NEW YORK (TheStreet) - Plenty of stocks in the industrials sector provide good buying opportunities for investors in 2015.

"The U.S. economy remains in a mid-cycle expansion, bolstered by an improving real income outlook for the U.S. consumer. Corporate fundamentals remain strong, and forward-looking indicators for manufacturing and capital spending remain in a solid uptrend, which should bode well for the information technology and industrials sectors," according to Fidelity's Quarterly Sector Update, published Jan. 26.

Credit Suisse (CS) analysts came up seven best ideas for the industrials sector.

The analysts put forth best investment ideas in a variety of sub-sectors for the next six to 12 months, in a report issued Wednesday. Analysts were allowed to choose up to three stocks in their coverage area. The exercise resulted in a list of 140 top stock ideas -- 29 are small cap (under $4.1 billion), 56 are SMID (under $9.6 billion), and 81 are mid cap ($2-27.1 billion), the report said.

TheStreet paired Credit Suisse's investment perspectives on the stocks with ratings from TheStreet Ratings, its proprietary research tool, to give an added perspective on the stock picks.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Here are Credit Suisse's top picks in the industrials sector. And when you're done make sure to check out Credit Suisse's top energy plays. Year-to-date returns are based on March 5, 2015 closing prices.

TDG Chart TDG data by YCharts

1. Transdigm (TDG - Get Report)
Sub-industry: Aerospace & Defense
Market Cap: $11.4 billion
Target Price: $230
Year-to-date return: 9.7%

Credit Suisse's Rob Spingarn: The best cash return story in Aerospace. It leverages consistently strong cash flows and capital market access to build case for M&A and special dividends. Skeptics have consistently questioned the longevity of TDG's signature pricing and M&A strategies, but these continue to deliver in both good cycles and bad as the company's annual price increases (est. 5-7%) get traction every year. further, given its high mix of aftermarket revenue (60%+) and EBIT (80%+ on very high margins), TDG is less vulnerable than others to a potential OE downturn.

TheStreet Ratings said: TheStreet Ratings team rates TRANSDIGM GROUP INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate TRANSDIGM GROUP INC (TDG) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins and good cash flow from operations. However, as a counter to these strengths, we find that the growth in the company's net income has been quite unimpressive."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 0.5%. Since the same quarter one year prior, revenues rose by 10.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The gross profit margin for TRANSDIGM GROUP INC is rather high; currently it is at 56.47%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 16.27% is above that of the industry average.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry, implying reduced upside potential.
  • The company, on the basis of net income growth from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Aerospace & Defense industry average. The net income increased by 10.9% when compared to the same quarter one year prior, going from $86.12 million to $95.53 million.
CP Chart CP data by YCharts

2. Canadian Pacific Railways (CP - Get Report)
Sub-industry: Air Freight & Ground Transport
Market Cap: $32 billion
Target Price: $225
Year-to-date return: 0.62%

Credit Suisse's Allison Landry said: Although CP is largely a 'cost story,' we believe that the company is also well positioned to generate solid gains on the top line. Specifically, CP stands to benefit from 1) secular tailwinds related to evolving supply chains/logistics within N. American energy markets; 2) improvement in core pricing gains; and 3) a new revenue stream that should arise from a lower cost business model.

TheStreet Ratings said: TheStreet Ratings team rates CANADIAN PACIFIC RAILWAY LTD as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate CANADIAN PACIFIC RAILWAY LTD (CP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, revenue growth, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CANADIAN PACIFIC RAILWAY LTD reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CANADIAN PACIFIC RAILWAY LTD increased its bottom line by earning $8.49 versus $4.98 in the prior year. This year, the market expects an improvement in earnings ($10.96 versus $8.49).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Road & Rail industry. The net income increased by 450.0% when compared to the same quarter one year prior, rising from $82.00 million to $451.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 14.0%. Since the same quarter one year prior, revenues slightly increased by 9.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. When compared to other companies in the Road & Rail industry and the overall market, CANADIAN PACIFIC RAILWAY LTD's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • 48.13% is the gross profit margin for CANADIAN PACIFIC RAILWAY LTD which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 25.62% is above that of the industry average.

 

UAL Chart UAL data by YCharts

3. United Continental Holdings Inc. (UAL - Get Report)
Sub-industry: Airlines
Market Cap: $26.2 billion
Target Price: $100
Year-to-date return: 1.5%

Credit Suisse's Julie Yates: Best self-help story. Margin recovery efforts should drive ~400-500 bps of margin improvement by 2016. UAL has yet to fully realize benefits from structural industry change and its merger with CAL, but the carrier is on track for a turnaround and we expect it to transition unit revenue outperformance in 2015. We see a string of catalysts and tailwinds in 2015 that should drive earnings and valuation upside. We see no structural impediments to UAL achieving a low double-digit EBIT margin, which is not priced into the stock.

TheStreet Ratings said: TheStreet Ratings team rates UNITED CONTINENTAL HLDGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate UNITED CONTINENTAL HLDGS INC (UAL) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Among the primary strengths of the company is its solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, UAL's share price has jumped by 44.02%, exceeding the performance of the broader market during that same time frame. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • UNITED CONTINENTAL HLDGS INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, UNITED CONTINENTAL HLDGS INC increased its bottom line by earning $2.79 versus $1.30 in the prior year. This year, the market expects an improvement in earnings ($11.58 versus $2.79).
  • UAL, with its decline in revenue, underperformed when compared the industry average of 22.3%. Since the same quarter one year prior, revenues slightly dropped by 0.2%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • The gross profit margin for UNITED CONTINENTAL HLDGS INC is currently lower than what is desirable, coming in at 25.80%. Regardless of UAL's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 0.30% trails the industry average.
  • The change in net income from the same quarter one year ago has exceeded that of the Airlines industry average, but is less than that of the S&P 500. The net income has significantly decreased by 80.0% when compared to the same quarter one year ago, falling from $140.00 million to $28.00 million.

 

 

IR Chart IR data by YCharts

4. Ingersoll-Rand (IR - Get Report)
Sub-industry: Electrical Equipment & Multi-Industry
Market Cap: $17.7 billion
Target Price: $77
Year-to-date return: 6.8%

Credit Suisse's Julian Mitchell said: IR is one of the best plays on the recovering non-residential construction cycle and well place to take market share in Commercial HVAC. We see strong incremental margins as volumes accelerate based on strong execution with respect to cost-out/simplification efforts over the past several years. With a strong top line, strong incremental margins, and a very friendly capital allocation policy (prefer to return capital to shareholders via buybacks) this is one of our preferred names for 2015.

TheStreet Ratings said: TheStreet Ratings team rates INGERSOLL-RAND PLC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate INGERSOLL-RAND PLC (IR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • IR's revenue growth has slightly outpaced the industry average of 1.4%. Since the same quarter one year prior, revenues slightly increased by 4.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.71, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.06, which illustrates the ability to avoid short-term cash problems.
  • INGERSOLL-RAND PLC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, INGERSOLL-RAND PLC increased its bottom line by earning $3.29 versus $2.08 in the prior year. This year, the market expects an improvement in earnings ($3.80 versus $3.29).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Machinery industry. The net income increased by 435.6% when compared to the same quarter one year prior, rising from $47.70 million to $255.50 million.
  • Net operating cash flow has significantly increased by 116.87% to $475.60 million when compared to the same quarter last year. In addition, INGERSOLL-RAND PLC has also vastly surpassed the industry average cash flow growth rate of -12.41%.

FLR ChartFLR data by YCharts

5. Fluor (FLR - Get Report)
Sub-industry: Engineering & Construction
Market Cap: $8.6 billion
Target Price: $68
Year-to-date return: -4.2%

Credit Suisse's Jamie Cook said: FLR is one of the highest quality contractors and well diversified by end market, with more than 80% of backlog tied to cost-plus contracts and close to 50% of sales in markets outside oil & gas. FLR's service offering within oil and gas is extremely diverse across downstream, midstream and upstream, and the company is typically the contractor of choice in North America. FLR is one of the few E&Cs that has consistently returned cash to shareholders, and it expects to repurchase $1B of stock by the end of 2015.

TheStreet Ratings said: TheStreet Ratings team rates FLUOR CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate FLUOR CORP (FLR) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in net income, notable return on equity and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Construction & Engineering industry average. The net income increased by 28.6% when compared to the same quarter one year prior, rising from $166.80 million to $214.54 million.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. In comparison to the other companies in the Construction & Engineering industry and the overall market, FLUOR CORP's return on equity significantly exceeds that of the industry average and is above that of the S&P 500.
  • FLUOR CORP has improved earnings per share by 39.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, FLUOR CORP increased its bottom line by earning $4.50 versus $4.06 in the prior year. This year, the market expects earnings to be in line with last year ($4.50 versus $4.50).
  • The gross profit margin for FLUOR CORP is currently extremely low, coming in at 7.50%. Regardless of FLR's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, FLR's net profit margin of 3.93% compares favorably to the industry average.
  • FLR's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 25.81%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.

 

HDS Chart HDS data by YCharts

6. HD Supply Holdings, Inc. (HDS - Get Report)
Sub-industry: Industrial Distribution
Market Cap: $5.8 billion
Target Price: $33
Year-to-date return: 0.64%

Credit Suisse's Flavio Campos said: We believe HDS is relatively cheap on the sum of the parts valuation and that it is poised to gain share in its MRO business while benefitting from a potential recovery in non-residential construction. HDS can also deliver solid margin expansion through cost and category control, especially if the growth environment picks up leading to some operating leverage gains.

TheStreet Ratings said: TheStreet Ratings team rates HD SUPPLY HOLDINGS INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HD SUPPLY HOLDINGS INC (HDS) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for HD SUPPLY HOLDINGS INC is currently lower than what is desirable, coming in at 29.22%. Regardless of HDS's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 2.41% trails the industry average.
  • Investors have driven up the company's shares by 30.10% over the past year, a rise that has exceeded that of the S&P 500 Index. Looking ahead, however, we cannot assume that the stock's past performance is going to drive future results. Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere.
  • Net operating cash flow has remained constant at $67.00 million with no significant change when compared to the same quarter last year. Despite stable cash flow, HD SUPPLY HOLDINGS INC's cash flow growth rate is still lower than the industry average growth rate of 20.51%.
  • HD SUPPLY HOLDINGS INC has improved earnings per share by 15.4% in the most recent quarter compared to the same quarter a year ago. This year, the market expects an improvement in earnings ($1.25 versus -$1.15).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Trading Companies & Distributors industry average. The net income increased by 17.6% when compared to the same quarter one year prior, going from $51.00 million to $60.00 million.

 

 

ALSN Chart ALSN data by YCharts

7. Allison Transmission (ALSN - Get Report)
Sub-industry: Machinery
Market Cap: $5.7 billion
Target Price: $37
Year-to-date return: -7%

Credit Suisse's Jamie Cook said: Over 40% of ALSN's sales are levered to later cycle NA straight truck, which is still ~30% below prior peak levels with low to mid-single digit growth prospects.

TheStreet Ratings said: TheStreet Ratings team rates ALLISON TRANSMISSION HLDGS as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALLISON TRANSMISSION HLDGS (ALSN) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 1.4%. Since the same quarter one year prior, revenues rose by 10.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • ALLISON TRANSMISSION HLDGS has improved earnings per share by 21.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. We feel that this trend should continue. During the past fiscal year, ALLISON TRANSMISSION HLDGS increased its bottom line by earning $1.25 versus $0.88 in the prior year. This year, the market expects an improvement in earnings ($1.40 versus $1.25).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Machinery industry average. The net income increased by 17.7% when compared to the same quarter one year prior, going from $42.90 million to $50.50 million.
  • The gross profit margin for ALLISON TRANSMISSION HLDGS is rather high; currently it is at 55.68%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 9.27% is above that of the industry average.
  • Net operating cash flow has slightly increased to $140.90 million or 2.02% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -12.41%.