Industry Rank Analysis 4-4-12

The U.S. economy is continuing to recover, and one of the sectors which has been the real engine of that growth is business investment in equipment and software. While such investment in the fourth quarter accounted for less than 7.6% of the overall economy, it accounted for 18.3% of the overall growth in the fourth quarter, and that was down from an astounding 62.2% in the third quarter and 33.8% of the growth in the second quarter.

Today I am focusing on the equipment side of that, and more specifically investments in machinery. The strong macro performance of the sector is showing in upward estimate revisions and positive earnings surprises, and those in turn at reflected in the Zacks Rank.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 258 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well; a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.”

4 Machinery Groups Working Well

There are four Machinery “industries” that are showing up very well on the Zacks Rank. The strongest three of which are about median sized “industries,” with seven or eight firms in them. The “weakest” of the four is by far the largest, General Industrial Machinery, with 37 firms in it. It still shows up pretty well, coming in 44th place, a drop of five slots from last week. Its average Zacks Rank is 2.57, up slightly from 2.54 last week.

The strongest of the Groups is Machine Tools, with eight firms in it. It is currently the fifth strongest “industry” with an average Zacks Rank of 1.88, down from 2.00 last week. In Between we have the Construction and Mining Machinery “industry” in 19th place (up one from last week, and an average Zacks Rank of 2.38, unchanged from last week), and The Farm Machinery “industry,” a seven member group in 23rd place, slipping one spot from last week on an unchanged average of 2.43.

If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of the firms would earn the coveted Zacks #1 Rank (Strong Buy). Instead, of the total of 13 firms in these four groups, 21.7%, have earned that distinction. If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 10 (16.7%) hold it.

Go Big or Go Small

There is a huge range of market capitalizations from which to choose from on these lists, from very large down to micro cap. While the growth rate from this year to next is not shown directly, you can get a sense of it from looking at the change in the P/E ratio from this year to next. Most of these firms are looking at very respectable growth rates, at least in the short term.

Of course, Machinery is a quintessentially cyclical part of the market, so it is NOT a good idea to extrapolate those growth rates too far into the future. It does, however, indicate that we are in the middle of a cyclical upswing. Valuations on these stocks -- particularly if you are willing to look out to FY2 (mostly 2013) earnings -- are quite reasonable. While most of the smaller cap names do not pay dividends, some of the large and mid-cap cap names do provide a nice payout.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	"%Ch Curr Fiscal Yr Est - 4 wks"	"%Ch Next Fiscal Yr Est - 4 wks"	"Current Price"	Div Yield
Caterpillar Inc	CAT	$58,661	12.86	9.76	1.69%	3.36%	$90.99	2.02%
Lincoln Electrc	LECO	$2,639	12.95	10.94	12.37%	9.97%	$31.28	1.98%
Robbins & Myers	RBN	$1,987	18.6	14.36	0.00%	0.00%	$43.48	0.41%
Middleby Corp	MIDD	$1,434	16.58	13.95	0.00%	0.00%	$76.50	0.00%
Actuant Corp	ATU	$1,377	12.24	10.26	0.00%	0.00%	$20.06	0.20%
Barnes Grp	B	$1,191	15.37	12.61	5.29%	3.58%	$21.87	1.46%
Lindsay Corp	LNN	$692	18.55	17.45	0.00%	0.00%	$55.08	0.62%
Sun Hydraulics	SNHY	$647	17.2	14.7	0.08%	0.06%	$25.25	1.43%
H&E Equip Svcs	HEES	$355	N/A	12.32	-226.32%	0.00%	$10.14	0.00%
Dxp Enterprises	DXPE	$322	11.66	9.81	4.45%	4.10%	$22.81	0.00%
Hurco Cos Inc	HURC	$168	18.11	12.98	0.00%	0.00%	$26.08	0.00%
Flow Intl Corp	FLOW	$146	19.87	11.41	0.00%	0.00%	$3.08	0.00%
Manitex Int Inc	MNTX	$48	16.96	8.48	0.00%	0.00%	$4.24	0.00%

Number 2 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	"%Ch Curr Fiscal Yr Est - 4 wks"	"%Ch Next Fiscal Yr Est - 4 wks"	"Current Price"	Div Yield
Deere & Co	DE	$30,496	11.34	9.68	0.33%	0.01%	$72.66	2.26%
Sandvik Ab	SDVKY	$16,062	11.88	9.47	-8.80%	-8.33%	$13.54	2.86%
Eaton Corp	ETN	$14,450	10.51	8.88	2.60%	2.62%	$42.35	3.21%
Kubota Corp Adr	KUB	$10,827	15.37	14.14	0.00%	0.00%	$42.57	1.74%
Metso Corp -Adr	MXCYY	$5,765	13.64	10.66	-5.20%	-4.74%	$38.53	4.86%
Idex Corp	IEX	$3,128	15.33	13.17	1.69%	2.14%	$37.74	1.80%
Nordson Corp	NDSN	$2,944	12.65	11.61	0.13%	0.13%	$43.13	0.97%
Terex Corp	TEX	$2,016	35.81	8.55	-29.53%	-8.27%	$18.39	0.00%
Astec Inds Inc	ASTE	$730	16.19	12.77	13.95%	8.92%	$32.22	0.00%
Graham Corp	GHM	$178	17.07	13.16	4.64%	1.99%	$17.98	0.44%