Key Takeaways
- 1Industrials track the business cycle — infrastructure spending and PMI data are key indicators
- 2Aerospace & defense have longer, more predictable revenue cycles than other industrials
- 3Capital allocation discipline separates great industrial companies from mediocre ones
- 4Our model rewards industrials with high returns on capital and conservative investment patterns
#The Industrial Sector
Industrials manufacture, transport, and build. It's a diverse sector spanning commercial aerospace, defense, railroads, electrical equipment, construction, and waste management.
Sub-Sectors
| Sub-Sector | Cycle Sensitivity | Moat Source | Examples |
|---|---|---|---|
| Aerospace & Defense | Low | Government contracts, barriers to entry | Lockheed Martin, RTX, GE Aerospace |
| Railroads | Moderate | Infrastructure monopoly | Union Pacific, CSX, Burlington Northern |
| Electrical Equipment | Moderate | Technology, installed base | Eaton, Emerson |
| Machinery | High | Dealer networks, brand | Caterpillar, Deere |
| Waste Management | Low | Route density, regulatory permits | Waste Management, Republic Services |
| Airlines | Very High | Scale, route networks | Delta, United, Southwest |
#Key Metrics for Industrial Stocks
| Metric | Significance | Strong Signal |
|---|---|---|
| Return on Invested Capital | Capital efficiency | > 15% |
| Backlog / Book-to-Bill | Future revenue visibility | > 1.0x book-to-bill |
| Free Cash Flow Conversion | Earnings quality | > 90% |
| Operating Margin | Operational excellence | > 15% |
| Organic Growth | Demand strength | > 5% |
#Cyclicality and Factor Investing
Industrials are cyclical — they do well when the economy grows and poorly during recessions. Our factor model helps navigate this:
- Momentum captures cyclical upswings early
- Profitability identifies companies that maintain margins through downturns
- Stability avoids the most volatile cyclical names
- Value finds industrials trading below fair value during pessimistic periods
#Infrastructure Tailwinds
Multiple secular trends support industrial growth:
- 1Reshoring — Manufacturing returning to the US, boosting machinery and automation demand
- 2Grid modernization — Electrical infrastructure upgrades for renewable energy and EVs
- 3Defense spending — Geopolitical tensions driving increased military budgets globally
- 4Sustainability — Waste management and water treatment benefiting from ESG mandates
#The Bottom Line
Industrial stocks reward patient investors who buy quality companies at reasonable prices. Our model is particularly effective here — the profitability and investment factors naturally identify well-managed industrials that allocate capital wisely.
Last updated: February 10, 2026