5 Investments in Capital Spending

11/19/2014 10:00 am EST

Focus: INDUSTRIALS

The tide may finally be turning for capital spending, notes Kathy Kristof. In Kiplinger's Personal Finance magazine, she looks at a variety of leading industrial stocks that are poised to benefit from this developing trend.

Steven Halpern:  Our special guest today is Kathy Kristof of Kiplinger's Personal Finance Magazine.  In your latest article in Kiplinger’s, you note that ever since the start of the economic recovery, forecasters have been waiting for corporate America to go on a spending spree, but instead of making capital investment, they found other uses for their cash.  Could you expand on that?

Kathy Kristof:  Yes. It’s, essentially, I think companies were afraid to start spending on upgrading their machinery, and their buildings, and everything else, because they really didn’t know whether this was going to last.

And so, instead of spending money building up inventories or whatever, they were spending money—basically getting their money back to shareholders—so they would buy back stock, they would buy other companies.  

They would increase their dividends, but they didn’t actually do that capital spending until the second quarter of this year, and then we saw a really big uptick in the amount of capital spending that’s going on, and a lot of analysts think this is going to be lasting.  

We’ll have at least the next year or two where corporations will reinvest in their own plants and equipment, new telecommunications, new technology, all the capital spending that has been delayed for quite some time.

Steven Halpern:  Okay, so let’s look at some of the stocks that may benefit from this trend, and one that you suggest that looks particularly attractive is the industrial giant Honeywell (HON).  What’s the attraction there?

Kathy Kristof:  Well, there are a lot of attractions with Honeywell, frankly. Honeywell is just a very, very well run company that managed to do well even when other industrial giants were stagnating.  

Honeywell was just steadily increasing in both revenue and profit and now they’re benefitting from the fact that the air fleet is aging—and they make jet components—and so, their engines and navigation systems are in high demand.  
They also help the industry better manage energy use, and now, as you see companies beginning to build commercial buildings, what they don’t want is old technology for their lighting and energy, and so, they’re buying Honeywell's energy saving equipment as well,.

So this industrial giant, like I said, did well even when the market was in recession and is likely to do really well now that companies are starting to spend again.

Steven Halpern: Now you see similar benefits for United Technologies (UTX). Can you tell us a little about that company?

Kathy Kristof:  Absolutely.  At United Technologies, they also work in the aircraft industry.  It has Pratt & Whitney Engines and it has an Otis Elevator division—works on elevators and escalators for commercial buildings—so they too are likely to benefit from this capital spending boom.

Steven Halpern:  Now, one company whose name might be less familiar to investors is Eaton (ETN).  Could you tell us what that company does and how it plays into this trend?

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Kathy Kristof:  Well, Eaton is very much like United Technologies.  They are, however, based outside of the US, really because they bought Cooper Industries a few years ago and so they have that very attractive Ireland tax rate.

Their biggest division right now is Cooper Industries, which does lighting and so they are likely to benefit as capital spending picks up with commercial building.

Steven Halpern: Now, another leading player in the capital spending cycle is General Electric (GE) and you noted that the company is going through some changes and was returning to its roots.  Can you explain that?

Kathy Kristof:  Well, I mean, GE, as you probably know, just diversified itself into a company that nobody really understood anymore.  It was such a conglomerate, that they didn’t really have a clear focus, and in the last couple of years, they have started to sell divisions.  

For instance, it sold off its 49% interest in NBC Universal, and this September, it agreed to sell its home appliance business to Electrolux, so both of those sales increased the amount of cash that the company has.

And now it’s just getting much more focused on its industrial roots, and so in a capital spending environment, analysts think that could be a very positive thing for GE.

Steven Halpern: Now, finally, let’s look at Trinity (TRN), which you note doesn’t manufacture industrial parts or building supplies, but will benefit from the need for these products to be transported.  Can you tell us a little more about that?

Kathy Kristof:  They make railcars and railcars are in huge demand right now, because once you start picking up with capital spending, you know somebody buys the washing machine, or somebody buys the components to make the big tractor or technology equipment.  

All those components need to get to the manufacturer and then they need to get to the final buyer of that product and what Trinity does is make railcars, and tankers, and inland barges to transport your goods to market, and so it is likely to have quite a surge as all of this capital spending gets underway and there is just more need to get those products to market.

Steven Halpern: You also note that Trinity is a play on the rising production of energy in this country. Could you tell us a little about that?

Kathy Kristof:  Yes. It has been benefiting over the past several years by the fracking boom because, essentially, when an oil company decides that they’re going to get product out of shale, what they have to do is break up that shale and then inject something into the soil in order to release the oil and gas, and that might be sand, it might be water, it might be a chemical compound that will break up that stone.

And again, that chemical compound has to get to the site of the well somehow. Trinity has been bringing it in and then they bring the oil and gas right back with other tankers.

Steven Halpern: Again, our guest today is Kathy Kristof, of Kiplinger’s Personal Finance Magazine.  Thank you so much for taking the time, today.

Kathy Kristof:  My pleasure.  Thanks a lot.

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