If the volatility in cryptocurrencies is not to your taste, why not consider three old-economy stocks that make something tangible? All three of these stocks exist in the physical economy and make products in demand as long as people need to fly on airplanes, enjoy climate control, and use DIY tools. Moreover, Raytheon Technologies (NYSE:RTX), Carrier Global (NYSE:CARR) and Stanley Black & Decker (NYSE:SWK) have excellent long-term growth prospects in their own right. Here’s why all three are worth considering for your portfolio.
The aerospace giant’s mix of defense and commercial aerospace businesses stands it in good stead right now. It’s no secret that commercial air travel has slumped due to the pandemic, and investors may well shy away from the sector as a consequence. However, I think that would be a mistake. Not least because the industry is set for a multiyear recovery from 2020, and companies like Raytheon will take part in it.
The last point is highlighted when you look at the latest weekly data for commercial flights. Total flights are still down on 2019 but significantly up on 2020. Moreover, while Europe remains weak, U.S. domestic flights were down only 13.8% on 2019, and Chinese domestic flights are actually up 19.1% on 2019.
It all points to a robust year-over-year recovery in 2021. Raytheon expects its commercial aerospace-focused business (Pratt & Whitney aircraft engines and Collins Aerospace structures and components) to start improving year-over-year sales and earnings from the second quarter onward.
In the meantime, the company’s defense-focused businesses (Raytheon Missiles & Defense and Raytheon Intelligence & Space) will support the company with solid earnings and cash flows.
Ultimately, CEO Greg Hayes expects Raytheon’s combination of businesses will get the company back to between $8 billion and $9 billion in free cash flow (FCF) over “the next several years.” Those figures represent 6%-7% of Raytheon’s current market cap, and if Raytheon can get there, then the stock’s current valuation will turn out to have been an excellent value.
By coincidence, the second stock selected here used to be part of the same company, United Technologies, as the commercial aerospace-focused businesses of Raytheon Technologies. The breakup of United Technologies was good news for Carrier. It allowed the management of the leading heating, ventilation, and air-conditioning (HVAC) company to set about reducing costs and investing for growth. For example, the “Carrier 700 program” intends to reduce annual costs by a whopping $700 million by 2022.
However, it isn’t all just about slimming down. Carrier added 550 sales and support staff and released 120 new products in 2020. Also, the company continues to work toward its post-separation aims of increasing its growth in higher-growth markets like Asia and expanding its aftermarket and service sales.
Furthermore, the pandemic has improved Carrier’s near- and long-term growth prospects. For example, the stay-at-home measures have encouraged investment in residential air-conditioning (orders were up more than 60% in the first quarter), and it’s reasonable to expect commercial building owners will invest in HVAC to keep buildings healthy and clean as a result of the pandemic. Meanwhile, cold chain networks — think refridgerated trucks and cold storage warehouses — that were built out to distribute the vaccine are likely to increase demand for refrigerated transportation.
It’s all expected to lead to a significant pickup in earnings and FCF, with analysts forecasting growth in FCF from $1.7 billion in 2021 to around $2.2 billion in 2023, a figure representing approximately 5.7% of its current market cap. All told, Carrier continues to look like a good value.
Stanley Black & Decker
The tools, industrial products, and security products company has had an unusual few years. A combination of trade tariffs, foreign exchange headwinds, and raw material price increases created external cost headwinds of some $1 billion in the 2018-2020 period. The stay-at-home measures initially hit the company hard, only for the company to see a surge in demand for DIY tools during the extended lockdowns.
Fast forward to 2021, and the company faces a mix of challenges and opportunities. On the downside, raw material prices are rising again, and Stanley faces some tough growth comparisons in the second half. On the upside, end demand remains strong, and the company is preparing for a multiyear growth opportunity.
Indeed, the recent growth summit event management outlined the potential for growth from four pillars. They are e-commerce, investing in lawn and garden products, electrification (engineered fasteners to electric vehicle manufacturers), and health and safety products (electronic security and door automation).
In common with Raytheon and Carrier, analysts expect Stanley’s FCF to expand strongly in the next few years, rising from $1.4 billion in 2021 to $2.3 billion in 2023. For a company with a market cap of $33.9 billion, that’s a pretty good value.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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