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5 Industrial Services Stocks to Watch in a Challenging Industry
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The Zacks Industrial Services industry is facing few near-term challenges in the form of supply chain constraints and input cost headwinds. However, the recent improvement in manufacturing activities and business sentiment indicates that a recovery is imminent.
It is worth mentioning that rise in e-commerce activities will also drive the industry. Technological advancements and rising use of e-commerce solutions continue to grow at a rapid pace. The industry players including Ashtead Group PLC (ASHTY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) , SiteOne Landscape Supply, Inc. (SITE - Free Report) , MSC Industrial Direct Co., Inc. (MSM - Free Report) and ScanSource, Inc. (SCSC - Free Report) have been making efforts to capitalize on this scenario.
About the Industry
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It encompasses activities such as routine maintenance work, emergency maintenance, spare parts inventory control that keep a facility and its equipment in good operating condition. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and other consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. By offering inventory management, process and procurement solutions; these companies reduce MRO supply chain costs and improve plant floor productivity for customers.
What''s Shaping the Future of Industrial Services Industry
COVID-19 & Cost Woes Persist: The COVID-19 pandemic has induced significant volatility and uncertainty that have severely impacted businesses, and the industrial services industry has been no exception to the trend. The primary impacts of the COVID-19 pandemic on the industry included disruptions or closures of customer and suppliers’ facilities, and supply chains. While businesses have resumed operations, these risks remain. Moreover, these companies are facing input cost inflation, transport and logistic costs and supply chain constraints. Meanwhile, the industry players have been implementing cost reduction actions, which include limiting discretionary spending, reducing hiring, and deferring certain discretionary capital expenditures. These initiatives along with price increases are likely to help the industry sustain margins.
Improvement in Manufacturing Instills Optimism: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (“MBI”) and the Industrial Production Index (“IP”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. The index has been above 50 (which indicates expansion) since September after being impacted by COVID-19 related disruptions earlier. Gains have been witnessed in production and new orders activity. The IP index, which measures short-term changes in industrial production, rose at an annual rate of 2.5% in the first quarter of 2021 followed by 0.7% in April. The improvement in business sentiment and operational activity instills optimism regarding the industry’s recovery from the pandemic induced sluggishness.
E-Commerce is a Game-Changer: MRO demand has been significantly impacted by evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online. In 2020, over two billion people purchased goods or services online, which sent e-retail sales above $4.2 trillion. Per Statista, revenues in the e-commerce market are expected to witness a CAGR of 6.3% over the 2021-2025 time period. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, which is a 19-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #132, which places it at the bottom 47% of 249 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have gone down 14%.
Despite bleak near-term prospects of the industry, we will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Industrial Services industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 20.3% compared with the sector’s growth of 43.4%. Notably, the Zacks S&P 500 composite has rallied 33.5% in the same time frame.
One-Year Price Performance
Industry''s Current Valuation
On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 21.36x compared with the S&P 500’s 15.87x and the Industrial Products sector’s forward 12-month EV/EBITDA of 21.07x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Over the last five years, the industry has traded as high as 23.84x and as low as 7.43x, with the median being at 10.29x.
5 Industrial Services Stocks to Keep an Eye on
SiteOne Landscape Supply: This Roswell, GA-based company is a national wholesale distributor of landscape supplies in the United States and Canada.
The company has been gaining from the ongoing strength demand, as customers are spending more time at home and investing in their outdoor living spaces. In addition to organic growth, it has been growing its business through acquisitions to increase customer base, broadening product lines and expanding its geographic reach. The company has a strong pipeline of acquisition opportunities. It will gain from its focus on cost reduction and operational initiatives, enhancing supply chain efficiency and strengthening pricing. Meanwhile, the company is investing more in sophisticated information technology systems and data analytics. It has relaunched its website and the implemented B2B e-Commerce platform, which provides the convenience of an online sales channel.
The Zacks Consensus Estimate for earnings for fiscal 2021 of the company has gone up 25.7% in the past 60 days. Shares of the company have appreciated 18.7% over the past six months. The company has a trailing four-quarter earnings surprise of 131.3%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Price: SITE
Grainger: Lake Forest, IL-based Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services to around 3.5 million businesses and institutions globally.
The company is well-poised to gain from efforts to increase customer base through incremental marketing investments and effective marketing strategies. Grainger continues its efforts to strengthen relationships with both large and mid-sized customers to improve sales force effectiveness. Investments in e-commerce and digital capabilities will also yield results. Increased e-commerce sales and higher demand for certain products amid the pandemic will continue to drive the top line. Cost control measures undertaken by the company will sustain margins.
Notably, Grainger has gained 14.5% over the past six months. This Zacks Ranked #2 (Buy) stock has an estimated long-term earnings growth rate of 13.5%. The company’s consensus estimate for 2021 earnings has moved up 7% in the past 60 days. It has a trailing four-quarter earnings surprise of 4.4%, on average.
Price: GWW
ScanSource: Greenville, SC-based ScanSource distributes technology products and solutions in the United States, Canada and internationally.
In the Barcode, Networking & Security segment, the company is witnessing demand recovery across its technologies, led by growth in mobility, self-checkout, video surveillance and networking solutions. Large deals supporting the mobile everywhere trend, including warehousing and logistics, curbside pickup, and e-commerce, is driving growth. Demand for video surveillance and outdoor surveillance systems and cameras remains strong. In the Communications & Services segment, the company is witnessing growth in video, audio and collaboration products. The hybrid office and work-anywhere trends provide opportunities for the company’s solutions. All these factors will fuel its top-line performance, while cost control efforts will boost margins.
The Zacks Ranked #2 stock has gained 4.6% in the past six months. The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 21% in the past 60 days. The company has a trailing four-quarter earnings surprise of 24.3%, on average.
Price: SCSC
MSC Industrial Direct: The Melville NY-based company together with its subsidiaries, distributes metalworking MRO products in the United States, Canada, Mexico and the U.K.
The company is progressing well with its “Mission Critical” project that is driving productivity gains amid the uncertain macro environment. Per the plan, the company is investing in its market-leading metalworking business by adding to metalworking specialist team, introducing value-added services to customers, expanding vending, building sales force, and diversifying customers and end markets. It has targeted $90 million to $100 million of gross cost savings through fiscal 2023 from the Mission Critical initiative. It will also benefit from its continued focus on growth initiatives, execution of pricing actions and structural cost reductions. Apart from this, the company is gaining from new customer wins in metalworking business driven by its significant cutting tool applications, MSC Millmax. Further, the company continues to invest in technology and growing its e-commerce channel, which generates around 60% of its revenues.
The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 2% in the past 60 days. It has a trailing four-quarter earnings surprise of 8.5%, on average. The stock has gained 11.3% over the past six months. It carries a Zacks Rank #3 (Hold).
Price: MSM
Ashtead Group: This London, U.K. based company engages in construction, industrial, and general equipment rental business. It offers a broad range of construction and industrial equipment across a wide variety of applications to a diverse customer base.
The company is well-poised to deliver strong results backed by its diverse end markets and products, lower debt levels, and efforts to strengthen market position. Moreover, initiatives to optimize cash flow, reduce capital expenditure and operating costs are likely to yield results. Backed by a good quality fleet and a strong financial position, the company is well positioned to navigate through the turbulent times. It also continues to invest in digital transformation program that will enhance customer experience.
The Zacks Consensus Estimate for 2021 earnings has been revised upward by 3% in the past 60 days. The stock has gained 69.8% over the past six months. It carries a Zacks Rank #3.
Price: ASHTY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
5 Industrial Services Stocks to Watch in a Challenging Industry
The Zacks Industrial Services industry is facing few near-term challenges in the form of supply chain constraints and input cost headwinds. However, the recent improvement in manufacturing activities and business sentiment indicates that a recovery is imminent.
It is worth mentioning that rise in e-commerce activities will also drive the industry. Technological advancements and rising use of e-commerce solutions continue to grow at a rapid pace. The industry players including Ashtead Group PLC (ASHTY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) , SiteOne Landscape Supply, Inc. (SITE - Free Report) , MSC Industrial Direct Co., Inc. (MSM - Free Report) and ScanSource, Inc. (SCSC - Free Report) have been making efforts to capitalize on this scenario.
About the Industry
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It encompasses activities such as routine maintenance work, emergency maintenance, spare parts inventory control that keep a facility and its equipment in good operating condition. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and other consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. By offering inventory management, process and procurement solutions; these companies reduce MRO supply chain costs and improve plant floor productivity for customers.
What''s Shaping the Future of Industrial Services Industry
COVID-19 & Cost Woes Persist: The COVID-19 pandemic has induced significant volatility and uncertainty that have severely impacted businesses, and the industrial services industry has been no exception to the trend. The primary impacts of the COVID-19 pandemic on the industry included disruptions or closures of customer and suppliers’ facilities, and supply chains. While businesses have resumed operations, these risks remain. Moreover, these companies are facing input cost inflation, transport and logistic costs and supply chain constraints. Meanwhile, the industry players have been implementing cost reduction actions, which include limiting discretionary spending, reducing hiring, and deferring certain discretionary capital expenditures. These initiatives along with price increases are likely to help the industry sustain margins.
Improvement in Manufacturing Instills Optimism: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (“MBI”) and the Industrial Production Index (“IP”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. The index has been above 50 (which indicates expansion) since September after being impacted by COVID-19 related disruptions earlier. Gains have been witnessed in production and new orders activity. The IP index, which measures short-term changes in industrial production, rose at an annual rate of 2.5% in the first quarter of 2021 followed by 0.7% in April. The improvement in business sentiment and operational activity instills optimism regarding the industry’s recovery from the pandemic induced sluggishness.
E-Commerce is a Game-Changer: MRO demand has been significantly impacted by evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online. In 2020, over two billion people purchased goods or services online, which sent e-retail sales above $4.2 trillion. Per Statista, revenues in the e-commerce market are expected to witness a CAGR of 6.3% over the 2021-2025 time period. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, which is a 19-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #132, which places it at the bottom 47% of 249 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have gone down 14%.
Despite bleak near-term prospects of the industry, we will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Industrial Services industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has gained 20.3% compared with the sector’s growth of 43.4%. Notably, the Zacks S&P 500 composite has rallied 33.5% in the same time frame.
One-Year Price Performance
Industry''s Current Valuation
On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 21.36x compared with the S&P 500’s 15.87x and the Industrial Products sector’s forward 12-month EV/EBITDA of 21.07x. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio
Over the last five years, the industry has traded as high as 23.84x and as low as 7.43x, with the median being at 10.29x.
5 Industrial Services Stocks to Keep an Eye on
SiteOne Landscape Supply: This Roswell, GA-based company is a national wholesale distributor of landscape supplies in the United States and Canada.
The company has been gaining from the ongoing strength demand, as customers are spending more time at home and investing in their outdoor living spaces. In addition to organic growth, it has been growing its business through acquisitions to increase customer base, broadening product lines and expanding its geographic reach. The company has a strong pipeline of acquisition opportunities. It will gain from its focus on cost reduction and operational initiatives, enhancing supply chain efficiency and strengthening pricing. Meanwhile, the company is investing more in sophisticated information technology systems and data analytics. It has relaunched its website and the implemented B2B e-Commerce platform, which provides the convenience of an online sales channel.
The Zacks Consensus Estimate for earnings for fiscal 2021 of the company has gone up 25.7% in the past 60 days. Shares of the company have appreciated 18.7% over the past six months. The company has a trailing four-quarter earnings surprise of 131.3%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Price: SITE
Grainger: Lake Forest, IL-based Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services to around 3.5 million businesses and institutions globally.
The company is well-poised to gain from efforts to increase customer base through incremental marketing investments and effective marketing strategies. Grainger continues its efforts to strengthen relationships with both large and mid-sized customers to improve sales force effectiveness. Investments in e-commerce and digital capabilities will also yield results. Increased e-commerce sales and higher demand for certain products amid the pandemic will continue to drive the top line. Cost control measures undertaken by the company will sustain margins.
Notably, Grainger has gained 14.5% over the past six months. This Zacks Ranked #2 (Buy) stock has an estimated long-term earnings growth rate of 13.5%. The company’s consensus estimate for 2021 earnings has moved up 7% in the past 60 days. It has a trailing four-quarter earnings surprise of 4.4%, on average.
Price: GWW
In the Barcode, Networking & Security segment, the company is witnessing demand recovery across its technologies, led by growth in mobility, self-checkout, video surveillance and networking solutions. Large deals supporting the mobile everywhere trend, including warehousing and logistics, curbside pickup, and e-commerce, is driving growth. Demand for video surveillance and outdoor surveillance systems and cameras remains strong. In the Communications & Services segment, the company is witnessing growth in video, audio and collaboration products. The hybrid office and work-anywhere trends provide opportunities for the company’s solutions. All these factors will fuel its top-line performance, while cost control efforts will boost margins.
The Zacks Ranked #2 stock has gained 4.6% in the past six months. The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 21% in the past 60 days. The company has a trailing four-quarter earnings surprise of 24.3%, on average.
Price: SCSC
MSC Industrial Direct: The Melville NY-based company together with its subsidiaries, distributes metalworking MRO products in the United States, Canada, Mexico and the U.K.
The company is progressing well with its “Mission Critical” project that is driving productivity gains amid the uncertain macro environment. Per the plan, the company is investing in its market-leading metalworking business by adding to metalworking specialist team, introducing value-added services to customers, expanding vending, building sales force, and diversifying customers and end markets. It has targeted $90 million to $100 million of gross cost savings through fiscal 2023 from the Mission Critical initiative. It will also benefit from its continued focus on growth initiatives, execution of pricing actions and structural cost reductions. Apart from this, the company is gaining from new customer wins in metalworking business driven by its significant cutting tool applications, MSC Millmax. Further, the company continues to invest in technology and growing its e-commerce channel, which generates around 60% of its revenues.
The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 2% in the past 60 days. It has a trailing four-quarter earnings surprise of 8.5%, on average. The stock has gained 11.3% over the past six months. It carries a Zacks Rank #3 (Hold).
Price: MSM
The company is well-poised to deliver strong results backed by its diverse end markets and products, lower debt levels, and efforts to strengthen market position. Moreover, initiatives to optimize cash flow, reduce capital expenditure and operating costs are likely to yield results. Backed by a good quality fleet and a strong financial position, the company is well positioned to navigate through the turbulent times. It also continues to invest in digital transformation program that will enhance customer experience.
The Zacks Consensus Estimate for 2021 earnings has been revised upward by 3% in the past 60 days. The stock has gained 69.8% over the past six months. It carries a Zacks Rank #3.
Price: ASHTY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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