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3 Industrial Services Stocks to Watch Amid Industry Headwinds
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The Zacks Industrial Services industry is facing near-term challenges in the form of supply-chain constraints and flared-up input costs. Also, the recent contraction in orders due to customers being cautious about their spending amid growing fears of a global economic slowdown, adds to the woes.
It is worth mentioning that the rise in e-commerce activities will act as a key catalyst for the industry. Technological advancements and the rising use of e-commerce solutions continue to grow rapidly. The industry players, including W.W. Grainger, Inc. (GWW - Free Report) , DMC Global (BOOM - Free Report) and Hudson Technologies (HDSN - Free Report) are making concerted efforts to capitalize on this trend.
About the Industry
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities, such as routine maintenance work, emergency maintenance and spare parts inventory control, which keep a facility and its equipment in good operating condition. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. By offering inventory management, and process and procurement solutions, these companies reduce MRO supply-chain costs and improve customers' plant floor productivity.
What's Shaping the Future of Industrial Services Industry
Recent Slowdown in Manufacturing Activity a Concern: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity are historically correlated to changes in the Industrial Production Index (IP). Per the Federal Reserve, industrial production decreased 0.2% in August 2022 against a 0.5% gain in July. Overall, industrial production gained 3.7% over the 12-month period ended August 2022. The index for durable goods manufacturing was up 4.7% in the 12-month period ended August 2022. In September, the Institute for Supply Management’s (ISM) manufacturing index registered 50.9%. Even though the reading indicates expansion for the 28th month in a row, it was the lowest reading since May 2020 (43.5%). The New Orders Index returned to contraction territory at 47.1%. Amid growing concerns of a global economic slowdown, customers seem to be putting their reins on spending.
Supply-Chain Issues and Higher Costs a Woe: The industry has been experiencing supply-chain disruptions, both for obtaining raw materials and components for shipping finished goods to customers. It is also bearing the brunt of significant levels of inflation, including higher prices for labor, freight and fuel. The companies are currently witnessing labor shortage for some positions and incurring steep labor costs to meet demand. The industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and diversification of the supplier base to mitigate some of these headwinds.
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers basically want to execute their business activities in the most efficient way possible, which often means online. The pandemic led to a significant push in e-commerce activities. In 2020, more than two billion people purchased goods or services online, recording e-retail sales above $4.2 trillion. In 2021, global retail e-commerce sales amounted to $5.2 trillion. This is expected to attain a level of $8.1 trillion by 2026,. To capitalize on this trend, the industrial services industry players stepped up their investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Industrial Services Industry, a 23-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #140, which places it in the bottom 44% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s estimate for 2022 has moved down to 2% since August 2022.
Before we present a few Industrial services stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and its valuation picture.
Industry Versus S&P 500 & Sector
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 fallen 24.5% compared with the sector’s decline of 18.8% and the Zacks S&P 500 composite’s slump of 18.3%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 7.78X compared with the S&P 500’s 19.73X and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.15X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry traded as high as 9.90X and as low as 6.05X, with the median being 7.95X.
3 Industrial Services Stocks to Keep an Eye on
DMC Global: BOOM’s acquisition of 60% controlling interest in Arcadia Inc., a leading U.S. supplier of architectural building products, in December 2021, marked a significant milestone. The buyout is expected to double DMC Global’s consolidated sales, boost gross margins and expand its addressable market while providing diversification from its more cyclical energy and industrial infrastructure markets. The acquisition contributed $144.4 million to sales in the first six months of 2022, reflecting approximately 47% of its total sales. Arcadia is seeing strong demand from the commercial construction and high-end residential markets despite tight raw material supplies. Apart from the accretive acquisition, BOOM’s results are constantly reflecting robust North American and international demand for well perforating products from DynaEnergetics, its energy products business. Pricing increases implemented to address the ongoing inflation in raw material costs also continue to aid margins.
Broomfield, Colorado-based DMC Global provides a suite of technical products for the energy, industrial and infrastructure markets worldwide. The Zacks Consensus Estimate for fiscal 2022 earnings indicates growth of 125% from the year-ago actuals. The estimate has moved up to earnings of 45 cents against the loss of 2 cents per share expected 90 days ago. BOOM has a trailing four-quarter earnings surprise of 95.5%, on average, and an estimated long-term earnings growth rate of 20%. The stock has declined 57.4% in the past year.
Grainger: GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America (N.A.) segment will continue to benefit from pricing actions and strength in commercial, transportation and heavy manufacturing. The Endless Assortment segment is gaining on new customer acquisitions at its Zoro and MonotaRO businesses. GWW has been witnessing strong growth in non-pandemic product sales as the U.S. economy recovered after the pandemic. Grainger is thus investing in non-pandemic product inventory and partnering with suppliers to mitigate supply-related challenges, inbound lead-time challenges and any possible cost increases. Investments to enhance e-commerce sales and digital capabilities will aid growth. Cost-control measures undertaken by GWW will sustain margins.
Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies and other related products and services. The Zacks Consensus Estimate for 2022 earnings has moved up 6.6% in the past 90 days. The consensus mark indicates growth of 41.5% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 7.95%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #2 (Buy) at present. Its shares have gained 21.9% in the past year.
Price and Consensus: GWW
Hudson Technologies: The industry has been witnessing continued strength in the average selling prices of certain refrigerants. This is being fueled by heightened demand while supply remains limited for these refrigerants. Hudson Technologies has been reporting improved volumes since the first quarter of 2022 on changes in certain sales strategies that drove its end markets and overall demand for refrigerants. The combination of higher selling prices and the cost of certain refrigerants sold, which saw no substantial elevation, is expected to boost HDSN’s margin performance.. HDSN is targeting annualized revenues of more than $400 million by 2025.
Woodcliff Lake, NJ-based Hudson Technologies is a refrigerant services company, providing solutions to recurring problems within the refrigeration industry, primarily in the United States. It currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2022 earnings indicates growth of 159% from the year-ago reported figure. The estimate has moved up 29.7% in the past 90 days. HDSN has a trailing four-quarter earnings surprise of 365%, on average. It has an estimated long-term earnings growth rate of 30%. The stock has appreciated 123% in a year’s time.
Price and Consensus: HDSN
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3 Industrial Services Stocks to Watch Amid Industry Headwinds
The Zacks Industrial Services industry is facing near-term challenges in the form of supply-chain constraints and flared-up input costs. Also, the recent contraction in orders due to customers being cautious about their spending amid growing fears of a global economic slowdown, adds to the woes.
It is worth mentioning that the rise in e-commerce activities will act as a key catalyst for the industry. Technological advancements and the rising use of e-commerce solutions continue to grow rapidly. The industry players, including W.W. Grainger, Inc. (GWW - Free Report) , DMC Global (BOOM - Free Report) and Hudson Technologies (HDSN - Free Report) are making concerted efforts to capitalize on this trend.
About the Industry
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities, such as routine maintenance work, emergency maintenance and spare parts inventory control, which keep a facility and its equipment in good operating condition. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. By offering inventory management, and process and procurement solutions, these companies reduce MRO supply-chain costs and improve customers' plant floor productivity.
What's Shaping the Future of Industrial Services Industry
Recent Slowdown in Manufacturing Activity a Concern: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity are historically correlated to changes in the Industrial Production Index (IP). Per the Federal Reserve, industrial production decreased 0.2% in August 2022 against a 0.5% gain in July. Overall, industrial production gained 3.7% over the 12-month period ended August 2022. The index for durable goods manufacturing was up 4.7% in the 12-month period ended August 2022. In September, the Institute for Supply Management’s (ISM) manufacturing index registered 50.9%. Even though the reading indicates expansion for the 28th month in a row, it was the lowest reading since May 2020 (43.5%). The New Orders Index returned to contraction territory at 47.1%. Amid growing concerns of a global economic slowdown, customers seem to be putting their reins on spending.
Supply-Chain Issues and Higher Costs a Woe: The industry has been experiencing supply-chain disruptions, both for obtaining raw materials and components for shipping finished goods to customers. It is also bearing the brunt of significant levels of inflation, including higher prices for labor, freight and fuel. The companies are currently witnessing labor shortage for some positions and incurring steep labor costs to meet demand. The industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and diversification of the supplier base to mitigate some of these headwinds.
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers basically want to execute their business activities in the most efficient way possible, which often means online. The pandemic led to a significant push in e-commerce activities. In 2020, more than two billion people purchased goods or services online, recording e-retail sales above $4.2 trillion. In 2021, global retail e-commerce sales amounted to $5.2 trillion. This is expected to attain a level of $8.1 trillion by 2026,. To capitalize on this trend, the industrial services industry players stepped up their investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Industrial Services Industry, a 23-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #140, which places it in the bottom 44% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s estimate for 2022 has moved down to 2% since August 2022.
Before we present a few Industrial services stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and its valuation picture.
Industry Versus S&P 500 & Sector
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 fallen 24.5% compared with the sector’s decline of 18.8% and the Zacks S&P 500 composite’s slump of 18.3%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 7.78X compared with the S&P 500’s 19.73X and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.15X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry traded as high as 9.90X and as low as 6.05X, with the median being 7.95X.
3 Industrial Services Stocks to Keep an Eye on
DMC Global: BOOM’s acquisition of 60% controlling interest in Arcadia Inc., a leading U.S. supplier of architectural building products, in December 2021, marked a significant milestone. The buyout is expected to double DMC Global’s consolidated sales, boost gross margins and expand its addressable market while providing diversification from its more cyclical energy and industrial infrastructure markets. The acquisition contributed $144.4 million to sales in the first six months of 2022, reflecting approximately 47% of its total sales. Arcadia is seeing strong demand from the commercial construction and high-end residential markets despite tight raw material supplies. Apart from the accretive acquisition, BOOM’s results are constantly reflecting robust North American and international demand for well perforating products from DynaEnergetics, its energy products business. Pricing increases implemented to address the ongoing inflation in raw material costs also continue to aid margins.
Broomfield, Colorado-based DMC Global provides a suite of technical products for the energy, industrial and infrastructure markets worldwide. The Zacks Consensus Estimate for fiscal 2022 earnings indicates growth of 125% from the year-ago actuals. The estimate has moved up to earnings of 45 cents against the loss of 2 cents per share expected 90 days ago. BOOM has a trailing four-quarter earnings surprise of 95.5%, on average, and an estimated long-term earnings growth rate of 20%. The stock has declined 57.4% in the past year.
The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: BOOM
Grainger: GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America (N.A.) segment will continue to benefit from pricing actions and strength in commercial, transportation and heavy manufacturing. The Endless Assortment segment is gaining on new customer acquisitions at its Zoro and MonotaRO businesses. GWW has been witnessing strong growth in non-pandemic product sales as the U.S. economy recovered after the pandemic. Grainger is thus investing in non-pandemic product inventory and partnering with suppliers to mitigate supply-related challenges, inbound lead-time challenges and any possible cost increases. Investments to enhance e-commerce sales and digital capabilities will aid growth. Cost-control measures undertaken by GWW will sustain margins.
Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies and other related products and services. The Zacks Consensus Estimate for 2022 earnings has moved up 6.6% in the past 90 days. The consensus mark indicates growth of 41.5% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 7.95%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #2 (Buy) at present. Its shares have gained 21.9% in the past year.
Price and Consensus: GWW
Hudson Technologies: The industry has been witnessing continued strength in the average selling prices of certain refrigerants. This is being fueled by heightened demand while supply remains limited for these refrigerants. Hudson Technologies has been reporting improved volumes since the first quarter of 2022 on changes in certain sales strategies that drove its end markets and overall demand for refrigerants. The combination of higher selling prices and the cost of certain refrigerants sold, which saw no substantial elevation, is expected to boost HDSN’s margin performance.. HDSN is targeting annualized revenues of more than $400 million by 2025.
Woodcliff Lake, NJ-based Hudson Technologies is a refrigerant services company, providing solutions to recurring problems within the refrigeration industry, primarily in the United States. It currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2022 earnings indicates growth of 159% from the year-ago reported figure. The estimate has moved up 29.7% in the past 90 days. HDSN has a trailing four-quarter earnings surprise of 365%, on average. It has an estimated long-term earnings growth rate of 30%. The stock has appreciated 123% in a year’s time.
Price and Consensus: HDSN