Cyclical Rebound: Spotting Undervalued Gems in Industrials & Materials

The post-pandemic economic recovery has left cyclical sectors like industrials and materials undervalued, despite their critical role in global infrastructure renewal and ESG-driven transitions. At the Wells Fargo Industrials & Materials Conference 2025, a select group of companies emerged as compelling plays, offering asymmetric upside as demand for energy transition technologies, resilient supply chains, and smart infrastructure accelerates. Here’s why investors should act now.

ESG-Driven Opportunities: The New Engine of Growth

The energy transition and stricter environmental regulations are reshaping demand for industrial services. UL Solutions (ticker: ULSI) stands out as a leader in testing and certification for sustainable technologies. Its Q1 2025 results revealed a 22.8% adjusted EBITDA margin, up 320 basis points year-over-year, fueled by rising demand for its services in low-emission HVAC systems and fire safety solutions. The company’s $110 million global fire science center and expanded HVAC testing labs in Texas and Italy position it to capitalize on regulatory tailwinds.

MYR Group (MYRG), a specialist in electric utility infrastructure and clean energy projects, is another standout. Its Transmission & Distribution (T&D) segment—handling EV charging networks and renewable energy grids—is growing rapidly. While explicit backlog data is scarce, MYR’s mid-single-digit organic revenue guidance and focus on EV infrastructure (a sector projected to hit $2.7B by 2030) suggest strong demand visibility.

Infrastructure Plays: Betting on Megatrends

The Biden administration’s $1.2 trillion infrastructure bill and global decarbonization efforts are fueling demand for construction and industrial materials. Woodward (WWD), a provider of aerospace and marine propulsion systems, reported a record $562M in aerospace sales in Q2 2025, driven by defense and commercial aftermarket demand. Its marine segment’s backlog—extending into 2029—reflects robust shipbuilding activity, though risks like U.S.-China trade tensions linger.

For materials firms, Hawkins, Inc. (HI), which produces specialty chemicals for infrastructure and consumer markets, benefits from rising demand for corrosion-resistant materials in construction. While specifics on order backlogs are limited, its 7-8% revenue-driven capex focus on lab expansions aligns with the sector’s long-cycle recovery.

Margin Expansion: Proof of Pricing Power

The conference highlighted companies leveraging operational efficiency to boost margins amid cost pressures. UL’s Software and Advisory Segment saw margins jump 280 basis points to 14%, driven by software-as-a-service (SaaS) adoption. Similarly, Woodward’s aerospace margins hit 22.2%, despite headwinds in China’s on-highway sector. This underscores the sector’s ability to pass on costs and innovate.

Valuation: Cheap Now, Expensive Later

Current valuations for industrials/materials lag historical averages. UL trades at 14.2x forward EV/EBITDA, below its five-year average of 16x, while MYR’s EV/sales ratio of 0.7x reflects skepticism about near-term execution risks. These discounts ignore the sector’s long-cycle tailwinds: infrastructure spending typically outperforms during mid-cycle expansions, and ESG mandates are structural, not cyclical.

Risks, but the Upside Outweighs Them

Macroeconomic slowdowns and supply chain bottlenecks (e.g., China’s manufacturing slowdown in Woodward’s industrial segment) pose near-term risks. However, the $1.2T infrastructure spend and $2.7T global energy transition market by 2030 provide a multi-year runway.

Invest Now: The Clock Is Ticking

The market’s focus on short-term macro fears has created a buying opportunity in industrials and materials. Companies like UL, MYR, and Woodward offer:
- ESG-linked recurring revenue streams (UL’s HVAC testing labs, MYR’s EV infrastructure).
- Margin expansion fueled by pricing discipline (Woodward’s aerospace segment).
- Exposure to policy-driven demand (U.S. infrastructure bill, EU Green Deal).

With P/E ratios at 10-12x versus historical highs of 15-20x, the sector is primed for a valuation reset. Act now—cyclical rebounds rarely wait.

Immediate Action Items:
1. Add UL Solutions (ULSI) to capture ESG-driven margin growth.
2. Buy MYR Group (MYRG) for EV infrastructure exposure.
3. Consider Woodward (WWD) for aerospace/defense tailwinds.

The post-pandemic recovery isn’t over—it’s just getting started. These names are the blueprints for winning in the next cycle.