Despite the rise in the markets this year, there are still great value stocks to be found.
It’s a good idea to buy stocks that have solid upside potential and limited downside. And I think automation technology company Emerson Electric (EMR 1.25%), water products company Pentair (PNR 1.95%), and industrial conglomerate 3M (MMM 1.34%) are ideal candidates in this regard. Here’s why.
Emerson Electric is an outstanding value stock
Management’s decision to focus the company on automation and adjacent markets like industrial software and test and measurement is set to pay off in the coming years. Having recently completed the sale of its remaining 40% interest in its heating, ventilation, air-conditioning, and refrigeration (HVACR) joint venture, Copeland, Emerson Electric is ready to accelerate its growth into its targeted end markets.
Its core business of automation has been mixed in 2024, with process automation (oil and gas, mining, chemicals, etc.) and hybrid (food, life sciences, etc.) growing solidly with mid-single-digit orders growth in the recent third quarter, offset by a low-single-digit decline in orders in discrete (factory automation).
Still, as its peer Rockwell Automation noted, discrete automation is experiencing an inventory correction. Distributors are reducing inventory from previously elevated levels caused by lengthening product lead times during the supply chain crisis. Emerson’s automation performance is expected to improve once the inventory correction is completed and interest rates decrease.
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Moreover, its 55% ownership of industrial software company Aspen Technology exposes Emerson to positive spending trends in energy, utilities, and smart grid solutions. Lastly, its acquisition of test and measurement company NI last year looks well-timed. Emerson, and its test and measurement peer Keysight Technologies, is expecting a growth recovery in 2025.
Thinking longer-term, Emerson’s automation solutions are critical to keeping its customers’ operations cost-effective, a crucial concern for plants operated outside low labor-cost countries. Trading at 17.5 times Wall Street earnings estimates for 2025, Emerson Electric stock has plenty of upside potential, while the downside is limited by the fact that its markets are bottoming in 2024.
Pentair is set for sales and margin growth
Pentair is a water products company servicing the industrial, commercial, and residential markets. It is one of the most compelling stocks on the market today. There are three key reasons why:
- Through transformational initiatives, the company aims to increase its operating profit margin from 20.8% in 2023 to 24% in 2026.
- Despite a slowdown in new residential pool construction in 2024, the installed base of pools is still growing and will support growth in maintenance spending on pools in the future.
- A lower interest rate environment should support a recovery in new pool construction.
As such, Pentair combines underlying growth from company restructuring with the upside potential from a lower interest rate environment.
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Both factors are significant. For example, its transformational initiative includes pricing adjustments, improving sourcing relationships to reduce costs, consolidating its manufacturing footprint, and initiating 80/20 focused sales. The latter refers to the principle whereby 20% of customers generate 80% of sales, allowing companies to focus their products, pricing, and marketing strategy on their most profitable customers.
The company can also cut costs by reducing its focus on smaller customers that generate minimal sales. I’ve previously discussed the initiatives for those who want to get into more detail, and valuation matters, too. Like Emerson Electric, Pentair’s end markets look like they are bottoming in 2024. The company is primed for solid growth in 2025, with some upside kicker from a lower interest rate environment.
3M’s recovery starts here
After years of lackluster sales growth and mediocre margin performance, 3M finally has management in place to improve matters. The spinoff of its healthcare business, Solventum, raised cash to support its legal settlements and rid 3M of a company it had invested substantial time, money, and effort without notable achievement.
Moreover, new CEO William Brown is committed to improving the company’s research and development capability to get the company back to producing new products that command market share and pricing power. While that will take time to come to fruition, Brown is also working on a fundamental restructuring to improve its supply chain, leverage its buying power in sourcing, and rationalize its factory and distribution footprint.
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As part of his plans, Brown plans to reduce the time 3M holds inventory for sale, resulting in a potential $1 billion improvement in free cash flow — that alone could be worth 28% more on the stock price.
As with Pentair, 3M offers upside from management’s restructuring initiatives and a cyclical improvement in its end markets, which, in 3M’s case, includes semiconductors, automotives, consumer electronics, and construction materials.
