The Industrials sector of the market experienced a generally solid first half reporting season in February, with most companies delivering results either broadly in line or above our expectations.
There was of course the odd disappointment but overall it showed that economic conditions in Australia and the US were tracking along nicely.
The environment in Europe looks to also be improving with global companies such as Amcor and Brambles both reporting modest underlying growth in that region. Emerging markets on the other hand remain mixed, especially in Latin America while in parts of Asia growth is also below trend.
Against this backdrop we favour companies with exposure to Australia and the US. We tend to like high quality businesses with strong management teams and two standouts from the recent reporting season are Orora Limited and Reliance Worldwide Corporation.
While both have relatively defensive earnings, we also see good growth prospects over the next few years, especially in the US where both companies have meaningful exposures.
Orora remains our top pick in the industrials sector and we believe investors can buy the stock now.
We like Reliance as a long-term investment but the valuation remains a stretch for us at the moment so it’s one to keep on the watchlist for any future share price weakness.
Another company we favour is PWR Holdings which easily passes the quality test and will also benefit from a lower Australian dollar against the Great British pound, which continues to recover post the Brexit announcement back in 2016.
Growth in infrastructure remains a key theme that will benefit a number of construction and engineering companies.
To support a growing population and ease congestion, both Australia and the US have grand plans to upgrade or build new roads, railways, bridges, tunnels, etc.
The desire to improve the infrastructure network will likely persist for some time. Stocks with exposure to this thematic include construction materials companies such as Wagners, Boral and Adelaide Brighton as well as engineers and contractors such as Cimic Group and Downer EDI.
- Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410