Value Investing in Industrials: Navigating Headwinds and Identifying a Compelling Opportunity

The industrials sector in 2025 operated under a cloud of persistent headwinds. The U.S. manufacturing industry faced a challenging economic environment, with the Institute for Supply Management's manufacturing purchasing managers' index remaining below 50 for much of the year, signaling contraction. This was driven by trade policy uncertainty and tariffs, with more than three-quarters of manufacturers citing that uncertainty as their top concern. Costs rose, employment fell, and investment in new facilities steadily declined.

Against this backdrop, the sector's recent performance presents a classic "buy the rumor, sell the news" dynamic. While the broader industrials industry has posted strong gains-beating the S&P 500 by over six percentage points in the past six months-these numbers mask significant underlying weakness. The rally has been broad, but not deep, and it has largely rewarded companies that are already positioned for a cyclical upturn. The key for a value investor is to separate the durable businesses with pricing power and resilient end markets from the disposable ones exposed to the cycle's downturn.

This is where the sector's inherent diversity becomes its greatest test. Not all industrials are created equal. Some companies are deeply tied to volatile capital expenditure cycles, while others serve more defensive, essential infrastructure. The value thesis, therefore, is not to buy the sector as a whole, but to identify the handful of companies with a wide and durable competitive moat. These are the businesses that can compound value through the cycles, not just ride them. The challenge is to look past the sector-wide noise and find the few that are truly built to last.

Analyzing the Resilient Option: ITT Inc. as a Value Candidate

For a value investor, the ideal industrial company is one that operates in essential markets, commands pricing power, and compounds capital through economic cycles. ITT Inc. fits this profile more closely than many peers. The company manufactures and sells engineered critical components and customized technology solutions for transportation, industrial, and energy markets. This focus on durable, long-term contracts provides a revenue stream less sensitive to the short-term volatility that plagues cyclical manufacturers. Its products are not discretionary; they are integral to the operation of vehicles, industrial processes, and energy systems, creating a natural moat.

This durability is the product of decades of disciplined strategy. ITT has systematically sharpened its focus by divesting non-core assets, notably its Wolverine automotive component business in 2024. At the same time, it has acquired niche technology firms like kSARIA and Svanehøj to enhance its portfolio in higher-growth, higher-margin segments. This approach-selling what doesn't fit and buying what does-has built a more concentrated and resilient business. The result is a company with a diversified portfolio across Motion Technologies, Industrial Process, and Connect and Control Technologies, each serving essential end markets. This operational discipline is reflected in its financials, with a projected full-year 2025 revenue exceeding $3.7 billion and an operating margin of 18.6% in 2024.

From a valuation perspective, the stock presents a potential margin of safety. With a market capitalization of approximately $13.4 billion, the shares trade at a recent price near $183.08. This is notably below its 52-week high of $197.07, suggesting the market has taken a step back after a strong run. The pullback, combined with the company's disciplined strategy and durable revenue base, creates a setup where the price may no longer fully reflect the quality of the underlying business. For a patient investor, this is the space where intrinsic value can be found.

Contextualizing Other Industrials: Alternatives and Pitfalls

The principle of selective investment is best illustrated by contrasting other industrials with the resilient profile we've identified. BWX Technologies offers a compelling alternative story, one built on a long-term, secular growth narrative. The company is positioned at the intersection of two powerful forces: surging energy demand from artificial intelligence and a clear U.S. government policy commitment to expand nuclear power. With a decade-long history of raising its dividend and a focus on cutting-edge small modular reactor technology, BWX represents a capital-intensive play on essential infrastructure. For a value investor, its appeal lies in the durability of its contracts and the potential for cash flows to compound over decades, much like ITT's engineered components. The setup is different-more regulated and longer-dated-but the core idea of a business with a wide moat serving a non-discretionary need remains.

On the flip side, the sector is littered with companies that exemplify the pitfalls of a lack of durable advantage. AMETEK is a prime example of a business that has relied on acquisitions rather than organic growth to expand. Its 5.1% annual sales growth over the last two years was below the typical industrials company, and the absence of organic momentum suggests the business model lacks a powerful internal engine. This reliance on external deals often leads to integration challenges and dilution of returns, a classic sign of a narrow moat. Similarly, Astec Industries faces a double whammy of weak demand and cost pressure. Its sales pipeline suggests future revenue growth won't meet standards, with a backlog that has averaged declines, while high input costs result in an inferior gross margin. This combination of a shrinking order book and margin pressure undermines the company's ability to generate sustainable free cash flow, making it a poor candidate for long-term compounding.

The takeaway is that within the industrials sector, the quality of the business is paramount. BWX shows what a durable, policy-backed moat can look like, while AMETEK and Astec demonstrate the risks of a business that lacks pricing power and organic growth. For the value investor, the goal is to identify the former and avoid the latter, ensuring that capital is deployed only in companies with the resilience to compound through the inevitable cycles.

Catalysts, Risks, and the Value Investor's Watchlist

For the value investor, the thesis on ITT hinges on a few forward-looking factors. The primary risk is the cyclical nature of industrial demand. A prolonged manufacturing contraction, as seen in 2025 when the Institute for Supply Management's manufacturing purchasing managers' index remained below 50 for much of the year, would pressure ITT's revenue and margins. The company's exposure to transportation and industrial markets means it is not immune to the broader economic cycle, even if its products are essential.

The key catalyst to watch is a shift in monetary policy. The potential for interest rate cuts could help reignite demand for manufactured goods and support capital spending by ITT's customers. This would provide a tailwind to the company's organic growth, which is projected to be between 3% and 5% for 2025. In the current environment, where trade policy uncertainty remains a top concern for manufacturers, any reduction in financial friction could be a meaningful boost to the industrial cycle.

Beyond macro factors, the value investor must monitor execution on the strategic plan. The company's disciplined approach of divesting non-core assets and acquiring niche technology firms like kSARIA and Svanehøj is designed to build a more concentrated and resilient business. Success here is critical to maintaining and widening its competitive moat. The ability to navigate ongoing trade uncertainty and convert its global footprint into consistent, high-margin growth will determine whether the current valuation offers a durable margin of safety.

The bottom line is that ITT represents a bet on a cyclical recovery, but one backed by a company that is actively building a more defensible position. For a patient investor, the watchlist is clear: monitor the manufacturing PMI for signs of stabilization, watch for dovish shifts in Fed policy, and assess the integration of strategic acquisitions. The goal is not to time the cycle perfectly, but to ensure the business quality remains intact as the cycle turns.