3 Very cheap industrial stocks that will catapult higher with lower interest rates

On Friday, Fed Chairman Jay Powell gave a very convenient speech at the Jackson Hole Symposium, indicating that the US will see the first interest rate cuts since the start of the COVID-19 pandemic in September.

The faster increase in the federal funds rate helped reduce inflation, but it came at a cost. Cyclical sectors such as industrial equipment stocks took it on the chin.

Last week, the industrial and automotive chip giant Texas Instruments noted that its chip volumes were now below those seen in 2019, the date of the last major industry downturn. But with the Federal Reserve seemingly set on a rate-cutting cycle, downbeat industrial stocks could return with a vengeance.

Texas Instruments is actually near its pending all-time highs, but the next three industry leaders are well below their all-time highs, making their shares look like cheap buys today.

Microchip Technology

Microchip Technology (MCHP -1.82%) it’s a peer and competitor to Texas Instruments in some ways, but unlike TI, Microchip is nearly 20% below its all-time highs.

Microchip manufactures microcontrollers, analog chips, FPGAs (Field Programmable Gate Arrays), and other ancillary chip products that go into a wide variety of machines in various end markets. However, Microchip has the largest exposure to the industrial machinery sector at 43% of revenue, and the automotive sector at 18% of revenue, bringing exposure to these markets to 61%.

Microchip performed strongly through 2023 due to supply shortages in the industrial space, but the top line is now in a nasty correction. In the latest quarter, Microchip’s revenue fell nearly 46% from the previous quarter to $1.24 billion. And management guided for even lower revenue in the current quarter to $1.15 billion in the middle.

And yet, Microchip maintains healthy profitability even in the depths of a historic downturn. Last quarter, the company achieved an adjusted (non-GAAP) operating margin of 31.5% and is targeting an operating margin of 28.5% in what should be the low point of this cycle.

This is still a high level of profitability, allowing Microchip to increase its dividend by 10.7% from the previous year.

Microchip’s management sounded upbeat on the earnings call, noting that forward orders rose to very low levels and cancellations and recalls continued to decline. Management was also encouraged by the strength of Microchip’s design-in gains with customers, particularly for its new 64-bit microcontroller product. That should provide more “juice” in the next evolution.

While cash-strapped customers are currently managing inventories at very low levels, lower interest rates could change the scenario. When it does, look for the 2.2% yield Microchip to see its gains spark again.

Graphic industries

Stock of industrial equipment Graphic industries (GTLS 2.42%) saw its stock halved at the end of 2022 after announcing the large acquisition of Howden at that time. And while the stock has struggled to recover, recent earnings results and recession fears have sent the stock to late-2022 lows again.

But this could be an opportunity. Certainly, management missed analysts’ expectations on revenue and earnings last quarter and also scrapped its full-year guidance.

At first glance, this isn’t great. But the “wandering” was largely due to the timing of higher project earnings, which will be recognized in 2026 instead of 2025. These orders should go through, as historically the Chart has had order cancellations below 1% .

The company may continue to adjust to the merged business with Howden. The merger has transformed Chart into a one-stop shop that is more of a strategic partner for global customers, unlike previously when the business was primarily an equipment supplier that recognized revenue close to the time of order. With its comprehensive and customized systems today, Chart now involves clients earlier in the project planning and construction process. So it extends the time frame for revenue recognition against orders.

However, looking under the hood, Chart still puts up impressive numbers. Orders in the last quarter were up 12.1% year-on-year, but that’s without “large LNG” orders. Large liquefied natural gas projects have traditionally been Chart’s forte, but the orders are big and lumpy.

If you strip out the previous year’s LNG order, the rest of Chart’s business saw a 40% increase in orders. This was importantly driven by growth in its new “specialty” energy transition segment, which has a long growth track consisting of hydrogen, water purification, space exploration, nuclear power, clean mining and other types of equipment . This segment saw an amazing 48.4% increase in orders and is now the largest segment of the business with 36% of new orders. Management also highlighted a new industrial cooling opportunity for AI data centers, which has the potential to expand Chart’s addressable market by $500 million over the next three years. Of note, Chart just guided for $4.53 billion in revenue for 2024.

Importantly, Chart is on track to exceed its cost and revenue synergies from the Howden acquisition. Adjusted gross and operating margins continued to expand by 3.1 percentage points and 4.9 percentage points, respectively, in the latest quarter.

Those profits will now pay down Chart’s debt, which currently weighs on the stock. But as Chart continues to execute and pay down debt with the help of falling interest rates, the stock should eventually rise again.

Image source: Getty Images.

IPG Photonics

It’s hard to find an industrial stock that has had as much bad luck as IPG Photonics (IPGP -1.76%) in the last five years. IPG is a leader in fiber lasers, which are sophisticated lasers that are replacing older CO2-based technology and have made great strides in industrial cutting and welding applications, while seeing increasing adoption in new use cases such as would be medical applications and 3D printing.

But in 2019, IPGP began to see competition from lower-cost alternatives in China for logging applications, which was a large market. Then, in 2022, Russia’s invasion of Ukraine cut off IPG from its production assets in Russia and Belarus. Of note, IPG’s founders were of Russian origin, but founded the company in Massachusetts in the 1990s. As a vertically integrated company that manufactures all of its own components, management was forced to manufacture components in other geographies. That increased costs and decreased returns.

Now in 2024, the company is facing a nasty industrial slowdown, impacting markets for some of IPG’s biggest growth opportunities, such as welding batteries for electric vehicles.

However, despite a 23% drop in revenue last quarter, IPG was still profitable. The company pointed to another declining quarter in the current quarter and about profitability profits. However, once the industrial market recovers, IPG sees long-term double-digit growth and its operating margins reaching 25% to 30%.

Importantly, the company also has about $1.1 billion in cash on its balance sheet and no debt, amounting to about a third of its entire market cap. Management has been cautiously buying back cheap stock, reducing its share count by more than 5% from last year, while maintaining a healthy cash balance.

IPG just got a new CEO in Mark Gitin, a highly respected executive in the laser industry who has a lot of previous experience in the optical laser industry at Coherent and MKS tools.

With a low stock price, plenty of cash and an experienced industry leader taking over as CEO, IPG is another industrial stock to bet on as interest rates fall and the economy improves.