High-yielding Industrials Still Have Appeal

While the recent downturn has hurt most stocks, it’s been particularly hard on manufacturing companies such as these five. That’s because they serve narrow markets or cyclical industries. However, all of them are doing a good job controlling costs, which will help them stay profitable until the economy improves. That should also let them keep paying above-average dividends.

QUAKER CHEMICAL CORP. $17 (New York symbol KWR; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.6 million; Market cap: $180.2 million; WSSF Rating: Average) makes lubricants and specialty chemicals that protect industrial machinery from corrosion.

The company recently raised its quarterly dividend for the first time since 2004, from $0.215 a share to $0.23. The new annual rate of $0.92 yields 5.4%.

Quaker uses oil to make its products, so it gains from the recent drop in prices. However, the company’s prominent share of the narrow market it operates in makes it easier for it to pass along higher raw material costs to its customers. That should also help Quaker maintain the current dividend rate.

In the three months ended June 30, 2008, revenue rose 15.0%, to a record $158.2 million from $137.6 million a year earlier. That’s partly due to a 5% price increase. Overseas markets supply over 50% of Quaker’s total revenue, so it also benefited from a weaker U.S. dollar.

Earnings per share rose 29.3%, to $0.53 from $0.41. However, the latest quarterly earnings excluded a special charge of $0.12 a share related to the hiring of a new chief executive officer. Quaker expects this transition will result in further charges totaling $0.25 a share over the next three years.

Quaker’s long-term debt of $87.4 million is a high 49% of its market cap. However, that’s reasonable in light of its market share and rising overseas sales. It also holds cash of $22.2 million or $2.09 a share.

Quaker will probably earn $1.82 a share in 2008, and the stock trades at 9.3 times that estimate. It’s also attractive at just 0.3 times its sales of $57.40 a share.

Quaker Chemical is a buy.

BRIGGS & STRATTON CORP. $14 (New York symbol BGG; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 49.8 million; Market cap: $697.2 million; WSSF Rating: Above average) is the world’s largest maker of engines for lawnmowers. It also makes other home and garden equipment such as pressure washers and snow blowers.

Rising costs for gasoline and food have cut consumer spending on discretionary items such as gardening equipment. A colder-than-usual spring season also hurt sales. However, the company is doing a good job controlling costs as it cuts production to meet demand. As well, Hurricanes Gustav and Ike prompted increased sales of portable generators. Briggs should be able to keep paying its $0.88 dividend, which now yields 6.3%.

Meanwhile, Briggs reported a loss for its first fiscal year ended September 30, 2008 of $0.04 a share (total $2.0 million). That’s a big improvement over the $0.42 a share ($20.8 million) it lost in the year-earlier quarter. Due to the seasonal nature of its lawnmower and gardening equipment businesses, Briggs usually loses money in its first quarter.

Sales rose 24.8%, to $458.2 million from $367.1 million, as lawnmower makers replenished their falling inventories of small engines. As well, demand for snow blowers was strong as retailers built up their inventories before winter. Briggs also recently acquired Australian lawnmower maker Victa Lawncare Pty. for $24.8 million. Victa contributed $13.2 million to Briggs’ sales in the most recent quarter.

Briggs’ long-term debt of $266.6 million is a high 4.6 times its fiscal 2008 cash flow. However, the company’s cost cuts should give it more cash for debt repayments as the economy improves. It also holds cash of $32.6 million or $0.66 a share.

The stock now trades at 16.7 times its projected fiscal 2009 earnings of $0.84 a share. That’s reasonable in light of Briggs’ high market share.

Briggs & Stratton is a buy.

GENUINE PARTS CO. $35 (New York symbol GPC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 161.8 million; Market cap: $5.7 billion; WSSF Rating: Average) distributes automotive replacement parts to over 4,800 independent outlets in North America. It also operates over 1,100 auto parts stores under the NAPA banner. As well, the company distributes industrial parts, office furniture and electrical equipment.

Genuine Parts has increased its dividend for 52 consecutive years. The current rate of $1.56 a share yields 4.5%.

The stock has moved down from $50 in November, 2007. That’s partly due to its exposure to the slowing automotive industry, which accounts for half of its revenue and earnings. However, a drop in new car sales is good news for Genuine Parts. As more drivers choose to maintain their current vehicles instead of buying new ones, demand for replacement parts is likely to rise.

In the third quarter of 2008, Genuine Parts earned $131.0 million, up 1.9% from $128.6 million a year earlier. Earnings per share rose 6.6%, to $0.81 from $0.76, on fewer shares outstanding. Revenue grew 3.0%, to $2.9 billion from $2.8 billion.

Genuine Parts’ strong balance sheet will also help it overcome this downturn. Long-term debt of $250 million is just 4% of its market cap. It also holds cash of $124.4 million or $0.77 a share.

The company should earn $3.10 a share in 2008, and the stock trades at just 11.3 times that figure.

Genuine Parts is a buy.

SNAP-ON INC. $37 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 57.4 million; Market cap: $2.1 billion; WSSF Rating: Average) makes hand and power tools for auto mechanics.

Like Genuine Parts, Snap-On should benefit from slowing new car sales and rising demand for repair and maintenance services. It also sells its products through a fleet of franchised vans that visit garages. This way, dealers can form long-term relationships with their customers. That gives it an advantage over competitors, and should help it keep paying its $1.20 dividend (3.2% yield).

Snap-On is also expanding overseas, which cuts its exposure to a slowing North American economy. It recently paid $15.1 million for 60% of a Chinese company that makes hand tools. Foreign operations now supply roughly 40% of Snap-On’s revenue.

In the three months ended September 27, 2008, Snap-On’s earnings rose 34.3%, to $0.94 a share (total $54.6 million) from $0.70 a share ($41.1 million) a year earlier. That’s partly due to savings from an ongoing plan to improve efficiency. Revenue rose 2.5%, to $697.8 million from $680.7 million. About 70% of the higher revenue was due to favorable foreign currency exchange rates.

Snap-On’s long-term debt of $500.6 million is just 40% more than one year’s cash flow, so it has plenty of flexibility to make more acquisitions or expand its current operations. The company also held cash of $118.3 million or about $2.00 a share.

The stock now trades at 9.1 times its likely 2008 earnings of $4.07 a share. Snap-On should continue to profit from the increasing complexity of new cars, and growing car ownership in developing countries.

Snap-On is a buy.

THE STANLEY WORKS $33 (New York symbol SWK; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 78.6 million; Market cap: $2.6 billion; WSSF Rating: Average) makes a wide variety of hand and power tools for consumer and industrial users.

The tool business exposes Stanley to the cyclical home construction, renovation and automotive repair industries. However, the company is successfully expanding its building security operations, which now account for 35% of its revenue and 45% of earnings. Steady revenue streams from the security business should let Stanley keep paying its $1.28 dividend, which yields 3.9%.

In July, 2008, Stanley acquired Canadian-based Xmark Corp. for $48 million. Xmark makes radio frequency tags that help locate people and property. The company also paid $278 million for Sonitrol Corp., which provides security monitoring services to businesses in North America. These purchases should add $140 million to Stanley’s annual revenue.

Stanley can comfortably afford these purchases. Long-term debt of $1.2 billion is 46% of its market cap. It also held cash of $299.3 million or $3.80 a share. As well, it recently sold its laser leveling business for $205 million. The company plans to sell several other smaller businesses by the end of 2008.

In the third quarter of 2008, Stanley’s earnings fell 6.7%, to $0.98 a share (total $78.4 million) from $1.05 a share ($88.5 million) a year earlier. However, sales grew 1.2%, to $1.12 billion from $1.11 billion.

Stanley should earn $3.79 in 2008, and the stock trades at 8.7 times that figure.

Stanley Works is a buy.