Usually companies labelled as industrials are imagined to be "smokestack" businesses like factories, but industrials can encompass many companies that deal in office work or a mix of services that are related to the stereotypical manufacturing style.
They can also be cyclical in nature, so when an economy such as Australia's starts moving, it's a good time to look at strong and well-performing companies to see what they can do in a market upturn.
ALS (ASX: ALQ) is a testing and analytical laboratory services provider that is involved with the resources, life sciences, energy and industrial sectors. The rate of earnings growth slowed in 2013, with NPAT rising only 2.6% from $224.7 million to $232.9 million, but over the past four years both revenue and earnings have risen impressively, partly through a series of recent acquisitions.
The $3.47 billion company by market capitalisation gets 41.8% of its revenue from mining related work, so it can be affected by a mining downturn if less laboratory testing is needed. However, its foreign business makes up a larger proportion of revenue than its domestic business, so diversification is good.
Net profit margin was 15.7% in 2013, and its past five-year earnings after tax growth was a compound annual 24.2%. 2013 NPAT was almost half of long-term debt, so it has a solid earnings base for future growth.
Mineral Resources (ASX: MIN) is a mining services and processing company that is benefitting from the increased production of the big iron ore miners. Mining services companies in general may be down, but those involved in ore processing and production are reaping the upturn in export shipping and commodities prices.
Its net profit margin is 16.5% and its five-year compound annual earnings growth rate is 30.9%. Though its 2013 NPAT before abnormals of $180.4 million was slightly above 2012's $177 million, at its November annual meeting, it endorsed the market consensus forecast for 2014 of between $247 million to $252 million expected NPAT. A potential 37% – 39% increase over 2013.
Steamships Trading (ASX: SST) is the kind of industrial company that encompasses shipping, transport, property, hotels, manufacturing and information technology. It is based in Papua New Guinea, and is a $961 million business.
Over the past five years its share price has gone from about $12 to $30, hitting a high of $39 in April 2013. In its June 2013 half-year report, it had its highest ever half-year NPAT of $46.8 million, but because of abnormals charges of about $45.5 million, overall NPAT was only $1.26 million, down from $38.2 million in the prior corresponding period.
In its 2012 annual report it achieved a 20.7% net profit margin and its past five-year compound annual earnings after tax growth rate was 21.9%. With LNG gas development projects agreed with Oil Search (ASX: OSH), further business opportunities could arise for the company because of its extensive involvement in regional business.
Foolish takeaway
Industrials can include commercial and professional services, transportation companies and others. Many times they can be operating "behind the scenes". They may not be household names, but astute investors will find a good company by seeing who is helping the frontline businesses be successful themselves. Industrials may have a regional or technological dominance that keeps them growing in size and earnings.
