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6 Industrial Stocks Likely to Beat Estimates in Q4

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The upcoming fourth-quarter earnings season for the industrial sector holds promise backed by the upbeat manufacturing data, strong housing and commercial construction markets and an improving U.S economy. Industrial production, which is considered one of the leading economic indicators for industrial stocks, jumped 8.2% at an annual rate in the fourth quarter. It is a measure of the level of output of manufacturing, mining and utilities sectors in a country. The upbeat performance was supported by a 7% jump in manufacturing and 12.7% in mining output in the quarter. The index is currently pegged at 107.5% of its 2012 average. Further, it has gained 3.6% in a year, logging its biggest calendar-year gain since 2010.

Manufacturing Activity, New Orders Close 2017 on a High

Manufacturing activity also closed on a high in 2017 as evident from the December PMI (Purchasing Managers' Index) reading of 59.7, per the Institute for Supply Management (“ISM”). The reading was a tad lower than the peak of 60.8 in September but marked the fastest pace of expansion since 2011. The PMI is an indicator of the economic health of the manufacturing sector with a reading above 50 signalling increased factory activity.

The score can be attributed to strong expansion in new orders and production. Further, 16 of 18 industries reported growth in December. With this reading, manufacturing has delivered positive growth for 16 consecutive months.  Notably, in 2017, the ISM manufacturing index averaged the highest readings for a calendar year since the last 13 years.

The manufacturing sector accounts for about 12% of the U.S. economy. The December PMI indicates growth for the 103rd consecutive month in the overall economy. The index has averaged 57.6% for 2017, which translates to a 4.5% increase in real gross domestic product (GDP) on an annualized basis.

New orders and production both rose to very healthy levels to close 2017 and have delivered positive growth trend for 16 straight months. In December, New Orders Index registered 69.4%, the highest reading since January 2004. In fact, the index has been at levels above 60% for seven months at a stretch – the highest expansion level in 14 years. The Production Index registered 65.8% in December, the highest reading since May 2010.

Steady Growth Ahead

Healthy order and production levels suggest that the strength exhibited by the manufacturing sector throughout 2017 should carry over into 2018. With the passage of the Tax Cuts and Jobs Act, the pace of growth could pick up even further. We believe that implementation of the Trump government’s growth policies, especially the proposed $1 trillion spending on infrastructure improvement, will be a boon for industrial stocks.

The continuous advancements in technologies applied in agriculture and mining industries sustain strong demand for farming and mining machinery. Long-term demand for agricultural equipment will be buoyed by increased global demand for food. Further, favorable trends resulting from growing, and affluent population along with rising living standards and dietary improvements will provide ample opportunity for long-term growth. Moreover, healthy growth in demand for packaged foods and beverages across nations, especially in emerging countries, are significantly increasing the use of highly sophisticated food processing and packaging equipment.

Construction machinery demand will remain strong in the years to come aided by population growth, urbanization, increased energy consumption as well as an expanding middle class. Further, increasing demand for global infrastructure, such as roads, housing, airports, and energy will help sustain growth.

Impressive Performance, Sector Position

Over the past year, the Industrial Products sector (one of the 16 broad Zacks sectors) has clocked a gain of 29.7%, outperforming the S&P 500’s growth of 20.5%.

The Industrial Products sector put up an impressive 19.6% growth in earnings in third-quarter 2017. At the onset of the fourth-quarter earnings season, investors remain eager to know about the performance of the sector in this quarter. Of the 4.2% of the S&P 500 participants that have reported so far, a 15.1% earnings growth has been recorded on the back of a 23.8% rise in revenues. The beat ratio is an impressive 100% for both the metrics. Per our latest projections, the sector will put up an earnings growth of 22.2% while revenues will advance 11.9% in fourth-quarter 2017. It is one the six sectors that is expected to log double-digit growth in earnings in the fourth quarter. (Read more: Tax Cuts Pushing Earnings Estimates Higher)

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). In 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 #8, enjoys a position in the top half.

How to Identify the Outperformers?

The encouraging figures suggest that there are a number of companies likely to beat our fourth-quarter earnings estimates. Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.

But with a wide range of industrial stocks thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings. The Zacks methodology makes the task simple, by combining a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of a Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our Key Picks

We have picked six industrial stocks that have the right combination of elements to post an earnings beat in the December ending quarter.

Peoria, IL-based Caterpillar Inc. (CAT) is the world's largest manufacturer of construction and mining equipment. The company’s Zacks Rank #2 and Earnings ESP of +9.25% makes us confident of an earnings beat this quarter. The company has trumped the Zacks Consensus Estimate in the trailing four quarters, delivering an average positive earnings surprise history of 53.1%. The Zacks Consensus Estimate for fourth-quarter 2017 earnings is $1.73.

Caterpillar is scheduled to release fourth-quarter 2017 results on Jan 25, before the market opens.

Headquartered in Cleveland, OH, Applied Industrial Technologies, Inc. (AIT) is leading industrial distributor and serves the needs of MRO and OEM customers in virtually every industry. The company has outpaced the Zacks Consensus in the preceding four quarters, with an average positive earnings surprise of 9.7%. The company is likely to deliver an earnings beat when it reports second-quarter fiscal 2018 results, given its Zacks Rank #2 and Earnings ESP of +1.41%. The Zacks Consensus Estimate for earnings the to-be-reported quarter is 71 cents.

Applied Industrial is expected to release second-quarter fiscal 2018 results on Jan 25, before the market opens.

Lake Zurich, IL-based ACCO Brands Corporation (ACCO) designs, manufactures, branded office products. ACCO Brand’s Zacks Rank #2 and an Earnings ESP of +0.76% makes us confident of an earnings beat this quarter. The company has also delivered earnings beat in the last four quarters, leading to an average positive earnings of 81.9%. The Zacks Consensus Estimate for earnings in the to-be-reported quarter is 44 cents.

ACCO Brands is scheduled to release fourth-quarter 2017 results on Feb 14, before the market opens.

Headquartered in Lincolnshire, IL, Zebra Technologies Corporation (ZBRA), together with its subsidiaries, designs, manufactures, sells, and supports direct thermal and thermal transfer label printers, radio frequency identification (RFID) printer/encoders, dye sublimation card printers, real-time locating solutions, related accessories, and support software worldwide.

Zebra Technologies’ Zacks Rank #2 and Earnings ESP of +1.06% makes us confident of an earnings beat this quarter. The company has a positive average earnings surprise of 7.7% in the last four quarters.  The Zacks Consensus Estimate for earnings for the fourth quarter is $2.12.

Zebra Technologies is expected to release fourth-quarter fiscal 2017 results on Feb 22.

Headquartered in Bedford, MA, iRobot Corporation (IRBT) designs, builds, and sells robots for the consumer market worldwide. The company has delivered an earnings beat in the trailing four quarters and delivered an impressive average positive earnings surprise of 92.5% over the said timeframe. The company is likely to beat estimates in the next quarter as it carries a Zacks Rank #2 and an Earnings ESP of +17.65%. The Zacks Consensus Estimate for the quarter is pegged at 26 cents.

iRobot is expected to release fourth-quarter fiscal 2017 results on Feb 7.

Headquartered in Atlanta, GA, Graphic Packaging Holding Company (GPK - Free Report) together with its subsidiaries provides paper-based packaging solutions to food, beverage, and other consumer products companies. The company has an average positive earnings surprise history of 0.3% in the trailing four quarters. The company is likely to beat estimates in the next quarter as it carries a Zacks Rank #2 and an Earnings ESP of +0.26%. For the fourth quarter, the Zacks Consensus Estimate is pegged at 19 cents.

Graphic Packaging is scheduled to release fourth-quarter fiscal 2017 results on Feb 6, before the market opens.

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