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October industrial production numbers from the Federal Reserve indicate that the demand for goods remains strong despite more services coming back online as vaccination reaches more people.
The increase is partly attributable to the recovery from Hurricane Ida, which particularly impacted the energy, agriculture and transportation sectors. The holiday season being right around the corner may have contributed as well.
Although slower than total industrial production growth of 1.6%, the manufacturing segment increased 1.2% (4.5% from Oct 2020) reaching its highest level since Mar 2019. Both durable and nondurable goods contributed to the increase in manufacturing, increasing 1.3% each and offsetting softness in logging and publishing, which dropped 1.5%.
Motor vehicles and parts was the strongest contributor (up 5.0%) to the growth in durables although the strike at John Deere pulled down the machinery segment by 1.3%. In non-durables, the strength was mainly in petroleum and coal products, with printing and chemicals also contributing.
Between Oct 2020 and Oct 2021, business equipment production increased 5.9%, final products increased 5.0%, materials 5.8%, non-industrial supplies 3.7%, construction 3.3% and consumer goods 2.6%.
Mining production jumped 11.8% from last year and 4.1% from September. Utilities increased 3.0% from Oct 2020 and 1.2% from September. So between the manufacturing, mining and utilities segments, mining was the strongest.
Manufacturing capacity utilization was strong at 76.7% (highest since Jan 2019) with total capacity remaining constant over the past year. Mining was slightly stronger at 76.9%, helped by a 1.3% reduction in capacity. Utilities was 73.8%, partly because capacity increased 2.6% over the past year.
Given that Oct PMI was 60.8% and other key metrics like new orders, production and backlog of orders were also strong, it’s clear that demand remains very strong and production continues to struggle to keep pace with it.
Customer inventories are still too low although overall inventories and pricing continue to climb, a testimony to the transportation bottlenecks that we’ve been seeing.
The auto industry has been an important driver of last month’s production, which means that auto dealers like AutoNation (AN - Free Report) , Penske Automotive Group (PAG - Free Report) and Rush Enterprises (RUSHA - Free Report) could finally see an increase in supply. AutoNation and Penske Automotive carry a Zacks Rank #1 (Strong Buy) while Rush Enterprises carries a Zacks Rank #2 (Buy). Within the Automotive - Retail and Wholesale industry is also another #2 ranked stock called Titan Machinery (TITN - Free Report) , also worth discussing.
Auto dealers have made the most of the supply chain issues by raising prices. While this did allow them to generate higher profits, persistently low inventories have been a concern. Some have also taken advanced orders on vehicles that hadn’t yet made it to the lots. So the possibility of closing these sales or of inventories going up should be viewed as a big positive.
AutoNation
AutoNation is currently expected to grow sales by 26.8% this year and another 4.5% next year. But if the inventory situation improves, as they are likely to, these growth numbers would also increase.
The same is true for AutoNation’s earnings, which are expected to increase 142.6% this year but then decline 1.3% in the next.
The company’s earnings estimates are growing in leaps and bounds. So the Zacks Consensus Estimate for AutoNation’s 2021 earnings is up from $15.97 to $17.27 in the last 30 days. That’s an increase of 8.1%. The 2022 estimate is up $2.96 (21.0%) during the same time period.
However, AutoNation shares remain hugely undervalued being priced at 7.67X earnings compared to their own median value of 10.16X over the past year and the S&P 500’s 22.04X.
Penske Automotive Group
The Penske Automotive story is very similar to AutoNation’s. Analysts currently expect the company to grow its revenue by 24.5% this year, followed by 7.4% growth next year.
As far as earnings are concerned, analysts are looking for 113.3% growth this year followed by a 10.3% decline in the next. Any improvement in supply will therefore positively impact Penske Automotive’s revenue and profits.
Analyst optimism on Penske Automotive’s earnings is evident from the estimate revision trend. Within the last 30 days, the Zacks Consensus Estimate has gone from $13.38 to $14.16 (a 5.8% increase). The 2022 estimate has increased from $11.77 to $12.70, an increase of 7.9%.
Despite the potential, Penske Automotive remains undervalued at 8.67X sales, compared to its median valuation of 8.94X over the past year and also the S&P 500.
Rush Enterprises
Rush Enterprises’ sales estimates aren’t available, but the company is expected to grow its earnings by 91.7% in 2021 and 5.9% in 2022.
The Zacks Consensus Estimates for 2021 and 2022 are up 32 cents (8.9%) and 26 cents (6.7%). So analysts are clearly very bullish on Rush Enterprises.
As far as the valuation is concerned, Rush Enterprises shares are trading at 13.25X earnings, which is below their median value of 14.42X over the past year, as well as the S&P 500.
Titan Machinery
Titan Machinery has full-service agricultural and construction equipment stores in the United States and Europe. So it should be another beneficiary of the increased production seen last month.
There is a lone analyst providing estimates for Titan Machinery that the company has consistently thrashed in the last few quarters (the average surprise in the last four quarters is 90.2%).
The analyst currently expects Titan Machinery’s revenue to grow 19.2% and 10.8% in 2021 and 2022 respectively. Earnings are expected to grow a respective 69.1% and 16.7%.
Titan Machinery is slated to report next week, so it’s better to look at the estimate revisions trend in the last 90 days (roughly since the last earnings report). And so, the 2021 estimate has increased 19.7% during this time while the 2022 estimate has increased 12.7%.
Titan Machinery shares trade at 14.32X earnings, below the median level of 15.84X and the S&P 500.
Year-to-Date Price Performance
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Industrial Production Rises in October: 4 Picks
October industrial production numbers from the Federal Reserve indicate that the demand for goods remains strong despite more services coming back online as vaccination reaches more people.
The increase is partly attributable to the recovery from Hurricane Ida, which particularly impacted the energy, agriculture and transportation sectors. The holiday season being right around the corner may have contributed as well.
Although slower than total industrial production growth of 1.6%, the manufacturing segment increased 1.2% (4.5% from Oct 2020) reaching its highest level since Mar 2019. Both durable and nondurable goods contributed to the increase in manufacturing, increasing 1.3% each and offsetting softness in logging and publishing, which dropped 1.5%.
Motor vehicles and parts was the strongest contributor (up 5.0%) to the growth in durables although the strike at John Deere pulled down the machinery segment by 1.3%. In non-durables, the strength was mainly in petroleum and coal products, with printing and chemicals also contributing.
Between Oct 2020 and Oct 2021, business equipment production increased 5.9%, final products increased 5.0%, materials 5.8%, non-industrial supplies 3.7%, construction 3.3% and consumer goods 2.6%.
Mining production jumped 11.8% from last year and 4.1% from September. Utilities increased 3.0% from Oct 2020 and 1.2% from September. So between the manufacturing, mining and utilities segments, mining was the strongest.
Manufacturing capacity utilization was strong at 76.7% (highest since Jan 2019) with total capacity remaining constant over the past year. Mining was slightly stronger at 76.9%, helped by a 1.3% reduction in capacity. Utilities was 73.8%, partly because capacity increased 2.6% over the past year.
Given that Oct PMI was 60.8% and other key metrics like new orders, production and backlog of orders were also strong, it’s clear that demand remains very strong and production continues to struggle to keep pace with it.
Customer inventories are still too low although overall inventories and pricing continue to climb, a testimony to the transportation bottlenecks that we’ve been seeing.
The auto industry has been an important driver of last month’s production, which means that auto dealers like AutoNation (AN - Free Report) , Penske Automotive Group (PAG - Free Report) and Rush Enterprises (RUSHA - Free Report) could finally see an increase in supply. AutoNation and Penske Automotive carry a Zacks Rank #1 (Strong Buy) while Rush Enterprises carries a Zacks Rank #2 (Buy). Within the Automotive - Retail and Wholesale industry is also another #2 ranked stock called Titan Machinery (TITN - Free Report) , also worth discussing.
Auto dealers have made the most of the supply chain issues by raising prices. While this did allow them to generate higher profits, persistently low inventories have been a concern. Some have also taken advanced orders on vehicles that hadn’t yet made it to the lots. So the possibility of closing these sales or of inventories going up should be viewed as a big positive.
AutoNation
AutoNation is currently expected to grow sales by 26.8% this year and another 4.5% next year. But if the inventory situation improves, as they are likely to, these growth numbers would also increase.
The same is true for AutoNation’s earnings, which are expected to increase 142.6% this year but then decline 1.3% in the next.
The company’s earnings estimates are growing in leaps and bounds. So the Zacks Consensus Estimate for AutoNation’s 2021 earnings is up from $15.97 to $17.27 in the last 30 days. That’s an increase of 8.1%. The 2022 estimate is up $2.96 (21.0%) during the same time period.
However, AutoNation shares remain hugely undervalued being priced at 7.67X earnings compared to their own median value of 10.16X over the past year and the S&P 500’s 22.04X.
Penske Automotive Group
The Penske Automotive story is very similar to AutoNation’s. Analysts currently expect the company to grow its revenue by 24.5% this year, followed by 7.4% growth next year.
As far as earnings are concerned, analysts are looking for 113.3% growth this year followed by a 10.3% decline in the next. Any improvement in supply will therefore positively impact Penske Automotive’s revenue and profits.
Analyst optimism on Penske Automotive’s earnings is evident from the estimate revision trend. Within the last 30 days, the Zacks Consensus Estimate has gone from $13.38 to $14.16 (a 5.8% increase). The 2022 estimate has increased from $11.77 to $12.70, an increase of 7.9%.
Despite the potential, Penske Automotive remains undervalued at 8.67X sales, compared to its median valuation of 8.94X over the past year and also the S&P 500.
Rush Enterprises
Rush Enterprises’ sales estimates aren’t available, but the company is expected to grow its earnings by 91.7% in 2021 and 5.9% in 2022.
The Zacks Consensus Estimates for 2021 and 2022 are up 32 cents (8.9%) and 26 cents (6.7%). So analysts are clearly very bullish on Rush Enterprises.
As far as the valuation is concerned, Rush Enterprises shares are trading at 13.25X earnings, which is below their median value of 14.42X over the past year, as well as the S&P 500.
Titan Machinery
Titan Machinery has full-service agricultural and construction equipment stores in the United States and Europe. So it should be another beneficiary of the increased production seen last month.
There is a lone analyst providing estimates for Titan Machinery that the company has consistently thrashed in the last few quarters (the average surprise in the last four quarters is 90.2%).
The analyst currently expects Titan Machinery’s revenue to grow 19.2% and 10.8% in 2021 and 2022 respectively. Earnings are expected to grow a respective 69.1% and 16.7%.
Titan Machinery is slated to report next week, so it’s better to look at the estimate revisions trend in the last 90 days (roughly since the last earnings report). And so, the 2021 estimate has increased 19.7% during this time while the 2022 estimate has increased 12.7%.
Titan Machinery shares trade at 14.32X earnings, below the median level of 15.84X and the S&P 500.
Year-to-Date Price Performance