5 Manufacturers Set For A Fall

Published in Investing on 2 August 2012

If history repeats itself, these shares could soon be priced at bargain levels.

Remember the dark days of late 2008 and early 2009? Like many investors, I certainly do. And in equal measure, my memories are of unremitting gloom and incredible bargains.

What was instructive was where those bargains lay. Banks and finance companies? Okay, that's easy to understand. Housebuilders and construction companies? Ditto.

Manufacturers? That depends. For as I wrote several times during those months, perfectly good shares had been driven down by market sentiment that seemed out of tune with the underlying realities.

So the news last night that manufacturing industry in most of the world is in a slump has set my antennae twitching. And if history repeats itself, I plan on being in a position to make a better fist of it than in 2009, when a lot of reserve capital was absorbed by two rights issues elsewhere in my portfolio.

Gloom

Let's start with the facts. And simply put, in the UK, the eurozone, China and the United States, the figures were awful.

  • Manufacturing in the UK and Europe contracted at its fastest for three years.
  • Manufacturing in the United States contracted for the first time in the years.
  • Manufacturing growth in China recorded its slowest increase in eight months.

Howard Archer, chief UK economist at analysts IHS Global Insight, was as usual to the point:

"Absolutely dreadful. The July purchasing managers' survey is massively disappointing and worrying, indicating that the manufacturing sector's problems are currently running deep. Rather than pick up from June when manufacturing activity was hit by the two days public holiday, the purchasing managers' survey was at its weakest level for 38 months in July and pointed to appreciable contraction."

Bargains

Now, to be clear, I'm not expecting headlines saying 'Great Depression' any day now. But the UK economy is in undeniable recession, so is Europe, and China may well follow. The position in the United States is admittedly murkier.

That said, I doubt that we'll see 'Depression'-based pricing: a 2009-style sale surely can't come around so quickly. But we could well see recession-based pricing in the manufacturing sector, which should be enough to throw up some juicy bargains.

And let's remind ourselves how alluring that can be. GKN (LSE: GKN), for instance, slumped from 269p in July 2007 to 46p in March 2009. Smiths Group (LSE: SMIN) fell from 1,650p in July 2007 to 702p in October 2008. Weir Group (LSE: WEIR) fell from 778p to 271p. Heck, even GlaxoSmithKline (LSE: GSK) -- which is a defensive healthcare and consumer products manufacturer, for heaven's sake -- fell from 1310p to 1068p.

Five to watch

So here are five solid FTSE 100 (UKX) manufacturing businesses to keep your eye on in the months ahead.

Trying to predict a likely entry price is pretty pointless, so your strategy will have to be 'buy on weakness', as the professionals put it.

CompanySector(s)Today's priceP/EYield
GKN (LSE: GKN)Automotive and aerospace208p9.53.1%
IMI (LSE: IMI)Fluid dispense812p13.13.7%
Reckitt Benckiser (LSE: RB)Cleaning and pharma products equipment3,562p14.93.5%
Meggitt (LSE: MGGT)Aerospace388p16.32.7%
Tate & Lyle (LSE: TATE)Food ingredients667p10.53.7%

Source: Google Finance

In my book, each of these businesses is in a strong competitive position, has good management, and no obvious nasties lurking in the woodwork.

Equally undeniably, a recession will see their share prices hammered, providing investors with an entry point. Better still, three of them have yields sufficiently high as to put them on the radar screen of income investors.

Choice picks

Now, manufacturers aren't popular with some investors: 'industry', they fret, is somehow boring and unrewarding.

So chew over this for a moment: manufacturing companies comprise six of the eight largest holdings of über-investor Neil Woodford, who looks after two of the country's largest investment funds and runs more money for private investors than any other City manager.

A free special report from The Motley Fool -- "8 Shares Held By Britain's Super Investor" -- profiles all eight of these largest holdings, including the six manufacturers, which include one manufacturing business that is very similar to one of the five listed above.

Might he buy this share if its price gets beaten down? He certainly has form: on a dividend re‑invested basis over the 15 years to 31 December 2011, Mr Woodford has delivered a spanking 347% return, versus the FTSE All‑Share's distinctly more modest 42% performance.

So why not download the report? It's free, so what have you got to lose?

Want to learn more about shares, but not sure where to start? Download our latest guide -- "What Every New Investor Needs To Know" -- it's free. The Motley Fool is helping Britain invest. Better.

More investing ideas from Malcolm Wheatley:

> Malcolm holds shares in GKN, GlaxoSmithKline, and Reckitt Benckiser, but not in any other company mentioned here.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

apprenticeDRL 02 Aug 2012 , 4:47pm

Can I also suggest Cobham (COB) for this list.

ProfessorMarcus 02 Aug 2012 , 5:16pm

BAe Systems (BA.)?

snoekie 02 Aug 2012 , 5:30pm

Morgan Crucible, fell to £1 from over £3

MDW1954 02 Aug 2012 , 5:50pm

Hello ProfessorMarcus and apprenticeDRL,

I have to confess that BAE was originally on the list, but replaced by another share with a bit more diversification. And Cobham, yes, is another very worthy contender.

Malcolm (author)

alarmbells 02 Aug 2012 , 6:22pm

I would only buy a nasty engineer on a yield of over 5%. I remember in the last bit of market folly picking up IMI for (IIRC) a 6% yield. Tasty!

These prices are way too high for cyclicals facing an economic Tssunami. Indeed, i'd go further - FTSE100 on 3.6% to 3.7% is not a compelling valuation either. I'd like to see FTSE 100 at $5 before dipping in and i'd like to see these chappies on 5% or more before buying.

You can easily get hit for 6 by a cyclical's share price. You want to paid for taking that risk. 3.7% is way to low a dividend for that risk. And as for GKN and Meggit - forgeddit!

MDW1954 02 Aug 2012 , 6:54pm

Alarmbells,

You may have missed the point of the article. I'm not saying buy now (although IMI in particular has fallen), but buy should they fall much lower. The table is there to provide a reference point to benchmark those falls against.

Malcolm (author)

wordofandy 03 Aug 2012 , 9:42am

a recession will see their share prices hammered, providing investors with an entry point.

No! Claiming a strong lead correlation between economic stats and stock prices is just plain wrong. The more statistically likely relation (although still nothing to bet cash on), is that the stock market itself is a leading indicator of economic performance, not vice versa (i.e. that if there was any relation, it would be that the current stock market prices are reflecting future economic performance).

Look at some numbers and pictures here for example:
http://us.bnymellonam.com/core/library/documents/knowledge/AlphaTrends/Stock_Markets_vs_GDP.pdf

Although I do permit that it is not too dangerous to make the claim since the message of the article is pretty much "here are some stocks, if they get cheaper (due to X [where X could be anything]), then they will be a better bargain", so the validity of the correlation is redundant due to the flexibility of X.

@alarmbells, are you sure that they are all cyclicals? I for one only buy soap in times of opulence, but I hear Joe Public is a pretty regular purchaser.

alarmbells 03 Aug 2012 , 12:01pm

Alarmbells,

You may have missed the point of the article


Nope, merely stated when I, for one, would become interested in cyclical companies - putting a price on my entry ppoint IOW.

@alarmbells, are you sure that they are all cyclicals?

RB isn't a cyclical. My comments were for the cyclical engineers, really.

I'd buy a good non-cyclical on a yield of about 4%. BAT, for eg are at least 10% away from being interesting.

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