The Durable Play In Durable Goods

By Aaron Levitt | June 29, 2012 AAA

Despite slowing global growth, it seems that the sky isn't completely falling after all. The United States manufacturing sector continues to show strength in the face of adversity. The latest good news comes from rising durable goods orders. Considered "left for dead" in the face of cheaper-waged emerging market nations, the U.S. manufacturing sector has surged since the credit crisis. Recent data continues to support the industrials. For investors, the sector could offer strong dividends and outperformance in the months ahead, as companies remain confident about the U.S. economy, despite a weaker job market and a potential recession in Europe.

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Higher Orders in May
As the "bedrock of America," the industrial manufacturers have continued to see gains, as the economy has begun to improve. The latest boost to the sector comes from rising orders for durable goods. At their core, durable goods are items that are expected to last at least three years and according to the Commerce Department, orders for long-lasting manufactured items rose 1.1% in May.

Overall, companies purchased $217.2 billion worth of equipment in May. That's roughly 46% above the recessionary low hit in April 2009, but still 11.4% below 2007 peaks. The 1.1% increase was more than the economists' forecasts of a 0.4% increase. This signals the end of two months' worth of declines. Durable goods orders sunk 0.2% in April and 3.7% in March.

Likewise, orders for core capital goods rose 1.6% as companies purchased more computers and heavy machinery. These items are generally tied to business investment plans and show that companies remain confident in the U.S. economy, despite the potential for recession in Europe. Manufacturing remains a key driver of job growth in the nation, with the sector adding 12,000 jobs in May. That's the eighth straight monthly gain.

As the U.S. continues to produce more high-tech and value-added components, the industrial sector should continue thrive. The recent order uptick for these sorts of goods is a bullish sign. Add this to falling natural gas/electricity prices and a generally weaker dollar and you have a recipe for long-term export and manufacturing success.

SEE: Economic Indicators: Industrial Production

Playing the Continued Good News
While there are still real risks to a sustainable global recovery, the continued spate of good news is certainly promising. Overall, the industrial manufacturers and capital goods companies continue to lead the way. For investors, playing the revived industrial boom could be one of the better plays going forward for the long term. Here are some picks.

With nearly $3 billion in assets, the Industrial Select Sector SPDR (ARCA:XLI) continues to be one of the largest and most liquid funds in the sector. The fund spreads assets across 63 different industrial giants, including Honeywell (NYSE:HON) and Emerson Electric (NYSE:EMR). The fund charges a dirt-cheap 0.18% in expenses and yields 2.26%. Likewise, the iShares Dow Jones US Industrials (NYSE:IYJ) offers a broad play as well.

With its pending $11.8 billion purchase of Cooper Industries (NYSE:CBE), Eaton (NYSE:ETN) could be a great bet. Already a leader in power generation, electrical grids and hydraulic systems, acquisition will strengthen Eaton's expertise in those areas. At the same time, Eaton's share price has slipped by about 25% over the quarter and now represents a great long-term buying opportunity. Shares of the firm yield 4.1%.

Providing the engines for a variety of mining, oil equipment and other industrial applications, Cummins (NYSE:CMI) has continued to see its star shine over the last few years and currently can be had for a P/E ratio of roughly 8.7 and around a 1.8% dividend yield. Similarly, small-engine maker Briggs & Stratton (NYSE:BGG) should do well, as any sort of housing recovery will drive demand for its power equipment engines.

SEE: Overview Of Mutual Fund Expenses

The Bottom Line
With durable and core capital goods orders rising, despite the issues facing Europe, businesses are still betting on a strong U.S. economy. That will ultimately benefit the industrial firms making these items. For investors, that means continuing to add quality manufacturing names to their portfolios. The previous picks along, with Roper Industries (NYSE:ROP), make ideal selections to play the trend.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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