Actions in UPS (NYSE: UPS)aerospace materials company Hexcel (NYSE: HXL)and security doors and locks company Allegy (NYSE:ALLE) They have all experienced a significant drop so far in 2024, falling behind the S&P 500 The index posted a 14.6% gain over the same period. However, there is compelling evidence that all three are positioned to outperform the market in the second half and beyond. Here’s why.
The investment case for UPS stock
Package delivery giant UPS faced a tumultuous 2023, with some challenges extending into the first half of 2024. Slowing economic growth has led to declining volume growth and revenue growth. A costly labor contract settlement further exacerbated the situation. To make matters worse, protracted labor negotiations led customers to divert their deliveries to other networks, fearing a strike.
However, these headwinds will turn into tailwinds in the second half, as management believes year-over-year volume growth will begin in the second quarter in the U.S. Meanwhile, cost increases due to contract labor are already in the numbers, so comparisons with last year will be easier. UPS is making 12,000 job cuts in response to weaker demand.
Everything points to a stronger second half and management’s forecast is for adjusted operating profit to increase between 20% and 30% in the second half compared to the same period in 2023.
The key to the turnaround and the metrics investors should watch closely when UPS reports its second-quarter results on July 23 is a return to U.S. delivery volume growth. Management previously said it expected slightly positive average daily volume in the US in the second quarter. If it happens, UPS will be well on its way to a recovery in 2024.
Hexcel investors are worried about Boeing
There is no doubt that Hexcel has great long-term growth prospects. Its advanced composites offer a weight and strength advantage over traditional materials such as aluminum. This is an important issue in the aerospace sector, as it helps optimize fuel consumption and reduce lifecycle operating and maintenance costs, particularly in wide-body aircraft.
There is therefore a clear trend towards new aircraft using more advanced composite materials. Boeing and Airbus They are several years behind schedule and are looking to ramp up production. Everything points to a bright future for Hexcel.
That said, there will be some short-term turbulence in 2024, and that’s why the company’s stock has fallen.
Simply put, since there is little demand for Hexcel’s products in the aftermarket, when aircraft deliveries decline at one of its end customers, in this case Boeing, Hexcel might notice it in its orders. Unfortunately, the slowdown at Boeing is creating uncertainty and investors are worried. Additionally, Hexcel has been building out its infrastructure to support strong future growth, which dampens profit margins in the near term.
Overall, it is understandable that investors may have concerns. Still, these are short-term issues, and Boeing will surely ramp up its aircraft production rate in the second half and increase it going forward. As such, Hexcel investors can expect continued sales recovery and margin growth in the coming years.
Allegion secures the future
The manufacturer of security doors and locks also has a bright future. It is leading the movement toward the convergence of electronic and mechanical safety products, which has countless benefits. Wireless technology allows building owners to monitor and control access areas remotely. Consequently, they can reduce losses, improve security, grant and deny access on a daily basis, and improve workflow productivity by knowing which workers are in which areas at all times.
The added value is significant and, given that only about 30% of sales are electronic products and the adoption rate of electronic locks is only 10% in North America, there is ample growth potential.
Still, investors are concerned about the company’s exposure to the North American residential market in 2024, and it doesn’t help that overall first-quarter sales were down 3.6% organically year over year.
However, both issues are likely to prove temporary. The North American housing market will improve in a lower interest rate environment. Moreover, the revenue decline in the first quarter is largely due to a tough comparison with the first quarter of 2023, when organic sales increased 15% organically. On a two-year comparison, sales increased 5.3% on a compound annual growth rate basis.
As such, the falling share price appears to be an excellent buying opportunity in a long-term growth story.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Hexcel and United Parcel Service. The Motley Fool has a disclosure policy.
These 3 Stocks Are Down in 2024, But Look Like They’ll Recover Spectacularly in H2 was originally published by The Motley Fool