ITW and Danaher: Industrial strength
Companies that make industrial machinery, tools and equipment are showing excellent earnings gains.
NEW YORK (MONEY) -- Share prices remain volatile, and companies in some sectors, such as semiconductors, have announced disappointing news this earnings season. But the heart of the U.S. economy is still chugging along.
Earnings reports have been particularly strong for companies that produce industrial machinery, tools and equipment.
Such companies are often under-appreciated. Investors sometimes view them as low-growth industrial businesses, when in fact the companies are technology-intensive and enjoy some of the potential of a growth stock. In addition, because the market is so fragmented, they also often have the opportunity to grow through acquisitions.
Moreover, capital spending still hasn't rebounded fully since the last recession. When it does, growth prospects for these companies will likely improve further.
Two good examples are Danaher and Illinois Tool Works. Both reported earnings growth last week of at least 23 percent for the second quarter.
Danaher is a conglomerate that specializes in sophisticated tools and equipment. Craftsman tools made for Sears are the most recognized product line.
Besides the tools division, Danaher has two larger businesses. Professional instrumentation includes electronic meters, environmental devices that check water purity, for instance, and medical equipment. Industrial technologies includes aerospace, electrical switches and distribution systems and motion sensors.
In addition, the company has boosted its growth by acquiring dozens of smaller businesses over the past five years. The most recent was the $2 billion acquisition of Syborn Dental Systems in May.
Danaher's (Charts) earnings are projected to grow at a 15 percent compound annual rate over the next five years. At a current $64, the stock trades at just over 17.6 times next year's estimated earnings.
Illinois Tool Works makes a diverse assortment of industrial products and systems, organized in four divisions.
Engineered products makes plastic and metal components and fasteners, as well as adhesives and coatings. The specialty systems division produces packaging equipment, welding equipment, commercial food machinery and power generators. Two international divisions offer similar product lines outside of the United States.
Earnings are projected to grow at a 12 percent compound annual rate over the next five years. The shares also yield 1.5 percent. At a current $44, the stock trades at less than 14 times projected 2007 results.
Danaher is attractively priced relative to its growth rate. But such a company always carries a little bit of risk because its high growth projections could disappoint if the environment became less favorable for acquisitions.
Conservative investors should choose Illinois Tool instead, which has easier growth targets to reach and trades at a below-market multiple.
Michael Sivy is an editor-at-large for MONEY Magazine. Sivy on Stocks runs each Tuesday at CNNMoney.com -- sign up to receive it by e-mail.