Some well-run industrial firms, while left for dead by many outsiders, didn't stand idly by during the Great Recession; they kept a lid on costs and devoted more attention to areas of the world that were actually growing. Now, as the economy shows signs of improvement both at home and abroad, some pros say these manufacturers are in excellent financial shape and are in a good position to grow their businesses profitably. "The industry's financial flexibility is startling, coming out of a recession," says Nick Heymann, managing director of global industrial infrastructure research at Sterne Agee.

Being optimistic about manufacturing might sound a little crazy. After all, this is a sector that has shed more than 2 million jobs in the U.S. alone in the past two years, shuttered factories and suffered the worst drop-off in orders since the Great Depression. There's no guarantee that the economy won't falter again. Still, there are some signs that the worst is over for many manufacturers. The sector actually added jobs in December, and the Institute for Supply Management's manufacturing index, which measures how busy U.S. factories are, reached its highest level in more than five years in January. "The world we look at really has improved," General Electric CEO Jeffrey Immelt told analysts recently.

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Traders often jump at any glimmer of good news, and it's no different with manufacturing stocks-the sector is up 62 percent since last March. Still, some experts say Wall Street is underestimating how much different-and better-some of these firms have become since they've begun cutting costs, shifting production to cheaper factories and making other belt-tightening moves. U.S.-based manufacturers should also benefit from a relatively weak dollar, which makes their goods cheaper to foreign customers, and from billions of stimulus dollars that were approved in 2009 but are only this year hitting the streets. Many of these firms are sitting on piles of cash, too, which should allow them to expand as the economy improves. Nicholas Bohnsack, a sector strategist at Strategas Research Partners, expects profits from industrial firms to rise 35 percent in 2010, a big improvement over their results at the end of the previous recession, in 2002, when industrial firms increased profits by 3 percent. We found five manufacturers that many pros think will capitalize on a global economic recovery.

International Paper (IP, $25)

In past recessions, the paper industry has often played a game of chicken that left both profits and stocks beaten to a pulp. Instead of curtailing production as the economy slowed, companies waited for a rival to make the first move. That left mills with unsold paper and cardboard boxes, preventing them from fully capitalizing on the eventual recovery. This time around, International Paper (IP) and its competitors managed to stay in sync with the economy, quickly halting production as demand cratered. As a result, the mills emerged from the downturn with tight supplies, enabling the companies to boost prices by 5 to 10 percent this year-the most dramatic increase out of a downturn in decades, says Steve Chercover, paper analyst at D.A. Davidson in Lake Oswego, Ore.

Part of International Paper's recent success stems from its purchase of rival Weyerhaeuser's containerboard business for $6 billion in the spring of 2008. While the deal looked ill-timed amid all the doom and gloom about the economy, it made the company the largest North American corrugated-box maker. The company has saved millions of dollars by slashing 10,000 jobs and restructuring the new business through the downturn. The cost-cutting feeds into analysts' estimates for the Memphis-based firm to boost its profits by 24 percent this year, to $628 million, or $1.43 a share.

The outlook for the industry still isn't exactly rosy. The company's paper business, which makes up about 25 percent of its sales, is still contracting and its containerboard business remains sluggish. The excitement comes from the firm's debt-or, more precisely, its success at whittling its debt down to $8 billion (after subtracting cash) from $11.5 billion two years ago, despite the downturn. "That's phenomenal," says Heather McPherson, associate portfolio manager at T. Rowe Price's Mid-Cap Value fund, which owns the stock. She says that means International Paper could soon do something else with its money, such as boost its dividend or make more international investments.

Like many other industrial companies, International Paper is focusing on expanding further into emerging markets to offset the contraction in its business. But McPherson says the company is moving prudently, sticking with countries it has decades of experience in, like Brazil, and using joint ventures in markets that are difficult to break into.

United Technologies (UTX, $72)

The diversity of United Technologies (UTX) business sheltered it from past downturns, but not this time: Struggling airlines grounded planes, clipping its jet-engine business, and new home sales tumbled, hurting its air-conditioning business. The result was that the industrial giant's profits fell last year for the first time in a decade.

The good news is that the company held up better than many of its peers, posting smaller revenue declines and generating enough cash to fund the $1.8 billion purchase of General Electric's electronic-security business in November. And this year is looking better still. Encouraged by the first increase in shipments since 2006 at its Carrier heating and air-conditioning business, and by record orders for its Sikorsky military helicopters, the Hartford, Conn., firm expects sales to increase in five of its six business units this year.

With the recovery gaining traction, analysts say, United Technologies should benefit, as customers looking to boost their efficiency turn to some of the company's cost-saving products, including elevators that reduce energy use by 50 percent and fuel cells that power hybrid buses. Then there's the China kicker. The company's history in that booming nation goes back to 1937, when Carrier installed an air-conditioning system in what was then Shanghai's tallest building. Today annual revenue from China is $3 billion, or about 5 percent of total revenue.

Of course, any change in China's growth prospects could spook industrial stocks. But Chief Financial Officer Greg Hayes recently told analysts that United Technologies still expects a good 2010 in China, partly because that country is poised to spend $250 billion this year on infrastructure projects and housing, which benefit the company's Otis elevator and Carrier air-conditioning businesses. Company executives also told analysts its operations were facing pricing pressure in Europe and China, and some parts of its business had yet to recover in the U.S. and Europe.

Looking past those near-term concerns, Kent Croft, of the Croft Value fund, sees United Technologies as a good bet for investors who think the economy is at the beginning of a multiyear recovery. "It deserves to trade at a premium," says Croft, who has owned the stock since 2005 and is buying more. "It is run by good operators and is in the right places."

Flowserve (FLS, $106)

Flowserve (FLS) traces its roots to a pumpmaker that got its start during the Industrial Revolution. Today the company has its sights on the industrial revolution in emerging markets. The Irving, Texas-based company makes valves, seals and pumps-components used to meet some basic needs in developing countries, such as providing energy and water for growing populations. That puts the company in a position to tap into the $35 trillion in global infrastructure spending expected over the next 20 years.

Flowserve Chief Executive Mark Blinn tells SmartMoney he's focusing much of the company's spending on growth opportunities abroad. Last year the company committed much of its $100 million capital spending budget to projects like three R&D centers in India and a new factory in Brazil. At the same time, it beefed up its repair and services business, which provided some stability in the downturn. The company has also broadened its business mix by reducing its dependence on the oil and gas industry and forging into areas like nuclear energy and water desalination. "They are on top of their game and expanding for the long run," says William Bremer, senior industrials analyst at brokerage firm Maxim Group.

Even though its stock has doubled in the past year, Flowserve hasn't fully recovered from the recession. "We have seen some signs of stabilization, but there is still uncertainty around the world," CEO Blinn says. Flowserve's success at slashing costs and building $5 a share in cash while diversifying its business means better times are ahead, says Robert Becker, research director at Keeley Funds, which owns the stock. "They tend to surprise you on the upside," he says.

Nalco Holding (NLC, $23)

The push to go green is a curse for many chemical companies. But for Nalco Holding (NLC), which generates the bulk of its sales from products that boost energy efficiency, improve air quality and save water, it's a potential catalyst for the kind of green that goes into its coffers. Since taking the helm two years ago, Chief Executive Erik Fyrwald has been restructuring the firm in a bid to boost sales and productivity. He reshuffled managers, closed several plants and cut jobs at Nalco's European operations after four years of sales declines. He also invested heavily in emerging markets-building a new research facility in Brazil and opening a manufacturing plant in China during the downturn. The company, whose chemicals are used for boiler processors and oil exploration, now sells 30 percent fewer products, focusing on those that are higher-tech and higher-margin.

Nalco has also managed to ward off pricing pressure more successfully than analysts expected. The result is that it anticipates 6 to 8 percent growth in 2011, if the global economy grows at 3 percent. Fyrwald tells SmartMoney that even in a flat economy, he thinks his company can increase sales by 3 percent in 2011 because of its stronger market position and its investments in new technology, emerging markets and the Middle East.

Since most of its chemicals are made from oil products, a sudden spike in crude would squeeze Nalco's profits. The company also has $3 billion in debt, putting its debt/equity ratio above others in the industry. While Nalco refinanced the debt last year and has almost twice the amount of money it needs to cover its short-term obligations, another global credit scare could spook investors. But to Paul McPheeters, manager of the AIM Disciplined Equity fund, those fears mean Nalco shares are still attractively priced. "The negatives people were focusing on are no longer there," says McPheeters, whose fund has owned the stock since 2004. "If you focus on the growth story and the cash they generate, it's still a fairly cheap stock."

Eaton (ETN, $75)

Judging by reports on inventories, many industrial firms are sitting with bare shelves. That means they need to start producing goods just to keep pace with current demand, which bodes well for Eaton (ETN). Even though few companies are committing to big-ticket projects, many have no choice but to spend on components like valves, transmissions and electrical switches, which they need as orders filter in. "Eaton makes those bread-and-butter components for industrial America, and that is where the activity will be," says Eli Lustgarten, a veteran manufacturing analyst at Longbow Research.

While Eaton has spent much of the past decade trying to move away from its auto and truck roots, it is that business-which is now a quarter of sales-that some see as a near-term boost for earnings and the stock. As the auto industry claws back from its sharp losses, Eaton is expecting 9 percent volume growth this year, with much of that coming from a drive to boost fuel efficiency and reduce emissions. Trucks may not be far behind. "Shippers have been holding trucks together with baling wire and will have to buy new ones," says Mike Kagan, who owns Eaton shares in the Legg Mason ClearBridge Equity fund he manages. "The market hasn't factored that into the stock yet."

The company says it has not yet seen longer-term orders pick up. It also expects continued weakness in nonresidential construction, keeping a lid on its electrical business. Still, analysts say Eaton's profits should rise as the recovery takes hold and the company reaps the benefits of broadening into areas like energy-efficient technologies, hydraulic power systems for fighter jets and managing power for hospitals. The Cleveland-based company has also been expanding through acquisitions, like that of a Taiwanese power-systems maker and a German electrical-engineering company. With cash of more than $4 a share, Eaton isn't done yet. "We're looking much more anxiously and enthusiastically at opportunities that are out there," CEO Sandy Cutler told analysts in late January.