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5 Growth Investing Options in Industrial Products Sector

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The U.S. economy has performed significantly well in the past five years, with its major stock indexes, including the S&P 500 and Dow Jones Industrial surging 91.6% and 93.8% respectively. Its Gross Domestic Product (GDP) expanded roughly 9.5% in these years, with a year-over-year expansion of 2.3% recorded for 2017.

The future expansion projections issued by the International Monetary Fund (IMF) also appear quite appealing. In its January 2018 report, IMF predicted that the U.S. economy will expand 2.7% in 2018 and 2.5% in 2019. These estimates reflect an improvement of 0.4% for 2018 and 0.6% for 2019 from its earlier growth forecasts. These alterations were primarily induced by the country’s tax policy changes as well as strong global growth momentum.

Our in-house projections, published on the Earnings Trends report dated Mar 7, indicate roughly 20.7% growth in earnings and 7% increase in revenues of S&P 500 companies in 2018. This compares favorably with a growth rate of 7.1% for earnings and 5.9% for revenues recorded in 2017.

Sector in Focus

We believe that investors keen on exposure to industrial companies have reasons to rejoice. Industrial Products, one of the 16 broad Zacks sectors, yielded a solid 35.2% return in the last five years. It currently holds the first position in the Zacks sectors list.

The constituent electrical products industry is at the top of the 265 industries comprising the Zacks sectors while those dealing with construction and mining equipment, office supplies and uniform and related services are in the top 3%. Also, companies dealing with metal & glass containers are in the top 6%. Going by the Zacks methodology, companies in the top half of the 265 industries have greater chances of financial outperformance than the bottom half. (To learn more visit: About Zacks Industry Rank)

In 2018, the sector’s earnings are projected to grow 23.3% year over year on revenue expansion of 10.1%. Margins are likely to expand 1.12%. The growth for earnings and margins are higher than 15.1% and 0.37% respectively recorded in 2017, while that for revenue is below 2017-figure of 10.6%.

In the next three to five years, earnings of the Industrial Products sector are projected to grow 10.7%.

What’s in Store for Growth Investors?

Operating conditions for the Industrial Products sector seems to have improved over time. A strengthening U.S. housing market, job additions and plans for investment in infrastructural improvement by the government are some positives. In addition, any effort aimed to improve trade relations with other nations will be a boon.

Key economic indicators like an 11.4% rise in new orders for U.S.-manufactured machinery in January 2018, 4.4% year-over-year growth in industrial production in February and 2.9% month-over-month rise in the ISM Purchasing Managers’ Index or manufacturing index for February point toward healthy operating conditions in the industry.

Also, lower taxes due to the implementation of the Tax Cut and Jobs Act in December 2017 are expected to free resources for the corporates, enabling them to make further investment in growth projects. However, the recently approved tariff on import of steel and aluminum might have certain adverse impacts in the form of competitive threats from international players and hike in cost of production.

Despite the near-term hurdles, we believe that Industrial Products sector’s solid long-term growth potential represents a win-win situation for growth investors. Also, the industries within the sector are capital intensive and have a large gestation period for yielding returns in any projects. Per the Zacks Style Score system, a growth investment strategy zeroes in on stocks after analysing the company’s income statement, cash flow statement and balance sheet. Instead of paying shareholders regularly, the majority of the annual earnings are reinvested in the business for funding growth programs. These stocks reward shareholders with solid capital gains.

Companies with favorable Growth Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) are anticipated to yield solid returns, clearly outperforming the market.

Suitable Growth Investment Options

We have zeroed in on five Industrial Products stocks with solid growth potential over the next three to five years and are worth investing in.

H&E Equipment Services, Inc. (HEES - Free Report) : The company primarily rents heavy construction and industrial equipment including cranes, aerial work platform equipment, industrial lift trucks and earthmoving equipment. Also, it provides parts and related services for these equipments. The company, with $1.5 billion market capitalization, currently sports a Zacks Rank #1.

It has a Growth Score of A and currently provides 43.8% return on equity.

Its earnings in the next three to five years are anticipated to grow 14.4%, higher than 10.7% estimated for the sector. Also, its near-term earnings estimates have been revised upward in the last 60 days. The Zacks Consensus Estimate currently stands at $1.94 for 2018 and $2.18 for 2019, reflecting growth of 11.5% and 6.3% from the respective figures 60 days ago.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Proto Labs, Inc. (PRLB - Free Report) : This $3.4 billion company specializes in manufacturing custom parts for prototyping and short-run production. Constant innovation of products, rising usage of Internet-of-Things devices and growing demand for personalized products — especially in health care, retail and financial services markets — are beneficial for the company.

The company currently carries a Zacks Rank #2 and has a Growth Score of A. It currently provides 13.6% return on equity.

Its earnings in the next three to five years are anticipated to grow 19.3%. Also, its near-term earnings estimates have been revised upward in the last 60 days. The Zacks Consensus Estimate currently stands at $2.86 for 2018 and $3.33 for 2019, reflecting growth of 13.9% and 3.1% from the respective estimates 60 days ago.

Xylem Inc. (XYL - Free Report) : This $14.2 billion company engages in providing products used for transportation, treatment and testing of water; products dealing with the usage of water; and solutions designed for conservation and efficient use of energy and water resources. Healthier residential, commercial and industrial applications businesses as well as ongoing productivity initiatives will boost profitability going forward. It currently carries a Zacks Rank #2.

The company has a Growth Score of A and provides 18% return on equity. Its earnings are projected to grow 17.8% in the next three to five years. In addition, its earnings estimates for 2018 and 2019 have been revised upward in the last 60 days. Currently, the Zacks Consensus Estimate is pegged at $2.92 for 2018 and $3.38 for 2019, reflecting growth of 3.9% and 5% from the respective estimates 60 days ago.

Applied Industrial Technologies, Inc. (AIT - Free Report) : This $2.8 billion company primarily distributes industrial products to original equipment manufacturer and maintenance, repair, and operations customers. A strengthening industrial market, lower corporate taxes, buyout gains and benefits from restructuring actions are prime tailwinds in the near term for the company.

The company currently carries a Zacks Rank #2 and has a Growth Score of B. It currently provides 16.5% return on equity.

Its earnings in the next three to five years are anticipated to grow 12%. Also, its near-term earnings estimates have been revised upward in the last 60 days. The Zacks Consensus Estimate currently stands at $3.45 for fiscal 2018 (ending June 2018) and $4.13 for fiscal 2019 (ending June 2019), reflecting respective growth of 0.9% and 19.7% from 60 days ago estimates.

A. O. Smith Corporation (AOS - Free Report) : This $11.3 billion company engages in manufacturing commercial and residential water heating equipment, as well as water treatment products. Strengthening water heater industry, robust consumer product demand in China and positive industry trends are likely to boost the company’s top line going forward.

It currently carries a Zacks Rank #2 and has a Growth Score of B. It provides return of 23.3% on equity.

Its earnings are projected to grow 13.3% in the next three to five years. In addition, its earnings estimates for 2018 and 2019 have been revised upward in the last 60 days. Currently, the Zacks Consensus Estimate is pegged at $2.57 for 2018 and $2.89 for 2019, reflecting growth of 7.5% and 9.9% from the respective figures 60 days ago.

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