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Citigroup: Buy these two engineering stocks and predict a price potential of up to 67%

It’s been a crazy few years in the industrial sector. A new report from Citigroup analyst Kyle Menges pays special attention to the machinery segment, a group of industrial companies that build and market specialized heavy equipment for a variety of applications, from construction to agriculture and just about everything in between.

The engineering sector had built up a huge backlog of orders during the pandemic-related lockdowns a few years ago due to a combination of increased demand and restricted supply chains. Since the lockdowns were lifted, these companies have benefited from high inflation and the imbalance between supply and demand, allowing them to achieve higher margins.

The situation is now normalizing as engineering companies have largely cleared their backlogs and are returning to their pre-pandemic operations. This is creating opportunities for investors, with opportunities for equity gains of up to 67%, as Citi’s Menges points out.

He says of the sector: “We believe that engineering companies will sustain higher margins through the cycle as inflation calms down. Over the last ~12 months, we have seen a realignment of supply and demand not seen since the global financial crisis, although this time it was more of a correction of the pandemic-related imbalance. Even if we assume that engineering gross margins decline by the amount they did during the global financial crisis, this would still suggest that engineering gross margins will be significantly higher going forward relative to historical levels.”

We can track some of Menges’ recommendations for the engineering sector using the TipRanks platform. According to the data, these stocks have received Buy ratings and solid upside potential from analyst consensus, so let’s take a closer look and find out why.

CNH Industry (CNH)

The first stock we’re looking at here, CNH Industrial, is a designer and manufacturer of heavy machinery for the agricultural and construction sectors. CNH is one of the older names in this niche, with its roots stretching back to the 1840s. The company’s longevity underpins its solid reputation for quality among its customer base, the farmers, construction workers and contractors who use the company’s products every day.

These products include tractors, combines, tillers, bulldozers, excavators and heavy-duty forklifts, to name just a few of the specialty vehicles CNH manufactures. The company manufactures this range of heavy-duty machinery under several brand names, all of which have strong industry reputations, such as Case IH, New Holland and Steyr. CNH’s industrial vehicles are sold, used and supported in around 170 countries worldwide, and the company has industrial and financial offices in 32 countries. CNH is incorporated in the Netherlands, has its global headquarters in the UK and its shares are traded on Wall Street, making it a truly global company.

The company is currently experiencing some turnover at the top, with outgoing CEO Scott Wine being replaced by Gerrit Marx, effective July 1. Mr. Marx takes the top job at CNH after serving as CEO of the Iveco Group, the Italian multinational manufacturer of transport vehicles.

On the financial side, we note that CNH reported a year-over-year decline in industry demand in its last reported quarter (Q1 2024) – a decline that suggests a normalization of industry backlogs. The company’s consolidated revenue was $4.8 billion, down 10% year-over-year but beating guidance by $180 million. The company’s quarterly earnings were 33 cents on non-GAAP measures, beating expectations by 7 cents per share. CNH reported a first-quarter free cash flow absorption ratio of $1.2 billion and had $3.23 billion in cash and other liquid assets at the end of the quarter.

This brings us to Kyle Menges’ coverage of the stock, which he believes has better days ahead. Menges writes, “CNH is our top pick among our agriculture coverage. CNH stands out as the only agriculture OEM we cover that we expect to post earnings per share growth next year. Our estimates reflect our confidence that new CEO Gerrit Marx can implement significant cost-saving initiatives that were already well underway under outgoing CEO Scott Wine. Our positive earnings outlook, coupled with the fact that CNH is currently an out-of-favor stock (due to concerns about the CEO transition), offers plenty of upside from current levels, in our view.”

Menges rates CNH stock a Buy and sets a $16 price target, implying a robust 67% one-year upside potential. (To watch Menges’ track record, click here.)

Overall, CNH has a Moderate Buy rating from Wall Street analysts based on 12 recent reviews with a breakdown of 5 Buy recommendations and 7 Hold recommendations. The stock is priced at $9.58 and their average price target of $14.87 suggests CNH will gain 555% in value over the next 12 months. (See CNH Industrial stock forecast.)

Oshkosh Corporation (OSK)

The second stock we’re looking at here is Oshkosh Corporation, based in Oshkosh, Wisconsin, a city known for several manufacturing companies of the same name. Oshkosh Corporation builds, markets, and sells a range of specialty vehicles and vehicle bodies. The company’s product lines include electric vehicles and EV platforms, augmented reality upgrades for smart vehicle fleets, AI-powered autonomous operating and active safety systems, advanced data analytics, product modeling, and logistics optimization, and digital manufacturing technology upgrades for factories – including wearable devices to improve efficiency and safety on the factory floor.

A few numbers show how this company has expanded its horizons beyond its small Midwestern town. The company employs more than 17,000 people and manufactures products based on more than 800 patents. Its products are sold under 13 brands and the company operates in 125 locations in 19 countries. Oshkosh’s operations and products can be found from Wisconsin to Italy, India, Singapore and Australia.

Oshkosh Corporation’s customers include other industrial manufacturers as well as end users such as fire departments and the military. The company’s products are in high demand with the Department of Defense, for which Oshkosh manufactures 2.5- and 5-ton trucks, 10-ton trucks, tank transporters, and mine protection vehicles, among others.

Looking at the financial releases, we found that the company posted revenue of $2.54 billion in the first quarter, a figure that is nearly 12% higher than the year-ago figure and beat expectations by $50 million. On the bottom line, the company’s non-GAAP earnings of $2.89 were more than 80% higher than the first quarter of 2023 result and were 64 cents per share above estimates.

According to analyst Menges, this is a good choice. He writes about the company: “OSK is our top pick in construction, driven by robust guidance for its unique professional equipment (~30% of revenue) and defense (~20% of revenue) segments. We expect growth in these two segments to more than offset slight revenue declines in the Access segment (~50% of revenue) in 2025 and 2026. This is due to our view that rental fleet replacement demand is likely to provide a solid cushion for NA Access equipment sales over the next few years.”

Menges also gives a buy recommendation and his price target of $130 shows that he is convinced that the stock will increase by 27% in the coming year.

This is another stock with a consensus rating from Wall Street based on 10 analyst ratings, including 4 buy recommendations, 5 hold recommendations, and 1 sell recommendation. Shares are currently trading for $102.38 and have an average price target of $131.11, implying a one-year upside potential of 28%. (See Oshkosh Stock Forecast.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important that you conduct your own analysis before investing.