On Friday, Fed Chair Jay Powell gave a highly dovish speech at the Jackson Hole symposium, indicating the U.S. will see its first interest rate cuts since the onset of the COVID-19 pandemic in September.
The fastest-ever increase in the federal funds rate has helped to bring inflation down, but it has come at a cost. Cyclical sectors such as industrial equipment stocks have taken it on the chin.
Last week, industrial and automotive chip giant Texas Instruments noted its chip volumes were now actually below those seen in 2019, the date of the last big industrial downturn.But with the Federal Reserve seemingly set on a rate-cutting cycle, beaten-down industrial stocks could snap back with a vengeance.
Texas Instruments is actually near its all-time highs in anticipation, 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 a peer and competitor to Texas Instruments in some ways, but unlike TI, Microchip is nearly 20% below its all-time highs.
Microchip makes microcontrollers, analog chips, FPGAs (field programmable gate arrays) and other ancillary chip products that go into a wide variety of machines in diverse end markets. However, Microchip has the highest exposure to the industrial machine sector, at 43% of revenue, and the automotive sector at 18% of revenue, bringing its exposure to these markets to 61%.
Microchip had strong results through 2023 as a result of the supply shortages throughout the industrial space, but its top-line is now in a nasty correction. Last quarter, Microchip's revenue plunged almost 46% from the prior year quarter to $1.24 billion. And management guided for even lower revenue in the current quarter to $1.15 billion at the midpoint.
And yet, Microchip is maintaining healthy profitability even in the depths of an historic downturn. Last quarter, the company achieved a 31.5% adjusted (non-GAAP) operating margin, and guided for a 28.5% operating margin in what should be the trough of this cycle.
That's still a high level of profitability, allowing Microchip to raise its dividend by 10.7% relative to the prior year.
Microchip's management sounded optimistic on its earnings call, noting that orders for the future had been picking up off very low levels, and cancellations and pushouts continued to decline. Management was also encouraged by the strength in Microchip's design-in wins at customers, especially for its new 64-bit microcontroller product. That should provide more "juice" in the next upturn.
While cash-strapped customers are currently managing inventories at very low levels, lower interest rates could change the script. When it does, look for the 2.2%-yielding Microchip to see its earnings take off again.
Chart Industries
Industrial equipment stock Chart Industries(NYSE: GTLS) saw its stock cut in half in late 2022 after announcing the large acquisition of Howden at that time. And while the stock has made efforts at a recovery, recent earnings results and recession fears have taken the stock down to late 2022 lows again.
But that could be an opportunity. To be sure, management missed analyst expectations for revenue and earnings last quarter, and also took down its full-year guidance.
At first glance, that's not great. But the "miss" was largely due to the timing of larger project wins, which will be recognized in 2026 instead of 2025. Those orders should come through, as historically, Chart has had cancellation of orders below 1%.
The company may still be adjusting to the merged business with Howden. The merger turned Chart into a one-stop shop that's more of a strategic partner to global customers, as opposed to prior when the business was mainly an equipment vendor that recognized revenue close to the time of order. With its comprehensive and customized systems today, Chart now engages customers earlier in the project planning and construction process. So, this is extending the timeline for revenue recognition relative to orders.
Yet looking under the hood, Chart is still displaying impressive numbers. Orders last quarter grew 12.1% year-over-year, but this is without any "big LNG" orders. Big liquefied natural gas projects has traditionally been Chart's bread-and-butter, but the orders are large and lumpy.
If you strip out the prior-year LNG order, the rest of Chart's business saw orders surge by 40%. This was importantly led by growth in its newer "specialty" energy transition segment that has a long runway for growth, comprised of hydrogen, water purification, space exploration, nuclear power, clean mining, and other types of equipment. That segment saw orders grow a whopping 48.4%, and now is the largest segment of the business, at 36% of new orders. Management also pointed out a new opportunity in industrial chilling for artificial intelligence data centers, which has the potential to expand Chart's addressable market by $500 million in the next three years. Of note, Chart just guided for $4.53 billion in revenue for 2024.
Importantly, Chart is on track to exceed its 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 last quarter, respectively.
Those profits are now going to pay down Chart's debt, which is currently weighing on the stock. But as Chart continues to execute and pay down debt with the help of declining interest rates, the stock should eventually head higher again.
Image source: Getty Images.
IPG Photonics
It's hard 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 leader in fiber lasers, which are sophisticated lasers replacing older CO2-based technology and have made big inroads into industrial cutting and welding applications, while also seeing growing adoption in new use cases such as medical applications and 3D printing.
But in 2019, IPGP began seeing competition from lower-cost alternatives in China for cutting applications, which was a big market. Then in 2022, Russia's invasion of Ukraine cut IPG off from its manufacturing assets in Russia and Belarus. Of note, IPG's founders were of Russian descent, but founded the company in Massachusetts in the 1990s. As a vertically integrated company that makes all of its own components, that left management having to scramble to produce components in other geographies. That raised costs and lowered yields.
Now in 2024, the company is facing a nasty industrial slowdown, impacting the markets for some of IPG's biggest growth opportunities like electric vehicle battery welding.
Still, despite a 23% decline in revenue last quarter, IPG was still profitable. The company did guide to another down quarter in the current quarter, and about breakeven profits. However, once the industrial market recovers, IPG sees long-term growth in the double digits, and for its operating margins to reach between 25% and 30%.
Importantly, the company also has about $1.1 billion in cash on its balance sheet and no debt, totaling about one third of its entire market cap. Management has prudently been repurchasing its cheap shares as well, lowering its share count by over 5% since last year while maintaining a health cash balance.
IPG also just got a new CEO in Mark Gitin, a highly respected executive in the laser industry, who has lots of prior experience in the optical laser industry at 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 bet on as interest rates come down and the economy improves.
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Billy Duberstein and/or his clients have positions in Chart Industries, Microchip Technology, and Texas Instruments. The Motley Fool has positions in and recommends Chart Industries and Texas Instruments. The Motley Fool recommends Coherent and IPG Photonics. The Motley Fool has a disclosure policy.
