The U.S. market has exhibited signs of improvement since the new government came to power, primarily factoring in President Donald Trump’s promised pro-growth policies. Year to date, the country’s major stock indexes have yielded healthy returns, including 11.6% by the S&P 500, 18.6% by the Nasdaq Composite and roughly 7.5% by the NYSE Composite.
Also, the country’s Gross Domestic Product (GDP) grew at an annualized rate of 3% in the second quarter of 2017, the strongest growth registered since the first quarter of 2015. The country’ GDP in the first quarter had advanced 1.4%.
Riding on the government’s promised growth policies, especially the proposed $1 trillion spending on infrastructure improvement, the industrial products sector has gained 8.8% year to date. Other tailwinds are the strengthening housing, automotive and commercial construction markets as well as steady growth in new job additions, with roughly 156,000 added in August. Of this, roughly 36,000 new jobs were added in the manufacturing industry.
We believe that few economic indicators, including manufacturing data and industrial production, point toward healthy operating conditions in the sector.
What Manufacturing Data Reveals?
The latest report issued by the Institute for Supply Management reveals that Purchasing Managers’ Index (PMI) or manufacturing index expanded to 58.8% in August, increasing 2.5 percentage points from 56.3% recorded in July. Though new orders dipped 0.1%, production improved 0.4%, backlog of orders grew 2.5% and employment 4.7%.
Notably, PMI reading above 50% indicates expansion of the manufacturing sector and vice versa. The August PMI represents growth in the manufacturing sector consecutively for the last 12 months. It also represents growth in the overall economy for 99 consecutive months. Machinery industry expanded in August, following healthy demand growth for light construction equipments while transportation and electrical equipments exhibited healthy sales growth and higher orders, respectively.
On a broader note, industrial production — a measure of the level of output of manufacturing, mining and utilities sectors in a country — grew at an annual rate of 4.7% in the second quarter. In July, industrial production grew 2.2% supported by 1.2% growth in manufacturing industry and 10.2% in mining, offset partially by 0.6% fall in utilities.
Industrial Stocks in Focus
Below we discuss four industrial stocks that seem to be good investment options for investors seeking exposure in the sector. The chosen stocks have favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong long-term earnings growth prospects, among other favorable aspects. You can see the complete list of today’s Zacks #1 Rank stocks here.
Caterpillar Inc. (CAT - Free Report) – The company, with market capitalization of $69.6 billion, primarily serves customers in the construction, road building, mining, forestry, energy, transportation and material-handling industries. It stands to benefit from strengthening U.S. construction market, increased infrastructure and residential investment in China, improved order activities and strict cost discipline. For 2017, the company anticipates revenues and earnings to be $42-$44 billion and $5 per share, respectively, up from its earlier projections of $38-$41 billion and $3.75 per share.
The company currently sports a Zacks Rank #1 and promises returns of 18.5% on equity and 7% on capital. Dividend yield at present is 2.65%. Its earnings are anticipated to grow 9.5% in the next three to five years.
We believe that healthy growth prospects led to positive revision in earnings estimates for Caterpillar. Over the last 60 days, its Zacks Consensus Estimate has increased 22.5% to $5.22 for 2017 and 25% to $6.69 for 2018.
Caterpillar, Inc. Price and Consensus