The Industrial Products sector is anticipated to witness a lackluster earnings season as evident from the latest Earnings Trends, per which its revenues are expected to decline 16.1%, while earnings are likely to witness a 41.9% slump. However, the slump is not restricted to this sector, as 13 of the 16 Zacks sectors are expected to log declines.
In the second quarter, industrial production contracted at an annual rate of 42.6% — the largest quarterly decrease since the World War II, per the Federal Reserve. Factory output slumped 47% at an annual rate in the quarter. Also, per the Institute for Supply Management, the Manufacturing Purchasing Managers’ Index (PMI), came in at 41.5% for April — the lowest since April 2009 when it registered 39.9%. In May, the PMI came in at 43.1%. Notably, a reading below 50 denotes contraction. Even though the index has climbed to 52.6% in June, the manufacturing index averaged 45.7% for the second quarter. The New Order Index averaged 38.4% while the Production index averaged 39.3% in the quarter under review.
These figures clearly indicate that the manufacturing sector has been hit hard by the pandemic and energy market volatility in the quarter under review. This along with other challenges associated with the pandemic, which include factory closures, supply chain disruptions, and low demand for goods, and logistic costs are likely to get reflected on the Industrial Products sector’s results in the June ended quarter. So far 79.3% of the sector participants have released their quarterly numbers, logging a decline of 38.1% in earnings and a slump of 19.4% in revenues on the scoreboard. While 95.7% of the industry players that have reported beat earnings, 82.6% surpassed revenues.
One of the major players in the sector, Caterpillar Inc. (CAT - Free Report) witnessed a 64% decline in second-quarter 2020 adjusted earnings per share but managed to beat the Zacks Consensus Estimate by a margin of 56%. Restrained spending in the oil & gas, mining and construction sectors amid the pandemic weighed on its results.
Nevertheless, the sector players, which are engaged in packaging for food, medicines, home and personal-care products, might have benefited from higher demand during the pandemic. In the wake of weak demand, the companies have been focusing on cost cutting measures including reducing discretionary expenses, freezing salary hikes, and lean manufacturing actions. This may have contributed to margins despite low volumes.
With regard to the price performance, the sector grew 28.2% in second-quarter 2020 compared to the S&P 500’s growth of 24.8%.
Selecting Potential Winners
Amid this backdrop, it is wise to select industrial stocks that are well positioned to beat earnings in their upcoming releases. Nonetheless, given the wide range of companies in this space, the task is by no means easy. One way to do it is by picking stocks, which have the combination of a Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
With the Zacks Stock Screener, four such industrial stocks have been identified.
Amcor plc (AMCR - Free Report) develops, manufactures, and sells various packaging products for food, beverage, pharmaceutical, medical, home and personal care, and other consumer goods end markets worldwide. This Zurich, Switzerland-based company has an Earnings ESP of +1.78% and a Zacks Rank #2, at present. The company, which is slated to report fourth-quarter fiscal 2020 results on Aug 18, has a trailing four-quarter earnings surprise of 7.15%, on average. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at 19 cents.
Nordson Corporation (NDSN - Free Report) engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids worldwide. The company is set to release third-quarter fiscal 2020 results on Aug 19. The company has a trailing four-quarter negative earnings surprise of 0.17%, on average. The Zacks Consensus Estimate for the fiscal third quarter is pegged at $1.32, reflecting a decline of 18.5% from the prior-year quarter. The estimate moved up 1% over the past 30 days. This Westlake, OH-based company currently has an Earnings ESP of +6.06% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Deere & Company (DE - Free Report) manufactures and distributes a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, road building, and forestry. The Moline, IL-based company has a trailing four-quarter earnings surprise of 10.95%, on average. The Zacks Consensus Estimate for the company’s third-quarter fiscal 2020 earnings, which is scheduled to be reported on Aug 21, is pegged at $1.16. The figure indicates a decline of 57.2% from the year-ago reported figure. The estimate has been revised upward by 5% over the past 30 days. Currently, the company has an Earnings ESP of +4.64% and a Zacks Rank #2.
Greif Inc. (GEF - Free Report) produces and sells industrial packaging products and services worldwide. The Delaware, OH.-based company has an Earnings ESP of +3.41% and a Zacks Rank of 3, at present. The company has a trailing four-quarter earnings surprise history of 14.7%, on average. The Zacks Consensus Estimate for the company’s third-quarter fiscal 2020 earnings stands at 88 cents, indicating a decline of 30% from the prior-year quarter. The estimate has moved south 3% over the past 30 days. The company is scheduled to report its results on Aug 26.
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