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2 Fabricated Metal Products Stocks to Increase as Energy Gets Cheaper

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The US economy continues to grow.

Economists' second look at the gross domestic product for the third quarter of 2019 indicates that the US economy grew by an annualized rate of 2.1% in the period versus a prior estimate of 1.9% and above the 2% increase recorded for the second quarter of 2019.

One of the main drivers to the US GDP growth was a 0.3% increase in consumer spending in October 2019 from the previous month of September. The largest component of US GDP was pushed up by spending on energy, and this is not surprising as we are approaching the coldest period of the year.

The energy cost sustained to heat the environment where people live and work depends, of course, on the price of oil which marked a positive uptrend over the past month and 3 months. Crude Oil WTI Futures closed at $58.08 per barrel on Thursday gaining respectively 4.07% and 4.12%.

In Iran, the fifth largest producer of oil in the world, a protest against the rise in the price of petrol on Nov. 28 which caused the arrest of hundreds of demonstrators, could create some downward pressures on the price of oil determining a cheaper energy cost.

Also, the reduction in the fuel price will make the manufacture of goods more convenient boosting US domestic companies' earnings margins and as a consequence driving share prices higher. Amid American manufacturers, those producing durable goods have already got a head start thanks to a significant improvement posted in October's new orders.

The indicator, which is a very good reading to assess the health status of the industry, signaled that in October the U.S. manufacturers saw a 0.6% rise in durable goods new orders versus a 1.4% fall in September and above expectations for a 0.8% decline.

Since fabricated metal products companies are leading the growth in durable goods new orders, investors should increase their positions in the related stocks, preferring those with high operating profitability. These stocks are well-positioned to take the best advantage possible from an expected lower energy cost.

The indicator used to screen for fabricated metal products stocks is the operating margin rate of 6.56% or higher. Why? Because a company showing such value for the operating margin rate tops most of the competitors in the industry.

Thus, these are some results of my search.

Mueller Industries

The first company is Mueller Industries Inc (NYSE:MLI), a Collierville, Tennessee-based manufacturer and seller of several products made of aluminum, brass, and copper. They serve a broad range of industries in North America, United Kingdom, Asia, and Mexico.

Mueller has an operating margin of 7.5% of total revenue. The company closed the third quarter of 2019 reporting an operating income of $46.25 million on nearly $609 million in total net sales. The net income attributable to the company was $29.1 million or 52 cents per diluted share which topped consensus estimates by 8 cents.

Shareholders of Mueller Industries saw total net revenues, operating income and margin rate increasing over time through the end of fiscal 2018.

The stock of Mueller Industries appreciated at the same time.

GuruFocus assigned a very positive profitability rating of 7 out of 10. The balance sheet is solid as the financial strength also got a positive rating of 6 out of 10.

The company has distributed dividends for more than 15 years. On Dec. 20, shareholders of record as of Dec. 6 will get 10 cents per common share generating 1.27% trailing and forward dividend yield as of Nov. 28.

The stock doesn't seem to be expensive according to the following ratios. The price-earnings ratio of 17.86 is just a bit above the industry median of 17.54, the price-sales ratio is 0.73 is better than the industry median of 1.04 and the enterprise value-Ebitda ratio is 9.44 versus the industry median of 10.61.

The stock closed at $31.62 price per share on Thursday for a market capitalization of $1.80 billion.

Analysts recommend a hold rating for the stocks with an average target price of $34 reflecting 7.5% upside to hit within 52 weeks.

Valmont Industries

The second company is Valmont Industries, Inc. (NYSE:VMI), an Omaha, Nebraska-based producer and seller of several fabricated metal products in the US and internationally.

Valmont Industries has an operating margin of nearly 8% of total revenue. Valmont Industries closed the third quarter of 2019 reporting a 1.1% year over year rise in the operating income to $63.9 million and a 1.7% growth in total revenues to $690.3 million. In contrast, the net income decreased 1.4% to $40.1 million.

GuruFocus assigned a moderate rating of 4 out of 10 for the company's profitability. With regard to its financial strength, Valmont Industries received a GuruFocus rating of 6 out of 10 indicating a solid balance sheet.

The fabricated metal products company has paid dividends for more than 3 decades. On Oct. 15 the company paid 37.5 cents quarterly cash dividend per common share to its shareholders generating a 1.04% yield for both the forward and trailing-12-month dividend as of Nov. 28.

The stock has climbed over time and closed at a price of $138.8 per share on Thursday for a market capitalization of $3.10 billion.

The stock is now not cheap but not so expensive either.

The price-sales ratio of 1.13 is a bit over the industry median of 1.04 and the enterprise value-Ebitda ratio of 11.89 is also slightly above the industry median of 10.61.

The share price at close on Thursday was 11% above the middle point of the 52-week range of $103.01 to $147.38.

The stock has an overweight recommendation rating suggesting that it is forecasted to outperform its industry over the next 12 months with an average target price of $157.33, mirroring a 13.4% increase from Thursday's closing price.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.