These two small-cap Manufacturing & Industry picks are riskier than most of the large-cap selections in that sector we cover in Wall Street Stock Forecaster. However, they are both market leaders that are investing in new products and making acquisitions.
TENNANT CO. (New York symbol TNC; www.tennantco.com) makes industrial floor-cleaning equipment, including scrubbers, sweepers and polishers. It also manufactures cleaning gear for garages, stadiums, parking lots and city streets.
The company continues to benefit from strong demand for products featuring its ec-H20 technology, which uses electricity to make tap water act like a detergent.
In 2013, Tennant’s sales rose 1.8%, to $752.0 million from $739.0 million in 2012. Overseas markets supply a third of the company’s sales. If you disregard the negative impact of currency exchange rates, sales rose 2.8%.
Earnings gained 7.3%, to $42.6 million from $39.7 million. Per-share earnings rose 8.7%, to $2.26 from $2.08, on fewer shares outstanding.
The company spends just 4% of its sales on research, but it continues to do a good job of developing energy-efficient equipment that uses fewer chemicals. It launched 20 new products in 2013 and aims to introduce 63 more by 2016. That should help it reach its goal of increasing its annual sales to $1 billion by 2017.
At the end of 2013, it held cash of $81.0 million, or $4.38 a share, and its long-term debt was $28.0 million.
The $0.72 dividend yields 1.1%.
Investing in stocks: With 60% of sales overseas, Quaker feels the effects of a higher U.S. dollar
QUAKER CHEMICAL CORP. (New York symbol KWR; www.quakerchem.com) makes lubricants and chemicals that keep mechanical parts from rusting.
Quaker needs oil to make its products, and rising crude prices have slowed its earnings growth. As well, it gets 60% of its sales from overseas, and the higher U.S. dollar has also weighed on its results.
The company has raised its prices and cut its costs in response. It has also acquired smaller, related firms, which has helped increase its sales and earnings.
In 2013, Quaker’s earnings rose 18.8%, to $56.3 million from $47.7 million in 2012. Per-share earnings gained 17.6%, to $4.27 from $3.63, on more shares outstanding. Without unusual items, earnings per share rose 10.0%, to $3.84 from $3.49.
Sales gained 3.0%, to $729.4 million from $708.2 million. Higher sales in Asia (up 7.9%) and Europe (up 7.4%) offset declines in North America (down 0.6%) and South America (down 3.8%).
Quaker is using its improving earnings to pay down debt: it ended 2013 with long-term debt of $17.3 million, down from $30.0 million a year earlier. It also held cash of $68.5 million, or $5.19 a share. That gives it plenty of room to make more acquisitions, particularly in developing countries.
The company’s $1.00 dividend yields 1.3%.
In the latest edition of Wall Street Stock Forecaster, we examine whether Tennant’s earnings growth will be sufficient to let the company maintain its investment in new products. We also look at Quaker’s profit outlook and its growth prospects as a cyclical company that relies on oil as its chief material. We conclude with our clear buy-hold-sell advice on these two stocks.
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Manufacturing is making up a steadily smaller share of North America’s economic activity. Does this make you wary of these stocks, or do you believe the companies that remain will be that much stronger? When you invest in manufacturing stocks, do you rely on long-established companies? Or do you look for smaller firms that may have big growth ahead of them?
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