With the ongoing Covid-19 pandemic shutting down factories, businesses and schools around the world in an effort to curb the spread of the virus, market indexes are heading further into bear territory. On Monday morning, the Dow Jones Industrial Average was down more than 8%, while the S&P 500 Index declined 7.64% and the Nasdaq Composite fell 7.71% after the Federal Reserve cut interest rates to zero in order to help protect the economy.
Despite the uncertainty regarding the long-term impacts of the outbreak on markets and the economy, value investors may be looking for opportunities among companies in the industrial products space whose stocks have taken a beating as a result and are now trading below their Peter Lynch value.
A legendary investor who managed Fidelity’s Magellan Fund between 1977 and 1990, Lynch developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener also looked for companies with a business predictability rank of at least two out of five stars and a 10-year revenue per share growth rate of at least 6%.
As of March 16, companies that met these criteria were AZZ Inc. (NYSE:AZZ), Acuity Brands Inc. (NYSE:AYI), Mueller Industries Inc. (NYSE:MLI), Hillenbrand Inc. (NYSE:HI), Cummins Inc. (NYSE:CMI) and The Middleby Corp. (NASDAQ:MIDD).
AZZ
The Fort Worth, Texas-based company, which provides galvanizing and metal coating services, welding solutions, specialty electrical equipment and engineered services to a number of markets, has a $678.3 million market cap; its shares were trading around $27.65 on Monday with a price-earnings ratio of 10.02, a price-book ratio of 1.04 and a price-sales ratio of 0.66.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 9 out of 10 also supports this assessment since the price ratios are all near 10-year lows.
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GuruFocus rated AZZ’s financial strength 6 out of 10 on the back of sufficient interest coverage. The Altman Z-Score of 2.99, however, indicates the company is under some financial pressure as it has low debt ratios.
The company’s profitability scored an 8 out of 10 rating on the back of declining margins. Its returns, however, outperform over 60% of its competitors. AZZ also has a moderate Piotroski F-Score of 6, which implies operating conditions are stable. Due to consistent earnings and revenue growth, the company has a 3.5-star business predictability rank. According to GuruFocus, companies with this rank typically return an average of 9.3% per annum over a 10-year period.
Of the gurus invested in AZZ, Mario Gabelli (Trades, Portfolio) has the largest holding with 0.51% of outstanding shares. Hotchkis & Wiley, Barrow, Hanley, Mewhinney & Strauss and Jim Simons (Trades, Portfolio)’ Renaissance Technologies are also shareholders.
Acuity Brands
The lighting products manufacturer, which is headquartered in Atlanta, has a market cap of $3.46 billion; its shares were trading around $86.57 on Monday with a price-earnings ratio of 11.27, a price-book ratio of 1.74 and a price-sales ratio of 0.97, which GuruFocus noted are near multiyear lows.
According to the Peter Lynch chart and the GuruFocus valuation rank of 7 out of 10, the stock is undervalued.
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Acuity’s financial strength was rated 7 out of 10 by GuruFocus, driven by adequate interest coverage and a high Altman Z-Score of 4.46, which suggests stability even though assets are building up at a faster rate than revenue is growing.
The company’s profitability was rated 9 out of 10 on the back of strong margins and returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. As a result of recording a decline in revenue per share over the past 12 months, Acuity’s five-star business predictability rank is on watch. GuruFocus says companies with this rank return an average of 12.1% per year.
With a 4.62% stake, Al Gore (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors are Simons’ firm, Charles de Vaulx (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ronald Muhlenkamp (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Scott Black (Trades, Portfolio), Ray Dalio (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio) and Gabelli.
Mueller Industries
The Memphis, Tennessee-based company, which manufactures products for piping systems, climate control systems and various original equipment manufacturing applications, has a $1.27 billion market cap; its shares were trading around $22.79 on Monday with a price-earnings ratio of 12.32, a price-book ratio of 1.97 and a price-sales ratio of 0.52.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank also leans toward undervaluation since the price ratios are all at multiyear lows.
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GuruFocus rated Mueller’s financial strength 6 out of 10 on the back of sufficient interest coverage and a high Altman Z-Score of 4.7.
The company’s profitability scored a 7 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Although it has recorded a slowdown in revenue per share growth over the last 12 months, Mueller has a two-star business predictability rank. On average, GuruFocus noted companies with this rank typically record an annual return of 6%.
Gabelli has the largest stake in Mueller with 6.94% of its outstanding shares. Chuck Royce (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Simons’ firm, Barrow, Hanley, Mewhinney & Strauss, Greenblatt and Steven Cohen (Trades, Portfolio) are also shareholders.
Hillenbrand
Headquartered in Batesville, Indiana, the company manufactures engineered industrial equipment and also has a funeral services business that makes burial caskets and cremation urns. Its shares were trading around $16.91 on Monday with a market cap of $1.26 billion, a price-earnings ratio of 11.85, a price-book ratio of 1.12 and a price-sales ratio of 0.54.
The Peter Lynch chart suggests the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 also supports this assessment as the share price and price ratios are near multiyear lows.
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As a result of issuing $1.2 billion in new long-term debt over the past three years, Hillenbrand’s financial strength was rated 4 out of 10 by GuruFocus. It also has poor interest coverage. The low Altman Z-Score of 1.09 warns the company is in distress and could be at risk of going bankrupt since it has recorded an operating income loss over the past three years.
The company’s profitability fared better, scoring an 8 out of 10 rating on the back of operating margin expansion, strong returns that outperform over half of its industry peers and a moderate Piotroski F-Score of 6. Hillenbrand’s two-star business predictability rank is on watch even though it has recorded consistent earnings and revenue growth.
Of the gurus invested in Hillenbrand, Simons’ firm has the largest holding with 0.42% of its outstanding shares. Other top guru shareholders are Hotchkis & Wiley, Barrow, Hanley, Mewhinney & Strauss, Greenblatt and Chuck Royce (Trades, Portfolio).
Cummins
The manufacturer of engines, filtration and power generation products, which is based in Columbus, Indiana, has a $19.74 billion market cap; its shares were trading around $132.88 on Friday with a price-earnings ratio of 9.13, a price-book ratio of 2.63 and a price-sales ratio of 0.88, which GuruFocus noted are close to multiyear lows.
According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 8 out of 10 also supports this analysis.
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GuruFocus rated Cummins’ financial strength 7 out of 10. Although the company has issued $296 million in new long-term debt over the past three years, it is at a manageable level due to having comfortable interest coverage. The Altman Z-Score of 3.99 also indicates it is in good financial standing despite recording a slowdown in revenue per share growth over the past 12 months.
The company’s profitability scored a 9 out of 10 rating, driven by strong margins and returns that outperform a majority of competitors, a moderate Piotroski F-Score of 6 and a four-star business predictability rank. GuruFocus says companies with this rank post an average return of 9.8% per year.
The GuruFocus Industry Overview chart shows Cummins is the ninth-largest company in the Industrial Products sector.
With a 1.84% stake, Hotchkis & Wiley is the company’s largest guru shareholder. Other top guru investors are First Eagle Investment (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Pioneer, the Parnassus Endeavor Fund (Trades, Portfolio), Greenblatt, the Smead Value Fund (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jones, Robert Olstein (Trades, Portfolio), Simons’ firm, Royce, Grantham and Dalio.
Middleby
The Elgin, Illinois-based company, which manufactures foodservice equipment, has a market cap of $3.73 billion; its shares were trading around $65.15 on Monday with a price-earnings ratio of 10.5, a price-book ratio of 1.89 and a price-sales ratio of 1.24. GuruFocus noted these were all at multiyear lows.
Based on the Peter Lynch chart and the GuruFocus valuation rank of 8 out of 10, the stock appears to be undervalued.
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Middleby’s financial strength was rated 5 out of 10. Although the company has issued approximately $1.1 billion in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.6, however, suggests it is under some financial pressure as its assets are building up at a faster rate than revenue is growing.
The company’s profitability fared much better with a 9 out of 10 rating even though its margins are in decline. Middleby is supported by strong returns that outperform a majority of industry peers, a moderate Piotroski F-Score of 6 and steady earnings and revenue growth. It also has a four-star business predictability rank.
Andreas Halvorsen (Trades, Portfolio) is the company’s largest guru shareholder with a 3.31% stake. Other top guru investors are Simons’ firm, Olstein, Pioneer, Dalio, Lee Ainslie (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Gabelli, Jones and Cohen.
Disclosure: No positions.
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This article first appeared on GuruFocus.