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The machinery industry has been riding high on the upbeat trend in manufacturing activity since September last year. The industry is also displaying signs of improvement since the announcement of pro-growth policies by President Trump.

Per the latest report from the Institute for Supply Management, Manufacturing PMI - primary gauge of manufacturing activity, stretched to 60.8% in September from 58.8% in August 2017. This reading was fueled by a rise in new orders, production and employment. It is the highest in 13 years and depicts that there is a boom in the manufacturing industry.

Other Factors Depicting Market Growth

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 second-quarter 2017. 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. However, industrial production edged down 0.9% in August due to the impact of Hurricane Harvey.

According to the ADP National Employment Report, private companies created 135,000 jobs in September. The manufacturing industry created 18,000 jobs, while the construction industry created the highest — 29,000 jobs — in the private sector.

Also, the U.S Architecture Billings Index (ABI), an economic indicator that provides an approximately nine to 12 month glimpse into the future of non-residential construction spending activity, has been at 50 or better recently, signaling robust conditions ahead for the construction industry.

Additionally, the U.S. GDP improved 3.1% in second-quarter 2017, marking its quickest pace in two years. It was a substantial acceleration from 1.2% growth in the first quarter. Overall, the economy grew 2.1% in the first half of 2017. An uptick in consumer outlays and business investments drove the upside.

How will Industrial Sector Perform in Q3?

The machinery industry is broadly grouped under the Industrial products sector. The Q3 earnings season has already begun and investors remain eager to know about the performance of the sector in this quarter. After delivering 18.8% earnings growth in the second quarter, the sector is projected to deliver growth of 9% in the third quarter. (Read more: Q3 Earnings Season Gets Going).

Sector Price Performance, Positioning

The Industrial products sector has clocked a gain of 25.4% over the past year, outperforming the S&P 500’s climb of 20.8%.

 


 

We put our Sectors (all 16 of them) into two groups: the top half (i.e. sectors with the best average Zacks Rank) and the bottom half (the sectors with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. (To learn more visit: About Zacks Sector Rank).

The industrial products sector, with a Zacks Sector Rank #5, remains in the top half.

Going Forward

Government policies encouraging better trade relations, job creation and high consumer-end demand will support growth for the machinery industry despite the adverse impact of natural disasters, including the recent tropical storms. Other tailwinds include strengthening housing, automotive and commercial construction markets. Additionally, stabilizing oil prices, enthusiasm over tax reforms and rounds of upbeat data are adding to the sector’s strength.

How to Make a Selection?

With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings estimates could appear difficult, but our proprietary methodology makes it fairly simple for you. One way to narrow down the list of choices during the earnings season is to look at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold), and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with the next 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.

Our Picks

For investors seeking to apply this strategy to their portfolio, we have chosen six industrial stocks that are poised to shine in the Q3 earnings season:

PEORIA, IL-based Caterpillar Inc. (CAT - Free Report) is the world's largest manufacturer of construction and mining equipment. This Zacks Rank #2 company, with a long-term growth rate of 9.5%, hasn’t reported a single negative earnings surprise over the trailing four quarters. In fact, Caterpillar’s Earnings ESP of +0.29% makes us reasonably confident of an earnings beat in the current quarter. It is slated to report quarterly numbers on Oct 24.

The company’s Q3 estimates moved up 38.6% over the past 90 days. Its expected earnings growth for the fourth quarter is 49.7%. Notably, the stock has gained 38.7% so far this year, outperforming the industry’s 37.2% gain.

Altra Industrial Motion Corp. (AIMC - Free Report) , headquartered at Braintree, MA, manufactures a diverse range of mechanical power transmission, or MPT components. With an Earnings ESP of +5.76%, the company is likely to beat earnings estimates in this quarter. Its third-quarter estimates climbed 4.5% in the last 90 days. The company’s projected earnings growth for the next quarter is 15.5%. It is set to release earnings results on Oct 20.

Notably, this stock, with a long-term earnings growth rate of 8%, has surged 58.8% year to date, way ahead of the industry’s 34.8% growth. Also, this Zacks Rank #2 company has topped earnings estimates in each of the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

WESTPORT, CT-based Terex Corporation (TEX - Free Report) is a manufacturer of a broad range of construction and mining-related capital equipment. The company has an impressive positive earnings surprise history. Also, Terex’s Zacks Rank #2 and Earnings ESP of +4.63% signal another likely earnings beat in the to-be-reported quarter. It is scheduled to report quarterly figures on Oct 30.

Terex’s long-term growth rate of 19.6% and marvelous stock performance are also worth noting. Its estimates have moved 23% upward for the third quarter in 90 days’ time. The company’s estimated earnings growth rate for fourth-quarter 2017 is a whopping 249.2%. Evidently, shares of the company have soared 45.3% this year, outperforming 37.2% growth registered by the industry.

NEW BRITAIN, CT-based Stanley Black & Decker, Inc. (SWK - Free Report) is a diversified global provider of tools and related accessories. With a Zacks Rank #2 and an Earnings ESP of +2.09%, the company is likely to beat earnings estimates in the quarter to be reported. It is scheduled to release third-quarter earnings on Oct 24.

The stock has rallied 36.4% year to date, outperforming the industry’s 31% growth. Notably, the company has a long-term earnings growth rate of 10.3%. Its expected earnings growth rate for the next quarter is 23.65%. Further, the company’s robust earnings surprise record is a cherry on the cake.

MINNEAPOLIS, MN-based Graco Inc. (GGG - Free Report) supplies technology and expertise for management of fluids in both industrial and commercial settings. The company is expected to report earnings results for the third-quarter 2017 on Oct 25.

Graco has an Earnings ESP of +2.14%. Over the past 90 days, its estimates have moved up 3% for Q3. The company’s projected earnings growth rate for the next quarter is 4.25%.

Also, this Zacks Rank #2 company has surpassed earnings estimates in each of the trailing four quarters. The stock, with a long-term earnings growth rate of 10.5%, has jumped 49.6% year to date, outperforming 23.2% growth recorded by the industry.

SARASOTA, FL-based Roper Technologies, Inc. (ROP - Free Report) designs and develops software, engineered products and solutions. The company has beat earnings estimates in each of the trailing four quarters. Also, Roper Technologies’ Zacks Rank #2 and Earnings ESP of +0.13% signal a likely earnings beat in this quarter. It is scheduled to release quarterly results on Oct 30.

Roper Technologies’ long-term growth rate of 12.3% and impressive stock performance also hold promise. Evidently, shares of the company have gained 36.5% this year, outpacing the industry’s solid gain of 23.2%. Its estimates have inched up 0.4% for the current quarter in 60 days’ time. The company’s expected earnings growth rate for the next quarter is 41.04%.

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