According to its latest 13F filing with the Securities and Exchange Commission, the Bill & Melinda Gates Foundation Trust holds significant positions in caterpillar (NYSE: CAT), Ecolab (NYSE: ECL), and UPS (NYSE: UPS). Considering that Warren Buffett is a trustee of the foundation, it is definitely worth it for retail investors to look at the trust portfolio and consider building on it. Therefore, let’s take a look at these three industrial stocks to see if they are good stocks to buy today.
This massive manufacturer of construction, mining, transportation and power equipment is definitely in recovery mode in 2021. Its retail sales growth is on the rise and dealer inventory is shrinking. $ 1.1 billion in the fourth quarter was much better than management expectations for a decline of $ 700 million. (Caterpillar sells through independent dealers, so when these dealers’ inventory drops dramatically, it means they’ll soon start ordering more equipment again.)
Plus, when Caterpillar sales trends bottom out and then start to rise, it’s usually a good time to invest in the business. Add the potential for a major federal infrastructure bill and a cyclical recovery in mining equipment sales, and it’s clear why some investors are expecting good things from Caterpillar.
Indeed, everything points to the stock having a good 2021 – it’s already up almost 12% year-to-date as of this writing. If I were a punter I would say Caterpillar stock could have a great year, but as a invest man, I think there is some need to be careful here as well.
For starters, the market appears to have already integrated a cyclical recovery, but it is far from clear whether it will be as strong as the rebounds of previous cycles. For example, coal mining (a struggling industry) has always been a big buyer of mining machinery, and in the oil and gas segment budgets remain tight. Meanwhile, the last Architecture billing index (ABI) from the American Institute of Architects shows that billing for architectural firms continued to decline month after month in December. For reference, ABI as an indicator tends to drive non-residential construction activity for about a year.
All in all, there are good reasons to suspect that the Caterpillar recovery might not be enough as strong as investors seem to appreciate.
The food safety, hygiene and drinking water company is a bit of an odd business in the context of the COVID-19 pandemic. On the one hand, it is one of the leaders in keeping the environment healthy and clean. On the flip side, its significant exposure to the accommodation, food and hospitality sectors means that many of its customers continue to suffer as social distancing efforts remain vital.
Additionally, if one of the outcomes of the pandemic is some sort of structural shift in consumer behavior towards less dining and travel, then Ecolab could lose business in the longer term.
These factors can be seen by looking at the sales trends by segment.
Q4 2020 adjusted sales change (YOY)
Q3 2020 adjusted sales change (YOY)
Water, food and beverage, downstream and paper
Institutional and global specialty
Includes accommodation, restaurants and hospitality
Global health and life sciences
Health, life sciences
Pest control, textile care
N / A
Given uncertainty about the kind of economic recovery that might be on the horizon, Ecolab management declined to provide earnings guidance when releasing its fourth quarter report, but analysts at Wall Street adjusted their forecast for diluted EPS. The consensus now is that it will drop from $ 4.02 in 2020 to $ 5.33 in 2021. As the current stock price, Ecolab is trading at almost 40 times expected earnings, which I think is pretty rich for a company with some uncertainty about its prospects.
Interestingly, the Gates Foundation not only has a significant stake in UPS, but it also occupies a significant position in its main rival, FedEx. The two obviously have a lot in common, including the fact that they are both wondering how to handle the pressures on margins brought on by growing e-commerce shipping volumes. The trend of online commerce is both an opportunity and a challenge for them.
That said, Carol Tome, CEO of UPS, made it clear that her main goal is to sweat more of her company’s assets in order to improve margin performance. UPS has been shown to be making progress on this front already. For example, revenue growth has been stronger than volume growth over the past two quarters in the key US domestic package segment.
Further margin improvements seem achievable – there is a lot of e-commerce volume around, and the will is there. And with the stock price below 18 times the estimated free cash flow for 2021, UPS looks like good value.
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