After an outstanding 2013, many investors look to 2014 with a wary, but positive eye. Most on Wall Street are generally bullish on 2014 prospects, but any number of external issues could trigger a steep sell-off. The Industrial analysts team at Bank of America Merrill Lynch is in the positive camp, and actually think that a speculative market melt-up would be a bigger threat than geopolitical or other external factors.

For a variety of reasons, Merrill Lynch thinks industrials set up better than materials heading into 2014. Improvement in the competitive positioning of U.S. manufacturing, consumers’ ability to make discretionary purchases and other factors should allow
for a positive outlook for industrial sectors. The Merrill Lynch head of U.S. equity and quantitative strategy, Savita Subramanian, has an overweight view on industrials.

Here are the top industrial stocks to buy for 2014 at Merrill Lynch.

CSX Corp. (NYSE: CSX) is a top transport name on the Merrill Lynch list. The major headwind for the stock in 2014 is the deteriorating coal sector. Energy markets continue increasingly to favor natural gas. To combat the decline, CSX sees the merchandise and intermodal businesses as a counterbalance for continued growth. Many companies are starting to move products via rail versus the highway, and that is a big positive for the company. Investors are paid a 2.20% dividend. The Merrill Lynch price target is $32. The Thomson/First Call estimate is $20. CSX closed Monday at $27.84.

Eaton Corp. PLC (NYSE: ETN) is a power management company providing energy-efficient solutions that help its customers efficiently manage electrical, hydraulic and mechanical power. Eaton continues to focus on doing business right as it leverages the business system for global expansion, product innovation, better profitability and the chase for breakout opportunities. Investors are paid a 2.3% dividend. Merrill Lynch has an $82 price target, and the consensus is lower at $78. Eaton closed Monday at $72.87.

Fluor Corp. (NYSE: FLR) announced last week that NuScale Power, for which Fluor is the majority investor, was named a recipient of U.S. Department of Energy funding that will support the development, licensing and commercialization of the company’s nuclear small modular reactor (SMR) technology. This project represents a significant investment in first-of-a-kind engineering and design certification for SMRs in the United States. In an improving economy, Fluor can be an earnings home run. Investors receive a small 0.8% dividend. Merrill Lynch has an $85 price target, and the consensus target is posted at $84.50. Fluor closed Friday at $75.94.

Ford Motor Co. (NYSE: F) has had a solid year, and the prospects for 2014 seem solid. With a very positive reaction to the iconic Mustang, and Americans finally replacing automobiles after the recession pulled back spending, Ford is expected to have a strong year. The company is expected to release 23 new vehicles globally, including 16 new models in the United States. Investors receive a 2.4% dividend. Merrill Lynch has a $24 price objective. The consensus is at $20.50. Ford closed Monday at $16.86.

General Dynamics Corp. (NYSE: GD), like other defense contractors, will have a shot at a much better 2014 with the newly passed budget. Some of the sequestration defense spending cuts have been restored. Without the bipartisan deal, defense spending would have cut significantly in 2014 and beyond. The 2011 Budget Control Act required federal discretionary spending to fall from $986 billion in 2013 to $967 billion in 2014. However, the new agreement rolls back the automatic “sequestration” cuts to defense jobs from the past two years, in addition to protecting spending for the next two years. Investors receive a 2.4% dividend. Merrill Lynch has a $114 price target, and the consensus is at $96. General Dynamics closed Friday at $90.92.

Southwest Airlines Co. (NYSE: LUV) is another top transport to make the Merrill Lynch list. The company announced last week a schedule for international service under the Southwest brand next year. With a view to expanding service in the coming years, Southwest is investing more than $100 million to upgrade Houston’s William Hobby Airport. It is installing new gates and a customs facility as it looks to add flights to Mexico, the Caribbean and Central and South America in 2015. Investors receive a small 0.9% dividend. Merrill Lynch has a $23 price objective, while the consensus figure is at $21. Southwest closed Monday at $18.73.

Toll Brothers Inc.‘s (NYSE: TOL) recent acquisition of Shapell is very positive for the growth story of the luxury home builder. The secular (long-term) story for the builders is fantastic. As a nation, we have underbuilt for more than a decade and household formation has been depressed. With a more confident consumer and an improving economy, the story only gets better. Merrill Lynch has a $42 price target for the stock, and the consensus is lower at $38. Toll Brothers closed Monday at $33.01.

The Merrill Lynch industrial stocks combine solid growth prospects with reasonable dividends. As we have previously mentioned, there is a strong possibility of a sizable correction at some point in 2014. That may actually be good for the market. Investors may want to scale buy into new names while keeping some cash on the sidelines.

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