At the start of 2016, weak commodity prices, low demand in the energy sector, poor economic conditions in some developed and developing nations, the U.K’s decision to exit the European Union, and unfavorable foreign currency movements restricted growth momentum of the major and developing economies worldwide. In the U.S., Industrial Machinery was one of the most adversely impacted industries from the uncertainties in the global arena.

The industry remained under pressure in the first quarter of 2016, but sentiment steadily improved thereafter. Optimism about the industry’s outlook in the period after the November 8^th election has notably improved expectations about the industry.

Industrial Machinery–Nation-Wise Description

One of the leading economic indicators for the industrial stocks is industrial production, which measures the level of output of manufacturing, mining and utilities sectors in a country. A brief discussion on the machinery industry in different nations is given below.

The United States: The country’s industrial production in the third quarter of 2016 increased 1.8% year over year, while dropping to a growth of just 0.1% in October. In November, industrial production fell 0.4% due to decline in utilities and manufacturing output, offset by gain in mining activities. In addition, unfavorable foreign currency movements and economic uncertainties worldwide led to weak export demand for the U.S.-manufactured machinery.

According to the U.S. Census Bureau, export demands for U.S. machinery declined 6.3% year over year in the January–October period. A 13.3% decline was recorded in shipments of farm machinery, while construction and mining machinery saw 25.9% and 44.6% fall, respectively. The exception was a 0.4% increase in shipments of industrial machinery. New machinery orders were down 5.7%, while order backlog decreased 6.5%.

However, the job market showed slight improvement in the month of November, as the unemployment rate declined 30 basis points (bps) to 4.6%. Jobs addition in the month amounted to 178,000, while average job addition in the past three months was 176,000.

Citing a strengthening labor market and slightly improving economic activities, the Federal Reserve recently raised interest rates. More expensive funds for capital investments might shrink business for industrial products makers. Also, the industrial companies have to watch out for the President-elect Donald Trump’s adverse view on business outsourcing.

Per its Oct 2016 report, the International Monetary Fund (IMF) has reduced its growth projections for the U.S. economy by 60 bps to 1.6% for 2016 and by 0.3% to 2.2% for 2017.

Japan: According to the report from Japan’s Cabinet Office, core machinery orders increased nearly 7.3% in the third quarter as against a fall of 9.2% in the previous quarter. In Oct 2016, the country’s core machinery order increased 4.1% from the previous month. The core machinery order is regarded as an indicator of capital spending by companies in the next six to nine months.

Orders from manufacturing clients grew 4.5%, while the same from the government clients increased 11%. The agency predicts core machinery orders to fall 5.9% in the fourth quarter, while total machinery order is expected to decline 1.3%.

The country’s economy is struggling with internal issues including low investment levels, unfavourable exchange rates, aging population and a huge public debt.Also, the consumption level has failed to revive to a satisfactory standard since it suffered from a 3% rise in national sales tax in Apr 2015.

In addition, the country is facing adversities of weak economic conditions externally. However, efforts to improve wages and hence, demand as well as to increase investments domestically and fight deflation might work in the country’s favor in the quarters ahead.

The IMF increased its growth projection for the country by 20 bps to 0.5% for 2016 and by 50 bps to 0.6% for 2017.

China:In the third quarter, China’s GDP grew 1.8% sequentially, same as the previous quarter, while on a year-over-year basis the same advanced 6.7%. Though the country is still struggling with capital outflows and forex issues, a slight improvement in infrastructure investment, retail sales and higher oil prices have worked in its favor.

In November, the country’s industrial production increased 6.2% year over year, slightly above 6.1% in October. The increase was driven by an improvement in manufacturing and utilities sectors, offset by weakness in the mining sector. In November, the country’s exports inched up 0.1% year over year, while imports increased 6.7%.

For 2016, the Chinese government anticipates economy to grow within 6.5−7% range. The IMF projects the Chinese economy to grow 6.6% in 2016 and 6.2% in 2017.

India: The country’sindustrial production in Oct 2016 decreased 1.9% year over year, lower than growth of 0.7% registered in the previous month.

In the third quarter, the country’s economy expanded to 7.3% versus 7.1% in the previous quarter. Expectations of a strong demand, improved policies and better monsoon conditions are factors that will influence the country’s growth, going forward. The government is making concerted efforts to turn the country into a prime manufacturing hub for all nations across the world. Apart from boosting the foreign capital inflow in the country, these strategies will improve the domestic job market as well as demand for industrial products.

According to the IMF, the country is projected to grow 7.6% in both 2016 and 2017, reflecting a 20 bps increase over the previous forecasts.

Brazil: In 2016, the country suffered from adverse impacts of low private investments, inadequate infrastructure and political uncertainties. In the third quarter, the country’s unemployment rate was 11.8%, above 11.3% in the previous quarter. In October, the rate remained unchanged. Also available data reveals that the country’s industrial production fell 7.3% year over year in October, while declined roughly 7.7% since the beginning of 2016. 

The IMF expects the country’s output to decline by 3.3% in 2016, but improve to 0.5% in 2017. The recovery is dependent on foreign direct investments and expansion of industries like tourism, steel and electricity.

Eurozone: Industrial production in the Eurozone declined 0.1% in October from the prior month, while inched up 60 bps year over year. The unemployment rate was 9.8% in October, compared with 9.9% in the previous month.

The IMF predicts output growth in Eurozone to be 1.7% in 2016 and 1.5% in 2017, up 10 bps over the previous forecasts.

Zacks Industry Rank

According to the Zacks Industry classification, Machinery is broadly grouped under Industrial Products, one of the 16 broad Zacks sectors. The Zacks sectors comprise 265 industries that are ranked on the basis of the earnings outlook of constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a rule, top 50% industries of all Zacks industries outperform the bottom half by a wide margin. Going by this rule, industries with Zacks Industry Rank of 132 and lower would fall in the top half, while those with Zacks Industry Rank of 133 and higher would be in the bottom half.

The machinery industry is sub-divided into nine industries at the expanded level: machine tools and related products, construction and mining, electrical utilities, electrical, farm, general industries, material handling, print trading and thermal processing.

Earnings Trend of the Sector

As of Dec 6, all the industrial products stocks (accounting for 2% of the S&P 500 index’s total market capitalization) in the S&P 500 Group reported results for the Jul–Sep 2016 quarter, recording growth of 13.7% in earnings while a 0.9% decline in revenues. In Oct–Dec 2016 quarter, earnings and revenues of industrial products stocks are predicted to fall 1.2% and 5.5%, respectively.

Moreover, results of all S&P 500 companies released til Dec 6 showed 3.5% growth in earnings and 1.9% rise in revenues. In the October–December quarter, earnings for the S&P 500 companies are projected to grow 3.2% and revenues to rise by 4.0%.

Conclusion

The IMF anticipates the world economy to grow by 3.1% in 2016, including 1.6% growth for advanced economies and 4.2% growth for emerging nations. With the ebbing impacts of headwinds, the world economy is projected to grow 3.4% in 2017, including 1.8% growth for advanced nations and 4.6% improvement for emerging countries.

In the quarters ahead, we believethat governmental policies encouraging better trade relations, increase in infrastructural investments, job creation and high consumer-end demand will support growth for industrial machinery stocks. Until such improvements materialize, stocks with high investment rankings might interest investors seeking exposure in the machinery industry.

In the S&P 500 group, machinery company Deere & Company (DE Quick QuoteDE - Free Report) , with a market capitalization of $32.4 billion, currently sports a Zacks Rank #1 (Strong Buy). The company’s long-term growth prospects seem bright on the back of increasing population, rising living standards, investments in new products and expansion in unexplored geographies. In the next 3−5 years we anticipate earnings to grow 7.67%. Year to date, the stock has outperformed the Zacks categorized Machinery industry as well as the S&P 500 market.

Among the non-S&P 500 billion-dollar stocks in the machinery industry, Actuant Corporation sports a Zacks Rank #1 (Strong Buy) and offers 12% earnings growth potential over the next five years while John Bean Technologies Corporation (JBT Quick QuoteJBT - Free Report) , with Zacks Rank #1, is expected to post earnings growth of 15%. Another company, EnerSys (ENS Quick QuoteENS - Free Report) , with a Zacks Rank #1, is anticipated to have earnings growth of 13% over the next five years.

 

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