3 catalysts we learned from earnings that should push our industrial stocks higher

Published Sun, May 5 202410:00 AM EDT

The industrial-focused names in the Club's portfolio wrapped up a pretty solid earnings season last week, but their stocks were largely not rewarded. Shares of toolmaker Stanley Black & Decker and industrial gas giant Linde tumbled on fiscal results Thursday, so the Club added to both positions on the overblown reactions. DuPont was the exception. The stock hit multi-year highs Wednesday after the specialty chemical maker delivered top and bottom line beats. Shares of electrical components giant Eaton sank undeservedly Tuesday despite quarterly beats. Honeywell , out the prior week, came under pressure on its April 25 earnings day on softer guidance. Artificial intelligence, destocking, and pricing emerged as themes and reasons for optimism, despite some of the initial stock moves. AI spending First, a surge in AI investments was welcomed news for Eaton, DuPont and Linde. Eaton posted a better-than-expected quarter Tuesday, beating estimates for revenue and earnings. Front and center was the success of its largest division, Electrical Americas, which set another record for sales, profit, and segment margins. It benefited from increased spending by companies to build and retrofit data centers for AI workloads. Those facilities need lots of power and that means Eaton's power management systems are in high demand. ETN YTD mountain Eaton (ETN) year-to-date performance On the post-earnings conference call, Eaton CEO Craig Arnold said AI data center orders "on a trailing 12-month basis have more than doubled, and our negotiations in the U.S. have increased by more than four times." We touched on the data center tailwind as a way to invest in the next wave of AI in a commentary last month. This past week's quarterly results put the opportunity into sharper focus. Despite the stellar quarter and guidance, Eaton shares declined 2.5% on Tuesday and another nearly 2% on Wednesday as investors took profits following a roughly 30% year-to-date gain. Still, the Club raised our price target to $350 per share from $330 because of stronger-than-expected demand for Eaton's offerings on the back of AI spend. "Everything was about as perfect as you can get this quarter," Jim Cramer said after the print. DD YTD mountain DuPont de Nemours (DD) DuPont delivered a much-needed rebound quarter this week, highlighted by improvements in the company's crucial Electronics & Industrials (E & I) division. Management said that AI demand and data center growth will help spur more growth in this division. E & I creates materials used in the manufacturing process of semiconductors, which later goes into powering AI. During the earnings call, CEO Ed Breen forecasted that E & I will grow in the high single digits in 2025 — as fab utilization, shorthand for chip manufacturing, continues to improve. "People don't realize what it's like when Ed Breen gets on the juggernaut," Jim said after the release. "This is the DuPont we wanted when we bought it." LIN YTD mountain Linde (LIN) year-to-date performance Linde posted mixed a quarterly Thursday — an earnings beat but a revenue miss. The stock fell 5% on softer guidance, which we thought was conservative. The Club took the dip as a buying opportunity, scooping up shares of the quality industrial name for the first time in over two years. We upgraded the stock to our buy equivalent 1 rating . During the conference call, CEO Sanjiv Lamba said surging demand for new data centers and AI chips will help drive volumes in the back half of the year for Linde's electronics business, which accounts for roughly 10% of its portfolio. Linde plays a role in the semiconductor fabrication process because of its specialty industrial gases. Destocking Destocking, or whittling down excess inventory, was important at Stanley Black & Decker, DuPont, and Honeywell. Supply chain disruptions and softening consumer demand on macroeconomic uncertainty were some of the factors that led to high inventory levels in recent years. SWK YTD mountain Stanley Black & Decker (SWK) year-to-date performance As supply chains continued to normalize and destocking costs eased, Stanley Black & Decker's results indicated that gross margins improved for the first quarter. While posting top- and bottom-line beats , the toolmaker failed to impress Wall Street with its guidance — reiterating its outlook, rather than raising it. Investors took profits, driving SWK shares down 7.5% on Thursday. But we bought the dip. "I want to load up the boat on this one," Jim said. The Club cut our Stanley Black & Decker price target to $105 per share from $110 in recognition of the delay. Timing around recovery for home improvement also remains unclear as interest rate cut expectations continue to get pushed out. Jim said SWK would benefit greatly from Fed rate cuts. Back at DuPont, its upbeat quarter — and subsequent share price surge — was largely due to overcoming destocking headwinds. The chemical maker has dealt with an inventory glut over several business lines, which has weighed on sales and profits for years. But destocking in DuPont's Water unit and parts of its Industrial Technologies segment appeared to bottom as the company experienced an increase in orders. These improvements, in part, led us to raise our DuPont price target to $85 per share from $78. Once destocking ends across all business segments, Club analysts forecast more upside as the stock demands a higher multiple. HON YTD mountain Honeywell International (HON) year-to-date performance During Honeywell's earnings call, CEO Vimal Kapur said the industrial conglomerate's short-cycle business is beginning to see improvements on better inventory levels. "We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity solutions and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade," Kapur said on the April 25 post-earnings call. Overall, Honeywell's quarterly results were better than feared. The company beat on sales and earnings, while its long-cycle business remained strong and jumped to a record of $32 billion. Pricing Our third takeaway was the importance of pricing for Linde and Stanley Black & Decker. Stanley Black & Decker's pricing for its largest segment — known as Tools & Outdoor — was flat for the quarter. But the Club saw this as a positive because management isn't lowering prices in order to boost demand for the company's offerings. During Thursday's conference call, Lamba described pricing as "an important lever " for the firm. Linde CFO Matthew White said on the earnings call, "Price continues to drive underlying sales growth with a positive contribution of 2% year-over-year." Lamba said, "While pricing remains an important lever for us, we're also focused on other growth opportunities. ... Add to that the contracted backlog and we have a solid growth pipeline for the next few years ahead." We know Linde has immense pricing power because its products are high up on the supply chain. (Jim Cramer's Charitable Trust is long LIN, HON, DD, ETN, SWK. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Power management company Eaton in Pleasanton, California.

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The industrial-focused names in the Club's portfolio wrapped up a pretty solid earnings season last week, but their stocks were largely not rewarded.