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Summary
- The US industrial sector felt the impact of a global pandemic-driven shutdown in 2020.
- The manufacturing index experienced its eighth consecutive monthly growth in December 2020.
- Industrial stocks like Raytheon Technologies and Waste Management have delivered robust quarterly performances despite the pandemic challenges.
The industrial sector is considered as the backbone of an economy as it plays a significant role in economic development.
However, the health emergency and economic shutdown in 2020 severely hit the industrial demand. Every sub-sector, including travel, logistics, industrial machinery, building construction, waste management and transportation was highly impacted by the restrictions imposed owing to the COVID-19 pandemic.
The year 2020 witnessed some big declines in many industrial stocks. The industrial index (NYSE:XLI) traded below the 48 mark during the peak of the pandemic in March 2020. Though ease in lockdowns, vaccine rollout, and other government measures led to some relief in the performance, the industrial index was not able to achieve the pre-pandemic levels during the last year.
However, XLI hit its 52-week highest mark on 12 January 2021. As of 12 February 2021, S&P 500 was up ~7.3% and the Industrial Select Sector SPDR ETF was up about 2.4% year to date. With global economies heading towards the pre-pandemic levels, the performance of the industrial index is also expected to improve further.
December PMI® Manufacturing Index
The PMI® Manufacturing Index went up to 60.7% in December 2020 from 57.5% in the month-ago period (November 2020), according to the Institute for Supply Management (ISM).
Increase in raw material inventories, new export orders, and growing employment and production are some of the factors that led to growth in economic activity in the manufacturing sector. The expansion for the eighth consecutive month reflects that the manufacturing industry is ready to outperform and dispel the dark clouds of the pandemic.
Given this backdrop, let us skim through two industrial stocks.
Raytheon Technologies Corp (NYSE:RTX)
Aerospace and defense company Raytheon Technologies (NYSE:RTX) is engaged in delivering advanced systems and services to global commercial, military and government customers.
The US defense budget highly influences the company's revenue, as it receives most of its revenue from the US government. The company is trying to limit its dependence on the US defense sector by expanding its business worldwide.
Q4 Performance - In Q4 ended 31 December 2020, the company reported sales of US$16.4 billion. It repaid a debt of US$1 billion and had a liquidity of around US$9 billion by the end of the period. Raytheon had a robust defense backlog of US$67.3 billion as of the last quarter of 2020.
2021 Outlook - For 2021, the company is expecting sales worth $63.4-65.4 billion with an organic sales growth of 3% and free cash flow of US$4.5 billion.
Waste Management, Inc. (NYSE:WM)
Waste Management (NYSE:WM) is a comprehensive waste management environmental services provider that offers collection, disposal, transfer and recycling services. The company caters to industrial, residential, and commercial institutions.
Third Quarter Performance - For the three-month period ended 30 September 2020, the company registered revenue of US$3.86 billion, down from US$3.97 billion in the year-ago period. Operating EBITDA surpassed US$1 billion; however it was lower when compared with the same period a year ago. The company also paid US$230 million of dividends to shareholders.
The strong performance of the company demonstrated resilience of the business model and strong initiatives towards lowering the cost to serve.
Waste Management expects to surpass its 2020 adjusted operating EBITDA margin of 28.0% to 28.5%. Moreover, the company anticipates clocking free cash flow of more than US$2 billion.
