The Best Industrials Stocks to Buy

After struggling throughout most of 2023, industrials sector performance continues to trail the broader market in 2024, and its stocks currently look slightly overvalued. This year to date, the Morningstar US Industrial Index has managed a 6.99% return versus 14.27% for the Morningstar US Market Index.

Morningstar director Brian Bernard notes two factors that could be dragging on the industrials sector: Worries about an agricultural market downturn and softening repair and remodel spending in the US after demand surged in 2021-22. He says that valuations have eased somewhat, but less than 20% of the industrials stocks Morningstar covers look undervalued.

Is Now a Good Time to Invest in Industrials Stocks?

That said, Bernard does see investment opportunities among industrials stocks.

“There are opportunities in farm machinery as investors are worried about an agricultural market downturn. The agricultural cycle has been strong over the past few years and is now starting to cool off. In our view, replacement demand can help partially offset weaker new agricultural machine demand,” he says.

He also sees possibilities in aerospace and shipbuilding. “While shipbuilding doesn’t offer the juiciest margins in the defense industry, it represents the quintessential set of conditions we see as providing durable competitive advantage and decades of visibility into revenue and profitability,” explains Bernard.

To come up with our list of the best industrials stocks to buy now, we isolated companies with Morningstar Economic Moat Ratings of wide or narrow. Why? Because we expect companies that have carved out economic moats to remain competitive for a decade or more. We then ranked those companies by valuation, pulling out the five most undervalued stocks from the list.

The 5 Best Industrials Stocks to Buy Now

The stocks of these five industrials companies, all with narrow or wide moats, are the most undervalued according to our fair value estimates as of June 27, 2024.

1. Global Payments GPN
2. CNH Industrial CNH
3. TriNet Group TNET
4. Chart Industries GTLS
5. TransUnion TRU

Here’s a little more about each of the best industrials stocks to buy, including commentary from the Morningstar analysts who cover each company. All data is as of June 27, 2024.

Global Payments

• Morningstar Price/Fair Value: 0.75
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 0.75%
• Industry: Specialty Business Services

Global Payments is the cheapest stock on our list of the best industrials stocks to buy. This narrow-moat payment processor boasts the largest market cap on our list at $34 billion. The stock is trading 25% below our fair value estimate of $179.00.

We believe the market is concerned about disruption to incumbent payment players like Global Payments. In our view, though, Global Payments continues to benefit from a strong competitive position and is successfully adapting to a changing industry. While Worldpay struggled under FIS’ roof, we think that was attributable to underinvestment, an issue that we don’t believe applies to Global Payments.

Global Payments merged with Total System Services in 2019. While it was the last large deal done in the acquiring space that year, we think this combination was the most attractive.

The targeted cost synergies from this deal were the most modest, which we think should lessen any concerns that the company is underinvesting. Additionally, among the three deals, this merger was the only one involving two companies that both had acquiring operations. Given that we believe scale is critical to competitive positioning in the industry, we think the combination immediately strengthened Global Payments’ moat. Additionally, we think the merger better positioned Global Payments to adapt to industry changes. First, we think international expansion will be an increasing area of industry focus going forward. The US market is relatively mature, and international expansion will be necessary to maintain growth. The two companies should be able to leverage each other’s global footprints.

Through the pandemic, Global Payments did feel the pinch from the coronavirus as payment transactions fell markedly. Given its focus on small merchants, we think Global Payments held up fairly well, and results following the pandemic suggest the long-term shift to electronic payments has reasserted itself, and volumes have recovered fairly quickly. As such, we think Global Payments can maintain the solid growth it has enjoyed historically, absent any downturn in the economy. If we do go into a recession, though, Global Payments' focus on small merchants could be a negative.

CNH Industrial

• Morningstar Price/Fair Value: 0.66
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.63%
• Industry: Farm and Heavy Construction Machinery

With the highest forward dividend yield on our list of the best industrials stocks to buy, CNH Industrial is 34% undervalued relative to our $15.30 fair value estimate. As the company reduces the number of its construction business products and refocuses on higher-volume models and precision agriculture, we believe this will allow CNH to run leaner in its manufacturing operations.

CNH Industrial provides customers with an extensive portfolio of off-highway products. We believe it will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH’s high-quality and strong-performing products, in addition to its robust dealer network. In developed markets, CNH helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine downtime, and consistent parts availability.

The company’s off-highway business manufactures agriculture and construction equipment. CNH addresses the agriculture market with three brands: Case IH (targets large grain farmers) and New Holland (serves small grain and livestock farmers) make full lines of agriculture equipment, while Steyr is mainly a tractor manufacturer. In our view, the agriculture business is well-positioned to compete with peers, but we think the construction business will need to optimize its dealer network, product portfolio, and manufacturing operations to be competitive.

In early 2022, CNH spun off its on-highway business (commercial vehicles and powertrain businesses) to Iveco. We believe this decision was a prudent move for shareholders. With the demerger, management will now shift its focus to the more profitable off-highway business. CNH’s high exposure to agriculture markets (over 90% of off-highway profits) bodes well, given the strong replacement cycle in large agriculture equipment.

CNH has exposure to end markets that have attractive tailwinds. In agriculture, we think demand for crops will remain resilient in the near term, largely owing to low global supplies in some crops. In construction, we think increased infrastructure spending in the US will be a benefit in the near term. Looking further out, we believe precision ag will be an incremental value driver for CNH. The company’s move in 2021 to acquire its technology partner Raven materially improved its precision ag capabilities. We estimate precision ag presents a $3 billion sales opportunity for CNH this decade.

TriNet Group

• Morningstar Price/Fair Value: 0.69
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 1.00%
• Industry: Staffing and Employment Services

TriNet offers outsourced payroll and human capital management solutions for small and midsize businesses via a professional employer organization model. This affordable industrials stock trades 31% below our fair value estimate of $145.00.

We view TriNet as well placed to take share of the expansive, fragmented small and midsize business payroll and human capital management market through industry consolidation and rising demand for comprehensive, outsourced solutions. Regional providers or do-it-yourself solutions such as Intuit’s QuickBooks or Microsoft’s Excel service most of the small-business market, creating meaningful scope for greater penetration by value-added providers like TriNet.

We expect TriNet and fellow HCM providers to benefit from attractive industry tailwinds, including rising regulatory complexity, increasingly dispersed workforces, and fierce competition for talent. In the context of these tailwinds, the high-touch professional employer organization service model is increasingly attractive to SMBs looking to share employment risk liability via a co-employment model and leverage the PEO provider’s scale and expertise to access HR compliance support and competitive employee benefits.

Relative to industry peers, TriNet is selective about the risk profile of co-employment clients, given the firm operates an at-risk insurance model, and targets six core industry verticals deemed to have attractive employment growth and benefit attachment potential. Together, this strategy yields higher-value clients with lower insurance risk profiles at the expense of worksite employee growth relative to peers. Over the coming decade, we expect low-single-digit worksite employee growth, steady insurance attachment, and like-for-like price increases to drive mid-single-digit top-line growth.

While TriNet is a PEO provider, the firm has diversified its offering via acquisition of self-service HCM software provider Zenefits and R&D tax credit solution Clarus R+D. The acquisitions expand TriNet’s addressable market and cater to clients that outgrow the PEO model, and as a pipeline for future PEO clients, minimizing client attrition and customer-acquisition costs. We view TriNet’s product expansion as strategically sound and complementary to existing offerings; however, we expect elevated investment to expand and market these acquired businesses to weigh on profitability over the medium term.

Chart Industries

• Morningstar Price/Fair Value: 0.70
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Specialty Industrial Machinery

Next on our list of cheap industrials stocks, Chart Industries looks 30% undervalued compared with our $200.00 fair value estimate. The company provides a variety of cryogenic equipment for storage, distribution, and other processes within the industrial gas and liquefied natural gas industries.

Since 2020, Chart Industries has engaged in a successful strategic pivot toward expanding its specialty portfolio of products toward high-growth areas such as hydrogen and LNG. It made several attractive investments and joint ventures with key partners that enabled it to materially increase the amount of in-house content for larger projects, lowering costs and providing more control over delivery time frames. The greater degree of control over integrating its equipment and processes was also driving pricing power, lifting margins, and increasing customer switching costs. Three-year targets introduced at its 2022 analyst day included a 17%-plus CAGR on revenue, 25%-plus CAGR on EPS, and margin expansion of 300-600 basis points.

The Howden acquisition in 2023 has effectively doubled the firm’s size in a single transaction to over $1 billion in annual EBITDA. Less than a year after the deal closed, the sales synergies target of $150 million has already been exceeded at $530 million. Over $1 billion in incremental sales seems possible across the next few years. Cost synergies were also beat with $181 million to date versus the $175 million target in the first year, and Chart is targeting $250 million by 2026. Growth opportunities are across fast-growing spaces, including aerospace, cannabis, water treatment, and hydrogen. Investors were initially skeptical of the price paid, as the 12.9 times EBITDA multiple was more than twice the estimated 6-7 times EBITDA multiple that KPS (the seller) paid for Howden when it bought it from Colfax in 2019.

While Chart will be focused on integration, the industrial logic for the deal is sound. There are some positives Howden brings, such as opening up new geographic regions, particularly Asia, and expanding its European footprint. The regional bases are essential given the size of the equipment, making transportation and delivery time frames often dealbreakers when competing for projects, and they allow for high-margin aftermarket contracts. The significantly higher aftermarket revenue (45% at Howden versus 15% at Chart) provides a steady stream of earnings for what has historically been a lumpy order-driven business.

TransUnion

• Morningstar Price/Fair Value: 0.74
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 0.57%
• Industry: Consulting Services

Our list of the best industrials stocks to buy now closes with TransUnion, which looks 26% undervalued compared with our $100.00 fair value estimate. One of the three leading credit bureaus in the US, TransUnion earns the only wide moat rating on our list.

Along with Equifax and Experian, TransUnion is one of the Big Three consumer credit bureaus. Given the fixed costs inherent in a data-intensive business, TransUnion has been able to generate meaningful margin expansion over the past several years.

TransUnion’s core business is selling credit reports to US lenders, but as this business is the most mature, the company has sought other avenues of growth. One avenue has been expanding beyond financial institutions into verticals such as insurance, rental screening, collections, and other sectors. The emerging verticals business was 31% of the firm’s revenue in 2023, up from 21% of revenue in 2009. We believe this will help TransUnion weather a downturn as this revenue is diversified across industries and less macro-sensitive, though these items may be sensitive to coronavirus-related disruptions.

TransUnion has sought to replicate its US playbook internationally as well. The most intriguing opportunity is in India, which, given the country’s large population, could be an evergreen source of growth for the firm. TransUnion’s early entry has allowed it to build a commanding market share in this country. While it will probably take many years to fully realize this market’s potential, we think the company’s leading position provides meaningful long-term upside.

Since its public debut in 2015, TransUnion’s acquisition strategy has run the gamut from smaller bolt-on deals to larger acquisitions. Examples of bolt-on deals include Tru Optik and Signal Digital, which provide data and analytics for digital marketing. TransUnion’s larger deals include its $1.4 billion acquisition of UK credit bureau Callcredit in 2018, its $3.1 billion acquisition of Neustar in 2021, and its $638 million acquisition of Sontiq in 2021. We believe TransUnion’s acquisitions have generally made strategic sense and have not weakened the firm’s moat.

How to Find More of the Best Industrials Stocks to Buy

Investors who’d like to extend their search for top industrials stocks can do the following:

• Visit Morningstar’s industrials sector page.
• Use the Morningstar Investor screener to build a shortlist of industrial stocks to research and watch.
• Read the latest news about notable industrial companies from Morningstar’s Brian Bernard.