by how far out available consensus sales estimates go.

2025 group

Consensus sales estimates among analysts polled by FactSet are available through calendar 2025 for 18 of the 46 capital goods companies. (We are using calendar-year estimates, even for 2021, because many companies report fiscal years that don’t match the calendar.)

Here they are, ranked by expected four-year sales CAGR. Sales figures are in millions of dollars:

Company Est. sales – 2021 Est. sales – 2022 Est. sales – 2023 Est. sales – 2024 Est. sales – 2025 Four-year estimated sales CAGR
Generac Holdings Inc. (NYS:GNRC) $3,723 $4,565 $5,060 $5,820 $6,408 14.5%
Quanta Services Inc. (NYS:PWR) $12,375 $15,994 $17,621 $19,098 $20,284 13.1%
Boeing Co. (NYS:BA) $70,306 $91,732 $93,175 $98,309 $113,288 12.7%
Raytheon Technologies Corp. (NYS:RTX) $64,876 $70,837 $75,726 $79,987 $86,280 7.4%
Idex Corp. (NYS:IEX) $2,732 $2,929 $3,098 $3,306 $3,497 6.4%
Illinois Tool Works Inc. (NYS:ITW) $14,387 $15,289 $15,991 $16,900 $17,978 5.7%
Ingersoll Rand Inc. (NYS:IR) $5,088 $5,530 $5,877 $6,121 $6,291 5.4%
Johnson Controls International PLC (NYS:JCI) $24,145 $25,785 $27,194 $28,631 $29,838 5.4%
Pentair PLC (NYS:PNR) $3,707 $3,960 $4,102 $4,339 $4,561 5.3%
Xylem Inc. (NYS:XYL) $5,315 $5,639 $5,937 $6,171 $6,516 5.2%
Northrop Grumman Corp. (NYS:NOC) $36,252 $38,086 $39,894 $41,932 $44,264 5.1%
Eaton Corp. PLC (NYS:ETN) $19,854 $20,374 $21,401 $22,556 $23,825 4.7%
A. O. Smith Corp. (NYS:AOS) $3,408 $3,714 $3,850 $3,945 $4,085 4.6%
L3Harris Technologies Inc. (NYS:LHX) $18,456 $19,093 $19,831 $20,702 $21,799 4.2%
General Dynamics Corp. (NYS:GD) $39,293 $40,838 $42,764 $44,404 $46,299 4.2%
Otis Worldwide Corp. (NYS:OTIS) $14,295 $14,810 $15,406 $16,061 $16,236 3.2%
Huntington Ingalls Industries Inc. (NYS:HII) $9,605 $10,623 $11,361 $11,320 $10,836 3.1%
Lockheed Martin Corp. (NYS:LMT) $67,628 $68,687 $69,132 $70,709 $71,142 1.3%
Source: FactSet

Click on the tickers for more about each company. Click  here  for Tomi Kilgore’s detailed guide to the wealth of information available for free on MarketWatch’s quote page.

2024 group

Sales estimates are available through 2024 for 37 companies. Here are the top 20, ranked by expected three-year sales CAGR:

Company Est. sales – 2021 Est. sales – 2022 Est. sales – 2023 Est. sales – 2024 Three-year estimated sales CAGR
Generac Holdings Inc. (NYS:GNRC) $3,723 $4,565 $5,060 $5,820 16.1%
Quanta Services Inc. (NYS:PWR) $12,375 $15,994 $17,621 $19,098 15.6%
Boeing Co. (NYS:BA) $70,306 $91,732 $93,175 $98,309 11.8%
Paccar Inc. (NAS:PCAR) $20,989 $24,802 $26,454 $28,710 11.0%
Howmet Aerospace Inc. (NYS:HWM) $5,120 $5,891 $6,478 $6,999 11.0%
Roper Technologies Inc. (NYS:ROP) $5,921 $6,206 $6,584 $7,643 8.9%
Fastenal Co. (NAS:FAST) $5,930 $6,434 $6,932 $7,541 8.3%
Fortive Corp. (NYS:FTV) $5,324 $5,661 $5,966 $6,656 7.7%
W.W. Grainger Inc. (NYS:GWW) $12,828 $13,756 $14,828 $15,936 7.5%
Allegion PLC (NYS:ALLE) $2,838 $3,058 $3,242 $3,523 7.5%
Parker-Hannifin Corp. (NYS:PH) $14,928 $16,065 $17,232 $18,480 7.4%
Raytheon Technologies Corp. (NYS:RTX) $64,876 $70,837 $75,726 $79,987 7.2%
Idex Corp. (NYS:IEX) $2,732 $2,929 $3,098 $3,306 6.6%
Ingersoll Rand Inc. (NYS:IR) $5,088 $5,530 $5,877 $6,121 6.4%
United Rentals Inc. (NYS:URI) $9,589 $10,393 $11,022 $11,527 6.3%
Stanley Black & Decker Inc. (NYS:SWK) $17,248 $19,185 $19,994 $20,675 6.2%
Honeywell International Inc. (NAS:HON) $34,627 $37,005 $39,411 $41,463 6.2%
Johnson Controls International PLC (NYS:JCI) $24,145 $25,785 $27,194 $28,631 5.8%
General Electric Co. (NYS:GE) $75,848 $80,745 $86,117 $89,742 5.8%
Huntington Ingalls Industries Inc. (NYS:HII) $9,605 $10,623 $11,361 $11,320 5.6%
Source: FactSet

2023 group

Among the 46 companies in the S&P 500 capital goods group, consensus sales estimates are available through calendar 2023 for 45 companies. Here are the top 20, ranked by expected two-year sales CAGR:

Company Est. sales – 2021 Est. sales – 2022 Est. sales – 2023 Two-year estimated sales CAGR
Quanta Services Inc. (NYS:PWR) $12,375 $15,994 $17,621 19.3%
Generac Holdings Inc. (NYS:GNRC) $3,723 $4,565 $5,060 16.6%
Boeing Co. (NYS:BA) $70,306 $91,732 $93,175 15.1%
Howmet Aerospace Inc. (NYS:HWM) $5,120 $5,891 $6,478 12.5%
Paccar Inc. (NAS:PCAR) $20,989 $24,802 $26,454 12.3%
TransDigm Group Inc. (NYS:TDG) $4,986 $5,601 $6,221 11.7%
Caterpillar Inc. (NYS:CAT) $50,164 $55,988 $60,263 9.6%
Huntington Ingalls Industries Inc. (NYS:HII) $9,605 $10,623 $11,361 8.8%
Fastenal Co. (NAS:FAST) $5,930 $6,434 $6,932 8.1%
Raytheon Technologies Corp. (NYS:RTX) $64,876 $70,837 $75,726 8.0%
Stanley Black & Decker Inc. (NYS:SWK) $17,248 $19,185 $19,994 7.7%
W.W. Grainger Inc. (NYS:GWW) $12,828 $13,756 $14,828 7.5%
Ingersoll Rand Inc. (NYS:IR) $5,088 $5,530 $5,877 7.5%
Parker-Hannifin Corp. (NYS:PH) $14,928 $16,065 $17,232 7.4%
Ametek Inc. (NYS:AME) $5,436 $5,904 $6,260 7.3%
United Rentals Inc. (NYS:URI) $9,589 $10,393 $11,022 7.2%
Rockwell Automation Inc. (NYS:ROK) $7,271 $7,903 $8,310 6.9%
Allegion PLC (NYS:ALLE) $2,838 $3,058 $3,242 6.9%
Textron Inc. (NYS:TXT) $12,809 $13,831 $14,595 6.7%
Honeywell International Inc. (NAS:HON) $34,627 $37,005 $39,411 6.7%
Source: FactSet

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