On Friday, Fed Chairman Jay Powell delivered an extremely dovish speech at the Jackson Hole symposium, hinting that the U.S. would see its first interest rate cuts since the outbreak of the Covid-19 pandemic in September.
The fastest rise in the key interest rate so far has helped to reduce inflation, but it has come at a price. Cyclical sectors such as the industrial equipment sector have suffered greatly.
Last week, the industrial and automotive chip giant Texas Instruments noted that its chip volumes are now actually below those of 2019, the year of the last major industrial downturn. But with the Federal Reserve apparently set for a rate-cutting cycle, battered industrial stocks could bounce back with a vengeance.
Texas Instruments is actually trading at its all-time high, but the following three industry leaders are well below their all-time highs, making their stocks look like cheap buys today.
Microchip technology
Microchip technology (NASDAQ: MCHP) is in some ways a worthy competitor to Texas Instruments, but unlike TI, Microchip is nearly 20% below its all-time high.
Microchip manufactures microcontrollers, analog chips, field programmable gate arrays (FPGAs), and other add-on chip products used in a variety of machines in different end markets. However, Microchip’s largest exposure is to the industrial machinery sector, accounting for 43% of revenue, and to the automotive sector, accounting for 18% of revenue, bringing its exposure to these markets to 61%.
Microchip had strong results through 2023 due to supply shortages across the industry, but its revenue is now in a sharp correction. In the last quarter, Microchip’s revenue fell nearly 46% year-over-year to $1.24 billion. And management forecast even lower revenue for the current quarter, at an average of $1.15 billion.
And yet, even in the depths of a historic downturn, Microchip maintains healthy profitability. Last quarter, the company achieved an adjusted (non-GAAP) operating margin of 31.5% and was targeting an operating margin of 28.5%, which should represent the low point of this cycle.
This still represents high profitability and allows Microchip to increase its dividend by 10.7% year-over-year.
Microchip management sounded optimistic in its earnings call, noting that future orders have picked up from very low levels and cancellations and postponements continue to decline. Management was also encouraged by Microchip’s strong design-in wins with customers, particularly for its new 64-bit microcontroller product. This should provide more “fuel” in the next upswing.
While cash-strapped customers are currently keeping their inventories at very low levels, lower interest rates could turn the tide. When that happens, Microchip’s earnings, which yield 2.2%, should rise again.
Chart Industries
Industrial equipment inventory Chart Industries (NYSE: GTLS) At the end of 2022, ‘s share price halved after the announcement of its major acquisition of Howden. And while the stock has struggled to recover, recent earnings reports and recession fears have brought the stock back to late-2022 lows.
But that could also be an opportunity. Management certainly missed analysts’ expectations for sales and profits in the last quarter and also revised its forecast for the full year downwards.
At first glance, this isn’t great. But the “failure” was largely due to the timing of major project gains, which will only be realized in 2026 rather than 2025. These orders should come in, as Chart has a history of canceling less than 1% of its orders.
The company may still need to adapt to the merger with Howden. The merger has transformed Chart into a one-stop shop that is more of a strategic partner for global customers. Previously, the company was primarily an equipment supplier, recognizing revenue shortly before orders were placed. With its comprehensive and bespoke systems, Chart now engages its customers earlier in the project planning and construction process, extending the timeframe for revenue recognition relative to orders.
But if you look behind the scenes, Chart can still show impressive numbers. Orders rose 12.1% year-on-year in the last quarter, but without “large LNG orders.” Large liquefied natural gas projects have traditionally been Chart’s bread and butter, but orders are large and irregular.
Excluding last year’s LNG orders, the rest of Chart’s business saw a 40% increase in orders. This was largely driven by growth in its newer “specialty” energy transition segment, which has long growth potential and consists of hydrogen, water treatment, space exploration, nuclear power, clean mining, and other types of equipment. Orders in this segment rose a whopping 48.4%, and it is now the largest segment of the business, accounting for 36% of new orders. Management also pointed to a new opportunity in industrial cooling for artificial intelligence data centers, which has the potential to expand Chart’s addressable market by $500 million over the next three years. Notably, Chart just forecast $4.53 billion in revenue for 2024.
Importantly, Chart is on track to exceed the cost and revenue synergies from the Howden acquisition. Adjusted gross and operating margins continued to expand by 3.1 percentage points and 4.9 percentage points, respectively, in the most recent quarter.
These profits will now be used to pay off Chart’s debt, which is currently weighing on the stock. But as Chart continues to pay down debt with the help of falling interest rates, the stock should eventually rise again.
Image source: Getty Images.
IPG Photonics
It is difficult to find an industrial stock that has had as much bad luck as IPG Photonics (NASDAQ:IPGP) over the past five years. IPG is a leading supplier of fiber lasers, advanced lasers that are replacing older CO2-based technologies and have made great strides in industrial cutting and welding applications. At the same time, the technology is also increasingly being used in new application areas such as medical applications and 3D printing.
But in 2019, IPGP began to face competition from lower-cost alternatives in China for cutting applications, a large market. Then, in 2022, the Russian invasion of Ukraine cut IPG off from its manufacturing facilities in Russia and Belarus. Notably, IPG’s founders were of Russian descent, but founded the company in Massachusetts in the 1990s. Because it is a vertically integrated company that makes all of its own components, management had to rush to produce components in other regions. This increased costs and reduced revenues.
Now, in 2024, the company is facing a severe economic downturn that will impact the markets for some of IPG’s biggest growth opportunities, such as welding batteries for electric vehicles.
Despite a 23% decline in revenue last quarter, IPG was still profitable. The company forecast another down quarter for the current quarter and earnings close to breakeven. However, once the industrial market recovers, IPG expects long-term double-digit growth and an operating margin of 25% to 30%.
Also importantly, the company has about $1.1 billion in cash on its balance sheet and no debt, which is about a third of its total market capitalization. Management has also been prudent in buying back its cheap stock, reducing its share count by over 5% since last year, while maintaining a healthy cash balance.
IPG also just hired a new CEO, Mark Gitin, a highly respected laser industry executive who brings a wealth of experience in the optical laser industry. Coherent And MKS Instruments.
With a low share price, plenty of cash, and an experienced industry leader taking over as CEO, IPG is another industrial stock to play as interest rates fall and the economy improves.
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Billy Duberstein and/or his clients hold positions in Chart Industries, Microchip Technology, and Texas Instruments. The Motley Fool holds positions in and recommends Chart Industries and Texas Instruments. The Motley Fool recommends Coherent and IPG Photonics. The Motley Fool has a disclosure policy.
