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Coronavirus Mars Outlook 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 participants serve a wide array of customers including commercial, government, healthcare and manufacturing.
 
Let us take a look at the industry’s three major themes:

  • Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (MBI). Notably, the MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. While a value above 50.0 generally indicates expansion, one below 50.0 reflects contraction. The MBI index was at 34.2 in April – at levels not seen since 2009. Sentiment around new orders, production, and backlog sharply contracted in April. Manufacturers of all sizes and serving all end-markets reported sluggish business activity as widespread shutdowns and government restrictions were implemented in a bid to curb the spread of COVID-19. This is likely to persevere until the situation improves.
     
  • The global MRO market is valued at approximately $622 billion.  In fact, MRO demand has been significantly impacted by evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is on the rise.  Customers basically want to execute their business activities in the most efficient way possible, which often means online.. W.W. Grainger, Inc. (GWW - Free Report) , one of the prominent industry players, is focused on capitalizing on this trend by making investments in e-commerce and digital capabilities. In 2019, 64% of Grainger’s revenues came from online channels, making it the 11th largest e-retailer in North America, according to Internet Retailer.
     
  • The global spread of COVID-19 has led significant volatility and uncertainty, and the industrial services industry has not been an exception to the trend. The effects of the COVID-19 pandemic include disruptions or closures of customer and suppliers’ facilities and supply chains globally, which can materially impact the demand for the industry. The industry players meanwhile are taking every action to bolster financial condition, conserve cash and optimize profitability. They are implementing cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees or reducing work hours, reducing short term executive pay, delaying salary increases, scaling back advertising spend, eliminating non-essential travel, delaying or reducing hiring activities and deferring certain discretionary capital expenditures. These are likely to help the industry maintain margins in the wake of weak demand.

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 19-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #190, which places it at the bottom 25% of 253 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 38%.
 
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 Outperforms Sector but Lags S&P 500

The Industrial Services industry has outperformed its own sector but underperformed the Zacks S&P 500 composite over the past year.

Over this period, the industry has declined 11.8% compared with the sector’s decline of 13.1%. Notably, the Zacks S&P 500 composite has rallied 4% in the same timeframe.

One-Year Price Performance



Industrial Services Industry’s Valuation
 
On the basis of forward 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 8.53x compared with the S&P 500’s 10.96x and the Industrial Products sector’s forward 12-month EV/EBITDA of 13.52x. 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 has traded as high as 13.99x and as low as 7.82x, with the median being at 11.35x.
 
Bottom Line

 
While the global COVID-19 pandemic has impacted supply chain, operations, and customer demand, the industrial services industry will gain on strong e-commerce demand. Efforts to control cost will help sustain margins in these troubled times.

We are presenting one stock with Zacks Rank #2 (Buy) and four stocks with Zacks Rank #3 (Hold) that investors may keep watch on.

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

Hudson Technologies, Inc. (HDSN - Free Report) : This Pearl River, NY-based company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year improvement of 83.9%. The company has an estimated long-term earnings growth rate of 30%.

Price & Consensus: HDSN



Capitol Investment Corp IV : This Fort Wayne, IN-based company currently carries a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year growth of 101.4%.

Price & Consensus: NSCO




TPI Composites Inc. (TPIC - Free Report) : The Zacks Consensus Estimate for this Scottsdale, AZ-based company’s fiscal 2020 earnings indicates year-over-year growth of 176%.  The company has a trailing four-quarter positive earnings surprise of 17.9%, on average.

Price & Consensus: TPIC



DMC Global Inc (BOOM - Free Report) : This Broomfield, CO-based company carries a Zacks Rank #3. The company has a trailing four-quarter positive earnings surprise of 19.1%, on average. The company has an estimated long-term earnings growth of 20%.

Price & Consensus: BOOM



SiteOne Landscape Supply, Inc. (SITE - Free Report) : The Zacks Consensus Estimate for earnings for fiscal 2020 of this Roswell, GA-based company has gone up 8% in the past 30 days. The company beat a trailing four-quarter positive earnings surprise of 106.7%, on average. The company currently carries a Zacks Rank #3.

Price & Consensus: SITE



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