The third-quarter earnings season is drawing to an end, with 470 S&P members that represent almost 96.2% of the index’s total market capitalization, having reported their numbers. Of these, 72.3% beat EPS estimates. Earnings are up 6.6% year over year. Among the sectors, Energy, Industrial Products, Technology, Construction, Business Services and Medical sectors fared well in the quarter.
The machinery industry falls under Industrial Products sector, which reported 16.7% earnings growth in the quarter. A few companies in the sector are yet to report. Earnings are expected to grow 18.7% in the quarter, almost in line with second quarter’s earnings growth of 18.8%.
The sector’s performance in the third quarter was backed by increased infrastructure spending and upbeat economic data. An improving global economy was also a catalyst. Also, investment in equipment continues to rise. However, the sector was adversely impacted by supply chain disruptions arising from factory infrastructure damages caused by two back-to-back hurricanes, Harvey and Irma. We believe that declining unemployment rate, improving consumer spending and stabilizing oil prices will support growth of the industrial sector going forward.
Driving Factors in Detail
Industrial production, one of the leading economic indicators for the industrial stocks, rose 0.9% in October. Manufacturing increased 1.3% while mining output fell 1.3%, as Hurricane Nate caused a short-term decline in oil and gas drilling and extraction. Industrial activity rose in October as normal operations resumed after hurricanes Harvey and Irma hit production in September and October. Also, industrial production grew 2.9% over the past 12 months, which bodes well for machinery stocks.
Further, the national factory activity index reading of 60.8 in September rose from 58.8 in August. It also exceeded market expectations of 58. A reading above 50 indicates increased factory activity.
According to the Bureau of Economic Analysis, U.S. GDP improved at an annual rate of 3% in third-quarter 2017. An increase in inventory investment and lower trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction.
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, was 51.7 in October, up from 49.1 in the previous month and representing sustainable growth in architectural activity.
According to the ADP National Employment Report, private companies created 235,000 jobs in October, reflecting resurgence in construction jobs. The manufacturing industry created 22,000 jobs, while the construction industry created the highest — 62,000 jobs — in the private sector.
Sneak Peek at How Some Machinery Stocks Fared in Q3
The world's largest manufacturer of construction and mining equipment, Caterpillar, Inc. (CAT - Free Report) posted upbeat results for the third quarter led by strong demand for its construction equipment in North America and robust sales in China.
Another construction and mining related equipment maker, Terex Corporation (TEX - Free Report) recorded a year-over-year surge in sales in the third quarter on improved sales and backlog growth.
Leading manufacturer of cranes and lift solutions The Manitowoc Company, Inc. (MTW - Free Report) posted earnings in the third quarter, a reversal from its prior-year quarter’s loss driven by order growth backed by improvement in U.S. energy and commercial construction markets.
Per our projections, the Industrial Products sector’s earnings are expected to further accelerate in the fourth quarter with 20.5% growth. Earnings are expected to grow 12.1% in first-quarter 2018, 12.8% in the second quarter and 9.7% in third-quarter 2018. (Read more: Plenty of Positive Retail Surprises).
We note that the sector is currently placed at the top 31% out of the 16 Zacks Sectors. (To learn more visit: About Zacks Sector Rank).
This sector has also been outperforming the S&P 500 market in recent times. Year to date, the sector has gained around 54.1%, above the S&P 500 index’s growth of 16.5%.
Therefore, we believe investors will benefit by grabbing industrial stocks, as the sector is likely to perform better in the near term.
How to Make the Right Choice?
Will it be prudent to invest on any industrial stock? The answer is no. So, let’s have a look at industrial stocks that have witnessed robust growth and still have a long way to go.
Through our latest Style Score system, we have zeroed in on four stocks that might prove to be a boon for value investors. One way to narrow down the list of choices is to look at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy) and 2 (Buy) with positive estimates revisions and price movement. You can see the complete list of today’s Zacks #1 Rank stocks here.
We have selected machinery stocks that have recorded positive estimates revision over the last 30 days. These stocks have also posted earnings surprises in the last four quarters.
Caterpillar: This Zacks Rank #1 stock has yielded roughly 48.8% return year to date. Last quarter, the company delivered a positive earnings surprise of 59.84%. It has come up with a four-quarter average positive earnings surprise of 53.06%. The company’s prospects look bright as evident from a 6% increase in earnings estimates for 2017 over the last 30 days. The current estimate represents year-over-year growth of 87%.
Terex: The stock currently sports a Zacks Rank #1 and has returned roughly 43.7% return year to date. Sentiments are in favor of the company, as reflected in the 11.2% positive estimate revisions for 2017 in the last 30 days. The current estimate represents year-over-year growth of 46.6%. Last quarter, the company delivered a positive earnings surprise of 28.89%. It has delivered four-quarter average positive earnings surprise of 135.92%.
H&E Equipment Services, Inc. (HEES - Free Report) : Year to date, shares of this Zacks Rank #1 company have gained 55.7%. Last quarter, the company came up with a positive earnings surprise of 94.87%. It has delivered four-quarter average positive earnings surprise of 34.66%. Also, its earnings estimates for 2017 have moved up 43.8% in the last 30 days, representing year-over-year growth of 53%.
Manitowoc: Year to date, shares of this Zacks Rank #2 company have gained 63.3%. Last quarter, the company delivered a positive earnings surprise of 325%. It has come up with a four-quarter average positive earnings surprise of 139.10%. Also, its earnings estimates for 2017 have been revised upward in the last 30 days, representing year-over-year growth of 22%.
Avery Dennison Corp. (AVY - Free Report) : This Zacks Rank #2 stock has yielded roughly 58.2% return year to date. Last quarter, the company delivered a positive earnings surprise of 4.13%. It came up with a four-quarter average positive earnings surprise of 6.85%. The company’s prospects look bright as evident from a 3% rise in earnings estimates for 2017 over the last 30 days. The current estimate represents year-over-year growth of 22%.
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