The Canadian manufacturing sector is on the edge of a tipping point. A confluence of different factors is about to unleash more capital investment in this segment of the Canadian economy.
Fortunately, the market hasn’t realized this yet. Investors still have a chance to swoop in early and snap up manufacturing stocks that are trading at discounted valuations before a bull market erupts. Here’s why the manufacturing boom is upon us and the stocks you should watch closely as this trend unfolds.
Manufacturing boom
North America’s manufacturing sector was hollowed out by globalization. Over the past three decades, all middle-class factory jobs moved to China and other low-cost parts of the world. However, this trend is over. Chinese wages have surged, which makes them less competitive, while Canadian and American companies are considering reshoring to avoid supply chain disruptions from sudden shocks to the global economy.
America has already unleashed substantial subsidies for green energy and semiconductor manufacturing. Now, Canadian authorities are attempting a similar strategy. Investors should see these strategic moves from the government as an early sign of a manufacturing boom.
Here are the top manufacturing stocks to watch.
Magna International
Automobiles are arguably the most exciting manufacturing sector in Canada right now. Canada doesn’t have a domestic car brand like Germany or Japan, but it doesn’t need one. Instead, Magna International (TSX: MG) is a contract manufacturer for the world’s leading original equipment manufacturers (OEMs).
The company produces vehicles and auto parts for over 58 major brands spread across the world.
Now, the transition to electric vehicles is working in their favour. Electric vehicles need more proprietary parts that can only be supplied by Magna. Also, these parts and services have higher margins than traditional internal combustion engines.
The Canadian government’s initiative to encourage electric cars is likely to benefit the stock. Meanwhile, it trades at a price-to-earnings ratio of 38.1 and offers a reliable 3.22% dividend yield. Keep an eye on this underrated manufacturing stock.
Bombardier Recreational
The Bombardier brand probably evokes trains, but Bombardier Recreational (TSX: DOO) is a different company. This one is focused on fun leisure vehicles such as snowmobiles, all-terrain vehicles, side-by-sides, motorcycles, and personal watercraft.
You’re probably familiar with their flagship brands, including Ski-Doo, Sea-Doo, Can-Am, and Lynx.
The company saw a surge in sales during the pandemic, as people turned to some of the few recreational activities that were not restricted. Now, this growth spurt seems to be self-sustaining.
BRP stock is up 28.6% over the past year, despite the worries about consumer spending and recession. However, earnings have grown faster. Earnings per share have compounded at a rate of 26% since the company was publicly listed in 2014. The stock still trades at a 9.7 multiple to earnings per share.
Keep an eye on this underrated manufacturing stock, as Canadian vehicle makers boom.
