Jacob Sonenshine

Stocks are dropping on the back of President Donald Trump's tariffs. Certain industrial companies could benefit, however, making industrial stocks look appealing.

All three major indexes have fallen severely this week after Trump confirmed additional 10% tariffs on China, and tariffs of 25% on Mexico and Canada. The S&P 500 is now down about 6% from a record set in February.

Investors worry that the tariffs will lift the cost to import hundreds of billions of dollars worth of goods, which is a low-single-digit percentage of the roughly $24 trillion U.S. economy. Companies are likely to respond to higher costs by lifting prices, which economists say could eventually reduce economic growth by a few tenths of a percentage point. That may not sound like much, but the inflation could put a Federal Reserve interest-rate hike back on the table, further reducing demand from consumers and businesses. That's why most stocks are way down from peaks, including the Industrial Select Sector SPDR exchange-traded fund, which is down 8% from a high set at the end of last year.

This presents a buying opportunity in manufacturer stocks. HVAC maker Carrier Global, for instance, may increase prices this month, J.P. Morgan analyst Stephen Tusa writes. The only way sales of Carrier's HVACs would take a hit would be if residential and commercial customers decide to build fewer structures and reduce investments, which won't happen quite yet, as businesses need to take a few quarters to asses any impact to consumer demand from higher prices. So in the near term, Carrier's higher prices could lift earnings.

Carrier is just an example of a company that could mitigate the tariff impact well this year, but a host of other manufacturers could outright benefit. Many companies will build new manufacturing plants in the U.S. to cut down on expensive imports from China and Mexico, thus keeping their costs in check. Eli Lilly said last week that it will invest an additional $27 billion over the next several years to build new plants in the U.S. to make medical ingredients.

It isn't known who will build and outfit those specific plants, but this is the type of dynamic that will boost sales for industrial firms. That's why analysts project that many U.S. manufacturers will see total sales growth over the next few years that are a few percentage points above the rate of growth for the broader U.S. gross domestic product, which has been in the low single digits in the past few quarters.

Carrier may well benefit from what Wall Street calls the "onshoring" trend, in which companies build new plants at home. Building structures now requires new, energy-efficient HVACs -- one reason analysts expect 6% annual sales growth for Carrier from the end of this year through 2027 to $25.3 billion, according to FactSet. This year's growth will be slower because many customers pulled forward some of their HVAC purchases at the end of 2024, leaving less demand for purchasing for this year. Carrier's growth should reaccelerate beyond this year, however, especially with onshoring remaining a theme.

If profit margins remain stable and the company uses its annual free cash flow of more than $2 billion to repurchase shares, earnings per share could rise almost 13% annually from the end of this year through 2027.

That would push the stock higher, given that it's down 23% from a record high, and trades at just under 21 times expected earnings for the coming 12 months. That's below the S&P 500's just over 21 times, but Carrier often trades at a premium when the market has no question marks about its business. As the growth story unfolds over the next few years, higher earnings should boost the stock, assuming the multiple either remains stable or rises.

Other manufacturers are positioned to sell additional products for onshoring customers. Morgan Stanley chief U.S. equity strategist Mike Wilson detailed in a Monday note a list of such names that the firm's industrials analyst covers. They include Trane Technologies, a maker of heating, cooling and ventilation products, Eaton, which makes cooling and power equipment, and Fastenal, distributor of industrial supplies.

Another one is Rockwell Automation, $31 billion maker of industrial automation products. The majority of its $8.2 billion in expected sales this year will come from such products, with $2.2 billion coming from software and controls revenue. Analysts expect 7% annual revenue growth from the end of this year though 2027 to $9.4 billion, driven by all segments.

Companies are increasingly automating their manufacturing processes, which is why Grand View Research forecasts that market growing 10% annually to over $300 billion by 2030.

Rockwell has a long runway for growth -- and it could see even more if customers boost onshoring efforts. Growth, combined with the company's cost discipline that it highlighted on a February earnings call, would lift margins over the coming years. Analysts expect earnings per share to grow at about 17% annually from the end of this year through 2027.

That's a solid deal for a stock that's down 12% from its 2025 high.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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March 04, 2025 13:05 ET (18:05 GMT)

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