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Investors interested in stocks from the Diversified Operations sector have probably already heard of Sumitomo Corp. (SSUMY) and ITT (ITT). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The proven Zacks Rank puts an emphasis on earnings estimates and estimate revisions, while our Style Scores work to identify stocks with specific traits.
Sumitomo Corp. and ITT are sporting Zacks Ranks of #2 (Buy) and #3 (Hold), respectively, right now. Investors should feel comfortable knowing that SSUMY likely has seen a stronger improvement to its earnings outlook than ITT has recently. But this is just one piece of the puzzle for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
SSUMY currently has a forward P/E ratio of 7.46, while ITT has a forward P/E of 23.82. We also note that SSUMY has a PEG ratio of 0.55. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. ITT currently has a PEG ratio of 1.81.
Another notable valuation metric for SSUMY is its P/B ratio of 0.86. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, ITT has a P/B of 4.42.
Based on these metrics and many more, SSUMY holds a Value grade of A, while ITT has a Value grade of D.
SSUMY is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that SSUMY is likely the superior value option right now.
Zacks Investment Research
Shares of 3M Company MMM are showing impressive gains of late, trading close to its 52-week high of $135.28. The stock closed at $134.61 (on Monday), just 0.5% below the highest point. In the past three months, the conglomerate giant’s shares have surged 33.5%, outpacing the Zacks Diversified Operations industry’s decline of 8.2% and the S&P 500’s growth of 2.2%. The company has also outperformed other industry players like Danaher Corporation DHR and ITT Inc. ITT, which have returned 7.2% and 3.6%, respectively, over the said time frame.
MMM Outperforms Industry, Sector & S&P 500
The stock is also trading above both its 50-day and 200-day moving averages, indicating solid upward momentum and price stability. This reflects a positive market sentiment and confidence in the company's financial health and long-term prospects.
3M Shares Trade Above 50-Day and 200-Day SMA
Factors Favoring the Company
3M has been benefiting from persistent strength in the Transportation and Electronics segment, driven by solid momentum in electronics, automotive and aerospace, commercial branding and transportation end markets. Continued channel inventory normalization, supported by strong growth in electronics demand, is aiding the segment’s performance.
Solid demand environment in the automotive electrification market and growth in auto OEM (original equipment manufacturer) build rates are expected to augur well for the Transportation and Electronics segment in the quarters ahead. Organic revenues grew 3.3% year over year in the second quarter of 2024.
The company’s Safety and Industrial segment has also been benefiting from a recovery in demand across most of the end markets. This improvement is primarily pronounced in businesses like industrial adhesives & tapes, personal safety and automotive aftermarket. The segment’s organic revenues improved 1.1% year over year in the second quarter of 2024, following declines in the previous two quarters.
3M has been undertaking structural reorganization actions to reduce operational costs and improve margins and cash flow in the long term. These include streamlining geographic footprint, simplifying supply chain and optimizing manufacturing roles to align with production volumes.
The company expects these actions to be completed by 2025 and yield annual pre-tax savings. In the second quarter of 2024, these restructuring actions, along with strong organic volume, raised 3M’s adjusted operating margin by 440 basis points year over year to 21.6%.
The company also remains committed to increasing shareholders’ value through dividend payouts and share repurchases. For instance, in the first six months of 2024, it paid dividends worth $1.2 billion and repurchased shares for $421 million. Exiting the second quarter, the company had $3.8 billion remaining under the share repurchase program. Also, it hiked its quarterly dividend by 1% in February 2024.
Better-Than-Industry Returns
MMM’s trailing 12-month return on equity (ROE) is indicative of its growth potential. ROE for the trailing 12 months is 112.92%, much higher than the industry’s 31.32%. This reflects the company’s efficient usage of shareholder funds.
Earnings Estimate Revision
Earnings estimates for 3M have moved north over the past 60 days, reflecting analysts’ optimism.
The Zacks Consensus Estimate for 2024 earnings is pegged at $7.22 per share, suggesting year-over-year growth of 0.7%. The consensus mark for 2025 earnings is pinned at $7.84 per share, indicating a year-over-year increase of 0.5%. As earnings estimates increase, the stock is likely to follow suit.
What’s Hurting the Stock?
Despite the positives, the company has been experiencing weakness in the consumer retail end markets, owing to a decrease in consumer discretionary spending. This is reflected in the Consumer segment’s revenues, which declined 2.4% in the second quarter.
There was a particular weakness in packaging and expression as well as home and auto care businesses. 3M expects consumer retail discretionary spending on hardline goods to remain muted for the rest of the year, which is likely to hurt its overall performance.
High debt levels have also been concerning. 3M exited the second quarter with a long-term debt of $11.8 billion, while its short-term borrowings and current portion of long-term debt totaled $1.3 billion.
Also, interest expenses in the second quarter remained high at $322 million, reflecting an increase of 123.6% on a year-over-year basis. It’s worth noting that 3M’s long-term debt-to-capital ratio is 74.7%, much higher than the industry’s 26.6%.
Stock Valuation
MMM’s lofty valuation remains a concern. The stock trades at a forward 12-month price-to-earnings (P/E) ratio of 17.57X, higher than the S&P 500’s average of 15.02X. This elevated valuation could make the stock vulnerable to further pullbacks if market sentiment sours. However, the stock is cheap compared with its peer, Honeywell International Inc. HON, which is trading at 18.83X.
Our Final Take
Given the promising long-term prospects and solid return on equity, maintaining a position in 3M appears prudent at present. This stance reflects confidence in MMM's growth trajectory and its potential to deliver sustained value to investors over time. 3M carries a Zacks Rank #3 (Hold) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
ITT Inc. ITT recently completed the acquisition of kSARIA Parent, Inc. (kSARIA). The transaction, valued at approximately $460 million, will be paid using a new term loan and the company’s current cash. This deal was announced in August 2024.
Based in Hudson, NH, kSARIA is engaged in designing and manufacturing high-quality cable management and protection solutions. The company also provides comprehensive turnkey installation services for fiber optic and electrical cable systems, specifically tailored for military and aerospace applications.
Acquisition Rationale of ITT
This acquisition is in sync with ITT’s policy of acquiring businesses to strengthen its business and expand its product portfolio and market share. The inclusion of kSARIA’s highly engineered cable assemblies for avionics, sensors, communications and networking applications will bolster its existing connector portfolio. By incorporating K-SARIA’s well-established client base, ITT will be able to penetrate and diversify its offerings in key markets.
kSARIA will be incorporated into the Connect & Control Technologies (CCT) segment.
Other Notable Acquisitions of ITT
The company acquired privately held Svanehøj Group A/S (Svanehøj) in January 2024 for approximately $395 million. The acquisition expanded its offerings, particularly in the marine pumps market. The acquisition of Micro-Mode Products, Inc. in May 2023 expanded ITT's product portfolio and customer base, specifically for long-term defense programs. It also grew its North America connectors platform, thus enhancing the CCT segment.
ITT acquired Clippard Instrument Laboratories’ product lines in August 2022. The latter’s stainless steel, brass and aluminum cylinders and volume tanks expanded its compact automation product range targeting the robotics, packaging and automation end markets. The acquisitions of Svanehøj and Micro-Mode contributed 4% to the company’s sales growth in second-quarter 2024.
ITT’s Zacks Rank and Price Performance
ITT currently carries a Zacks Rank #3 (Hold). In the past year, the company’s shares gained 37% compared with the industry’s 0.4% growth.
ITT is benefiting from strength across its segments and strong operational execution. Growth in pump projects in the energy market is aiding the Industrial Process segment. Increasing component and connector sales within the aerospace and defense markets are supporting the CCT segment. The company’s investments in innovation are likely to support continued growth.
Continued increases in raw material and labor costs are likely to hurt its profitability if demand weakens in any quarter. Increasing general and administrative expenses are worrisome as well. Also, given its international presence, foreign currency headwinds and exposure to troubled geographies are concerns.
Stocks to Consider
Some better-ranked companies are discussed below.
Federal Signal Corporation FSS currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Federal Signal delivered a trailing four-quarter average earnings surprise of 12.3%. In the past 60 days, the Zacks Consensus Estimate for FSS’ 2024 earnings has increased 5.2%.
Vector Group Ltd. VGR presently carries a Zacks Rank #2 (Buy). The company delivered a trailing four-quarter average earnings surprise of 15.4%.
In the past 60 days, the Zacks Consensus Estimate for VGR’s 2024 earnings has increased 5.2%.
Parker-Hannifin Corporation PH currently carries a Zacks Rank of 2. PH delivered a trailing four-quarter average earnings surprise of 2.6%.
In the past 60 days, the consensus estimate for Parker-Hannifin’s fiscal 2025 earnings has increased 1.2%.
Zacks Investment Research
Sept 12 (Reuters) - ITT Inc ITT.N:
ITT COMPLETES ACQUISITION OF KSARIA, LEADING MANUFACTURER OF MISSION-CRITICAL AEROSPACE AND DEFENSE CONNECTIVITY SOLUTIONS
Source text for Eikon: (Full Story)
Further company coverage: ITT.N
Investors with an interest in Diversified Operations stocks have likely encountered both Sumitomo Corp. and ITT . But which of these two stocks is more attractive to value investors? We'll need to take a closer look to find out.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The Zacks Rank favors stocks with strong earnings estimate revision trends, and our Style Scores highlight companies with specific traits.
Currently, Sumitomo Corp. has a Zacks Rank of #2 (Buy), while ITT has a Zacks Rank of #3 (Hold). The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that SSUMY has an improving earnings outlook. However, value investors will care about much more than just this.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
SSUMY currently has a forward P/E ratio of 8.03, while ITT has a forward P/E of 23.35. We also note that SSUMY has a PEG ratio of 0.47. This popular figure is similar to the widely-used P/E ratio, but the PEG ratio also considers a company's expected EPS growth rate. ITT currently has a PEG ratio of 1.77.
Another notable valuation metric for SSUMY is its P/B ratio of 0.90. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, ITT has a P/B of 4.33.
These are just a few of the metrics contributing to SSUMY's Value grade of A and ITT's Value grade of D.
SSUMY is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that SSUMY is likely the superior value option right now.
Zacks Investment Research
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