Deep Dive: How to avoid the next GE — and find industrial winners of the future

General Electric Co.’s decline has been dramatic. The industrial conglomerate was co-founded by inventor Thomas Edison and banker J.P. Morgan, among others, and its stock has been on the Dow Jones Industrial Index since 1896, the longest of any company.

But 2017 has been painful, perhaps even more so than during the financial meltdown almost a decade ago.

GE GE, -5.89%  announced a 50% decrease to its dividend Monday, and Chief Executive Officer John Flannery has cut in half estimated 2018 adjusted earnings per share.

The company’s stock is down 40% this year.

So you might be asking yourself, how do I avoid the next GE — and how do I find an industrial company that can thrive amid a tectonic shift in technology?

A review of company financial reports and long-term metrics raises red flags and highlights opportunities for investors.

Read: There’s still some good at GE — but much more bad and ugly

Sales

How could an investor have known there were major problems at GE? If we were to look only at sales over the past year, the story wasn’t inspiring, but it didn’t look like the end of the world either. Here are the 30 stocks in the Dow Jones Industrial average DJIA, -0.13% ranked by how much their sales for the past 12 reported months have increased from the year-earlier 12-month period:

Company Ticker Sales – past 12 months ($mil) Sales – year-earlier 12-month period ($mil) Change in sales Gross margin – past 12 months Gross margin – year-earlier 12-month period Total return – 12 months
Visa Inc. Class A V, +0.52% $18,358 $15,082 22% 79.28% 78.35% 38%
DowDuPont Inc. DWDP, -2.15% $55,312 $46,579 19% 20.58% 23.21% 33%
Chevron Corp. CVX, -0.26% $128,428 $108,281 19% 13.97% 6.87% 13%
Goldman Sachs Group Inc. GS, -1.26% $40,417 $35,317 14% N/A N/A 21%
J.P. Morgan Chase & Co. JPM, -0.60% $112,614 $98,873 14% N/A N/A 30%
Exxon Mobil Corp. XOM, -0.78% $222,508 $196,866 13% 21.91% 20.49% -1%
UnitedHealth Group Inc. UNH, -0.45% $196,621 $180,947 9% N/A N/A 47%
Microsoft Corp. MSFT, +0.14% $93,444 $86,278 8% 62.91% 61.27% 46%
Intel Corp. INTC, +0.24% $62,082 $57,927 7% 61.70% 61.16% 36%
Apple Inc. AAPL, -1.51% $228,577 $214,226 7% 36.93% 38.61% 65%
Home Depot Inc. HD, +1.64% $97,356 $92,033 6% 32.29% 32.29% 30%
Travelers Cos. TRV, +0.41% $28,659 $27,161 6% N/A N/A 27%
Caterpillar Inc. CAT, +0.74% $42,140 $39,993 5% 28.34% 26.48% 50%
Johnson & Johnson JNJ, -0.19% $74,413 $71,655 4% 68.54% 69.63% 20%
Nike Inc. Class B NKE, +0.13% $34,294 $33,043 4% 43.44% 44.60% 13%
United Technologies Corp. UTX, +1.48% $58,802 $57,024 3% 27.11% 27.56% 12%
3M Co. MMM, +0.49% $30,996 $30,078 3% 49.72% 49.43% 34%
Wal-Mart Stores Inc. WMT, +0.11% $489,926 $483,298 1% 25.61% 25.41% 31%
General Electric Co. GE, -5.89% $120,343 $119,974 0% 26.78% 28.66% -30%
Merk & Co. MRK, -0.20% $39,648 $39,655 0% 68.58% 64.91% -12%
Procter & Gamble Co. PG, -0.15% $65,193 $65,290 0% 50.51% 50.41% 10%
Walt Disney Co. DIS, -1.50% $54,975 $55,368 -1% 39.53% 41.38% 12%
Pfizer Inc. PFE, +0.23% $52,470 $53,244 -1% 70.00% 69.64% 9%
International Business Machines Corp. IBM, +0.33% $78,367 $80,207 -2% 45.43% 47.68% -3%
Cisco Systems Inc. CSCO, +0.27% $48,005 $49,247 -3% 64.00% 63.45% 14%
American Express Co. AXP, -0.15% $34,686 $35,644 -3% 72.89% 76.12% 36%
Verizon Communications Inc. VZ, -1.18% $124,419 $127,894 -3% 45.97% 47.03% 1%
Boeing Co. BA, -0.25% $91,310 $94,858 -4% 17.75% 13.59% 82%
McDonald’s Corp. MCD, +0.44% $23,509 $24,934 -6% 44.72% 40.72% 49%
Coca-Cola Co. KO, +1.52% $36,985 $42,069 -12% 61.13% 59.98% 18%
Source: FactSet

GE’s sales were up slightly, and the gross margin was down significantly — not a good sign.

Among nine companies suffering sales declines of at least 1%, five improved their gross margins.

GE was, by far, the worst stock performer among the Dow 30 over the past 12 months. That is not only because of the disastrous information that has come to light recently. It also reflects investors’ loss of patience after years of disappointing financial performance under Jeff Immelt, who was replaced in August.

ROIC

Return on invested capital (ROIC), a company’s earnings divided by total equity and long-term debt, is a measure of how effective a company’s management is at deploying capital, and comparisons are most meaningful within industries. Banks, for example, tend to have lower ROIC than industrial companies, because they are highly leveraged.

Here are the Dow 30 again, ranked by five-year average ROIC (that is, the annualized average for the past 20 quarters), along with 10-year average ROIC:

Company Ticker Average ROIC – 5 years Average ROIC – 10 years Total return – 5 years Total return – 10 years
Boeing Co. BA, -0.25% 33.5% 27.7% 307% 265%
International Business Machines Corp. IBM, +0.33% 29.6% 30.8% -8% 79%
Apple Inc. AAPL, -1.51%   28.3% 30.9% 148% 699%
Nike Inc. Class B NKE, +0.13% 24.6% 22.7% 160% 301%
Home Depot Inc. HD, +1.64% 23.6% 17.4% 190% 638%
3M Co. MMM, +0.49% 22.6% 22.1% 190% 265%
McDonald’s Corp. MCD, +0.44% 18.2% 18.5% 132% 298%
Microsoft Corp, MSFT, +0.14% 17.5% 28.4% 252% 211%
Johnson & Johnson JNJ, -0.19% 17.3% 18.9% 132% 182%
Visa Inc. Class A V, +0.52% 16.7% 14.0% 225% N/A
Intel Corp. INTC, +0.24% 15.0% 16.6% 165% 141%
Coca-Cola Co. KO, +1.52% 14.5% 19.8% 51% 107%
Walt Disney Co. DIS, -1.50% 13.8% 11.5% 135% 265%
Exxon Mobile Corp. XOM, -0.78% 13.4% 19.7% 13% 26%
Wal-Mart Stores Inc. WMT, +0.11% 12.9% 13.4% 44% 152%
Procter & Gamble Co. PG, -0.15% 12.3% 12.5% 56% 69%
Cisco Systems Inc. CSCO, +0.27% 12.1% 13.6% 137& 36%
UnitedHealth Group Inc. UNH, -0.45% 11.9% 12.5% 342% 349%
United Technologies Corp. UTX, +1.48% 10.8% 13.0% 71% 97%
Travelers Cos. TRV, +0.41% 10.4% 9.9% 119% 228%
DowDuPont Inc. DWDP, -2.15% 10.1% 7.5% 189% 144%
Verizon Communications Inc. VZ, -1.18% 9.6% 7.2% 32% 82%
Merck & Co. MRK, -0.20% 8.9% 12.6% 48% 41%
Pfizer Inc. PFE, +0.23% 8.8% 8.7% 75% 127%
Chevron Corp. CVX, -0.26% 8.0% 13.8% 35% 94%
American Express Co. AXP, -0.15% 7.4% 6.3% 84% 88%
Caterpillar Inc. CAT, +0.74% 6.1% 8.3% 92% 157%
J.P. Morgan Chase & Co. JPM, -0.60% 4.1% 3.5% 179% 176%
Goldman Sachs Group Inc. GS, -1.26% 2.9% 2.9% 121% 17%
General Electric Co. GE, -5.89% 2.9% 3.1% 9% -30%
Source: FactSet

GE brought up the rear for five-year ROIC and had bank-like returns on invested capital over long periods. But even after shedding most of GE Capital, its financial-services arm, over the past few years, annualized ROIC during the third quarter was a low 4.2%. GE’s stock had the second-lowest five-year total return and was the only Dow 30 stock to post a negative 10-year total return.

It’s been a rough ride for GE, as the long-term recovery from the doldrums of the credit crisis stalled.

Looking for long-term industrial winners

Let’s reverse the data we looked at above, while taking a look at the 68 companies in the industrial sector of the S&P 500 Index SPX, -0.23%

ROIC

Here are the 15 S&P 500 industrial-sector companies with the highest five-year average returns on invested capital:

Company Ticker Average ROIC – 5 years Average ROIC – 10 years Change in sales – past 12 months from year-earlier 12-month period Gross margin – past 12 months Gross margin – year-earlier 12-month period
Boeing Co. BA, -0.25% 33.5% 27.7% -4% 17.75% 13.59%
C.H. Robinson Worldwide Inc. CHRW, +0.01% 32.0% 32.8% 11% 8.16% 9.38%
Robert Half International Inc. RHI, -0.04% 31.2% 23.7% -2% 39.81% 40.07%
Lockheed Martin Corp. LMT, +0.25% 31.1% 31.1% 7% 10.64% 11.17%
Delta Air Lines Inc. DAL, +0.08% 27.6% 3.5% 2% 24.53% 29.47%
Fastenal Co. FAST, +0.51% 25.4% 24.1% 8% 49.51% 49.62%
American Airlines Group Inc. AAL, +0.15% 24.6% -10.0% 3% 28.01% 32.23%
United Parcel Service Inc. UPS, -0.64% 23.9% 19.3% 7% 12.69% 12.70%
Rockwell Automation Inc. ROK, -0.50% 22.9% 21.6% 7% 43.50% 41.72%
3M Co. MMM, +0.49% 22.6% 22.1% 3% 49.72% 49.43%
Rockwell Collins Inc. COL, -0.37% 21.6% 26.9% 30% 40.52% 48.47%
Alaska Air Group Inc. ALK, -0.06% 21.3% 13.5% 30% 32.22% 35.13%
J.B. Hunt Transport Services Inc. JBHT, -0.11% 21.3% 20.0% 7% 12.11% 13.36%
Expeditors International of Washington Inc. EXPD, -0.03% 20.5% 20.4% 10% 14.58% 15.78%
W.W. Grainger Inc. GWW, -0.11% 19.5% 19.7% 1% 39.62% 40.68%
Source: FactSet

Only two of these companies have increased sales over the past 12 months from the year-earlier 12-month period, while also expanding their gross margin: Rockwell Automation Inc. ROK, -0.50%  and 3M Co. MMM, +0.49% There are others with increases in sales and margin contraction, for which there might be a good explanation. You can also see that Boeing Co. BA, -0.25% had a 4% sales decline, but its gross margin expanded considerably. 

Increasing sales and gross margins

Here are the 15 S&P 500 industrial-sector companies that have increased their sales the most over the past 12 months, while also expanding their gross margins (assuming FactSet has gross margin data available for both 12-month periods):

Company Ticker Change in sales – past 12 months from year-earlier 12-month period Gross margin – past 12 months Gross margin – year-earlier 12-month period Average ROIC – 5 years Average ROIC – 10 years
Johnson Controls International PLC JCI, -0.31% 37% 30.85% 25.01% 6.1% 3.7%
Quanta Services Inc. PWR, -2.64% 22% 13.16% 12.03% 6.7% 6.2%
Roper Technologies Inc. ROP, +0.22% 18% 62.08% 61.37% 8.7% 9.1%
Cintas Corp. CTAS, +1.26% 15% 44.69% 43.88% 12.0% 10.1%
Parker-Hannifin Corp. PH, -0.90% 13% 24.28% 22.89% 12.6% 12.7%
TransDigm Group Inc. TDG, +2.30% 11% 57.68% 52.28% 5.3% 5.8%
Kansas City Southern KSU, -0.83% 9% 34.70% 33.73% 8.2% 6.8%
United Rentals Inc. URI, +0.18% 8% 37.82% 37.45% 5.3% 1.5%
Stanley Black & Decker Inc. SWK, +0.09% 8% 37.89% 36.06% 7.9% 7.2%
Rockwell Automation Inc. ROK, -0.50% 7% 43.50% 41.72% 22.9% 21.6%
Snap-On Inc. SNA, +0.39% 7% 51.81% 51.08% 14.3% 12.2%
CSX Corp. CSX, -0.70% 7% 33.21% 29.37% 9.2% 9.2%
Waste Management Inc. WM, +0.29% 7% 28.27% 27.92% 6.0% 6.5%
L3 Technologies Inc. LLL, -0.22% 6% 11.01% 9.87% 6.0% 7.3%
Fortune Brands Home & Security Inc. FBHS, +0.40% 6% 36.17% 35.29% 8.7% 7.9%
Source: FactSet

Both lists include companies with good numbers. But only one company is present on both lists: Rockwell Automation Inc. ROK, -0.50%  

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