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Near-Term Outlook Bleak for Industrial Services Industry

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The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. These items (repair components, cutting fluids, lubricants, safety supplies and other consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. The industry serves a wide array of customers, ranging from commercial, government, healthcare to manufacturing.
 
Let us take a look at the industry’s three major themes:

  • The industry is bearing the brunt of inflation, particularly with regard to metal-based products. This can primarily be attributed to the U.S.-China-induced trade tariffs, which have resulted in higher costs of raw material and lower business spending. Distributors continue to pass along higher prices to customers. However, it may not always be possible or adequate to cover rising product inflation in an intensely competitive environment. Thereby, the industry participants have been focusing on reducing cost structure to maintain margins.
     
  • In the United States, business investment and exports are two major indicators of MRO spending. Business inventory and exports are expected to improve while business investment, industrial production, exports and GDP are anticipated to weaken thanks to slowing global growth, trade tensions and associated uncertainty.
     
  • The global MRO market is approximately $608 billion and MRO demand has been significantly impacted by evolution of e-commerce. For instance, W.W. Grainger, Inc. (GWW), one of the prominent industry players, is focused on capitalizing on this trend by making investments in e-commerce and digital capabilities. In 2018, online channels generated around 62% of its revenues in the United States.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Industrial Services Industry, which is a 20-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #213, which places it at the bottom 15% of 252 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. In a year’s time, the industry’s earnings estimates for the current year have gone down 17%.
 
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over the past seven weeks.


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 Lags 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 9.5% compared with the sector’s growth of 21.4%. Meanwhile, the Zacks S&P 500 composite has rallied 25.6%.

One-Year Price Performance



Industrial Services Industry’s 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 10.17x compared with the S&P 500’s 12.01x and the Industrial Products sector’s trailing 12-month EV/EBITDA of 17.04x. 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 37.37x and as low as 9.14x, with the median being at 10.17x.
 
Bottom Line
 
A booming e-commerce sector and increased business spending will drive the industry in the long run. Efforts to reduce cost base will also deliver returns.
 
We are presenting one stock with Zacks Rank #2 (Buy) and four stocks with Zacks Rank #3 (Hold) that investors may take a look at.

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

Grainger: This Lake Forest, IL-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year growth of 8.20%. The company has beat estimates in the trailing four quarters by 1.94%, on average. The company has an estimated long-term earnings growth of 11.3%.

Price & Consensus: GWW



SiteOne Landscape Supply, Inc. (SITE - Free Report) : The Zacks Consensus Estimate for earnings for fiscal 2020 of this Roswell, GA-based company suggests year-over-year growth of 17.4%. The company has beat estimates in the trailing four quarters by 2.86%, on average. The company currently carries a Zacks Rank #3.

Price & Consensus: SITE



Hudson Technologies, Inc. (HDSN - Free Report) : This Pearl River, NY-based company currently carries a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year improvement of 89.8%. The company has an estimated long term earnings growth rate of 30%.

Price & Consensus: HDSN



HD Supply Holdings, Inc. (HDS - Free Report) : This Atlanta, GA-based company carries a Zacks Rank #3. The company has beat estimates in the trailing four quarters by 2.62%, on average. The Zacks Consensus Estimate for fiscal 2020 earnings per share suggests year-over-year growth of 2.35%. The expected long-term earnings growth for the company is 20%.

Price & Consensus: HDS



Harsco Corporation (HSC - Free Report) : The Camp Hill, PA-based company carries a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year growth of 9.9%.

Price & Consensus: HSC



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