Industrial stocks with special appeal

Rising prices for steel, copper and other raw materials have weighed on profits at all American industrial companies in the past few years. Higher oil prices have also made it more expensive to operate factories and transport goods to customers.

The best way to profit from this uncertainty is to focus on high-quality stocks with unique products, high market shares and other factors that give them special appeal.

These four industrial stocks have struggled lately, but we see them as a “heads-you-win, tails-you-break-even” situation. That means they should thrive during cyclical peaks, and keep losses to a minimum in economic downturns.

GENUINE PARTS CO. $50 (New York symbol GPC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 170.5 million; Market cap: $8.5 billion; WSSF Rating: Average) makes and distributes automotive replacement parts to over 4,800 independent outlets in North America. The company also owns 1,100 stores that operate under the NAPA banner. It also distributes industrial parts, electrical supplies and office equipment.

The company earned $2.76 a share in 2006, up 10.4% from $2.50 a share in 2005. Revenue rose 7.1%, to $10.5 billion from $9.8 billion.

Auto parts account for roughly half of Genuine Parts’ sales. Higher gas prices forced car owners to drive less in 2006, which hurt demand for parts.

Consequently, sales at this division rose just 3% in 2006, compared to a 6% increase in 2005. But sales should hold up if the economy slows, since the company’s high-quality auto parts extend the life of most cars. A cost cutting plan should lift profits in 2007.

Genuine Parts will probably get most of its growth in the next year or two from its industrial and electrical parts operations. North American plant operators continue to upgrade their facilities with automated production equipment, which helps improve their productivity. That should spur steady demand for items such as hoses, belts, bearings, pumps, valves, and wires.

The company recently cut the threshold of stockholder approval that it needs to complete a takeover, from two-thirds to a simple majority. That should make it easier for an offer to succeed, and helped push the stock to a new peak of $51. Genuine Parts now trades at 16.4 times the $3.05 a share that it should earn this year. The $1.46 dividend yields 2.9%.

Genuine Parts is a buy.

SNAP-ON INC. $55 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 58.6 million; Market cap: $3.2 billion; WSSF Rating: Average) makes tools and diagnostic equipment for mechanics.

The company distributes its products directly to garages through a fleet of dealer vans. Similar to Tupperware’s model, this method keeps Snap-On’s distribution costs down. Mechanics prefer it since it cuts the time to buy new tools.

In November 2006, Snap-On paid $527 million for the Business Solutions division of ProQuest Co. This business helps car dealers electronically access information about auto parts, warranties and service bulletins. It also helps them manage their inventory and billing systems.

Snap-On earned $1.69 a share (total $100.1 million) in 2006. However, this figure includes a $0.40 a share charge related to the settlement of a lawsuit. In 2005, Snap-On earned $1.59 a share ($92.9 million). Revenue rose 8.7%, to $2.5 billion from $2.3 billion, including $20.4 million from the new acquisition.

It will probably take Snap-On several months to fully integrate the new operations. But this acquisition should enhance the long-term prospects of the company’s existing vehicle-diagnostic services.

Snap-On is still working on improving the profitability of its core tool business, including new marketing campaigns and better customer service. These moves should eventually cut its annual expenses by $13 million.

The stock now trades at 15.9 times its forecast 2007 profit of $3.02 a share. The $1.08 dividend is safe, and yields 2.3%.

Snap-On is a buy.

BRIGGS & STRATTON CORP. $29 (New York symbol BGG; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 49.4 million; Market cap: $1.4 billion; WSSF Rating: Above average) is the world’s largest maker of engines for lawnmowers. This business accounts for about two-thirds of its sales and profits.

The remainder comes from other home and garden products, including pressure washers and snow blowers. Demand for labor-saving devices like these should grow as the population ages. Severe storms like those that hit the Midwest last winter should also spur sales of Briggs’ power generators.

In its third fiscal quarter ended March 31, 2007, profits fell 87.1%, to $0.15 a share (total $7.8 million) from $1.16 a share ($60.0 million) a year earlier. However, the latest quarterly earnings included a $0.42 a share writedown. Sales fell 10.4%, to $717.1 million from $800.2 million. Large retailers such as Home Depot have cut pre-orders of generators since they built up their inventories last year. Unusually cold spring weather has also forced retailers to delay orders for seasonal goods like lawnmowers.

Due to slowing demand and rising raw material costs, Briggs is shifting more of its production to low-cost countries such as China. It’s also slowing engine production to keep inventories at normal levels, which hurts its overall efficiency. Briggs anticipates further writedowns of between $8 million and $10 million.

The weaker earnings have also forced Briggs to suspend stock repurchases. It spent $48.2 million on buybacks in the nine months ended March 31, 2007. However, Briggs generated cash flow of $1.18 a share in the nine-month period, so the $0.88 annual dividend (3.0%yield) seems safe for now.

Briggs will probably earn just $1.27 a share in fiscal 2007, and the stock trades at 22.8 times that figure. But profits should improve to $2.27 in 2008, which implies a more reasonable p/e of 12.8.

Briggs & Stratton is a buy.

MTS SYSTEMS CORP. $39 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 17.7 million; Market cap: $690.3 million; WSSF Rating: Average) makes equipment and software that carmakers and other manufacturers use to test the mechanical behavior of materials, machines and structures. That helps them cut costs, and comply with new emission and safety regulations.

In its second fiscal quarter ended March 31, 2007, MTS earned $0.56 a share, down 3.5% from $0.50 a year earlier. Revenue fell 1.1%, to $101.8 million from $102.9 million. Favorable foreign currency rates added $3.4 million to its latest quarterly sales.

MTS is doing a good job expanding its overseas operations, which now account for two-thirds of its revenue. That cuts its exposure to the struggling North American automotive industry.

The company is also moving away from custom-built products to standardized platforms. Using standard parts to build systems for a variety of uses will let MTS speed up production and cut its per-unit costs. Lower-priced products will also make its systems more affordable to smaller companies.

MTS spends about 5% of its revenue of $21.50 a share on research, which helps it dominate its niche market. It recently sold some of its investments in smaller firms, and will probably use the cash to expand research and marketing at its core businesses.

Long-term debt is just 5% of stockholders’ equity, and the company has $117.4 million or $6.64 a share in cash. That gives it plenty of room to make acquisitions or expand its current operations. The company may also use the cash for a special dividend; the regular dividend of $0.44 yields 1.1%.

MTS’s stock got as high as $48 in May 2006, but fell on concerns that weaker new car sales would cut demand from automakers. But growing sales to aerospace and other industrial firms should offset this. It now trades at 17.6 times the $2.21 a share that MTS will probably earn in fiscal 2007.

MTS Systems is a buy.