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Industrial Stocks Are Stronger Than You Would Expect

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The industrial sector includes some of the biggest American companies and form the backbone of the whole economy. Since they are focused on manufacturing activity, they are usually large (which helps them generate scale advantages) and mature (which makes them good dividend payers). However, industrial stocks are cyclical in nature, which means they go down with a downturn in the economy and up in the opposite case.

That is what makes the segment so interesting in our current situation, where the likelihood of a recession is anybody’s guess, and depends to a large extent on the Fed’s actions.

On the positive side, the Fed is carefully studying the effects of its actions and treading softly as it sees fit. And inflation is being tamed, however painfully slow it may seem to be.

On the negative side, there will be more rate hikes, so more pain is likely before things get better. The manufacturing contraction in the last two months of 2022 is nothing to scoff at, either.

As far as industrials are concerned, the Fed’s actions are not bad altogether. Many of these companies have faced rising input costs in 2022 as supply chains snarled up. Oil and transportation costs added to this, as did the labor availability, which remained tight. With each spending report, we’re getting improving news about the inflation situation. So while higher rates increase the cost of capital, there are benefits in the form of lower inflation.

Another factor to consider is the broad range of companies that make up this sector, which gives it exposure to the more stable staples -- medical, agriculture and such other segments -- in addition to the manufacturing segment, which is more dependent on economic ups and downs. Some companies may also have exposure to markets with secular growth trends.

At the same time, fears of a recession have sent some of these stocks down to the levels that don’t adequately reflect their growth prospects. This creates opportunities that we may want to consider.

One big consideration for investing in industrial stocks at this time should be the analyst estimate revisions trend because this is an indication of strength that analysts are seeing in 2023. Digging down further, I came up with these three names:

Tenaris S.A. (TS - Free Report)

Tenaris’ seamless and welded steel tubular products and related services are sold mainly to oil and gas, but also other industrial companies.

Revenue growth has picked up strongly from the pandemic lows in 2020, along with earnings and cash flow. Analyst estimates indicate that this strength will continue. Revenue and earnings are accordingly expected to grow 22.2% and 21.5% in 2023, on top of 80.0% revenue growth and 134.2% earnings growth in 2022.

Analysts also appear to be incrementally positive about the company, raising 2023 estimates by 14 cents (2.7%) in the last 30 days.

The earnings expected surprise prediction (ESP) of 0.0% for this Zacks Rank #1 (Strong Buy) stock indicates an earnings beat when Tenaris reports December quarter results on Feb 15. The company has a relatively strong earnings surprise history. Although Tenaris missed estimates in the last quarter, it was by less than a percentage point. The four-quarter average surprise was 20.9%.

Tenaris also pays a dividend that yields 1.93%.

The stock is currently trading below its median level over the past year, representing a discount of 62.9% to the S&P 500.

Siemens Aktiengesellschaft (SIEGY - Free Report)

Siemens produces and sells a broad range of products that are intended to digitize and automate several industrial products and processes, that facilitate smart infrastructure products, systems, solutions, services and software for the energy market, that make passenger and freight transportation possible, as well as many other products and services. It operates globally.

In this case too, we see revenues picking up strongly since the pandemic dip in June 2020 although earnings and cash flows have moved around quite a bit. Since we only have estimates from three analysts, there is a certain room for error. However, current estimates represent 76.1% earnings growth in 2023 followed by 15.2% growth the following year.

Analyst estimates are also riding higher. For fiscal year 2023 ending in September, Siemens is expected to grow its earnings 76.1%. In 2024, it’s expected to grow 15.2%. The Zacks Consensus Estimate for 2023 has increased 6 cents in the last 30 days while that for 2024 has increased 11 cents.

The company posted a 12.7% positive surprise in the last quarter, and given its Zacks Rank #1 and earnings ESP of 0.0%, it looks like Siemens is headed for another earnings beat when it reports on Feb 9.

Siemens’ dividend yields 2.16%.

The shares are trading slightly above their median value over the past year, but at a discount of 8.4% to the S&P 500.

W.W. Grainger, Inc. (GWW - Free Report)

Grainger offers maintenance, repair and operating (MRO) products and services in the U.S., Japan, Canada and the UK. The company’s revenue, earnings and cash flows have been growing strongly since the pandemic. Production is efficient and inventory builds support the strong demand that it is seeing.  

Analysts are looking for 4.6% revenue growth and 4.2% earnings growth this year. The Zacks Consensus Estimate has jumped 11 cents in the last 30 days.

The ESP is -0.12% for this Zacks Rank #1 stock, so we are unable to predict a positive surprise when it reports tomorrow). However, it’s worth noting that Grainger has a consistent history of beating estimates. It has topped the Zacks Consensus in each of the last four quarters at an average rate of 10.1%.

Grainger’s dividend yields 1.2%.

Investors have already gotten into this stock given the stability and strength of its numbers (it trades at a 3.5% premium to the S&P 500). But the growth outlook and Zacks rank seems to indicate that there’s more room to run.

Three-Month Price Performance

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