The U.S. market is abuzz with President Trump’s import tariffs on steel and aluminium and its subsequent impact on various industries. Evidently, domestic steel and aluminium producing companies will emerge as prime winners while those using these metals as raw material and relying heavily on imports will likely lose. Industrial machinery, we believe, will likely feel the heat of the import tariffs in the form of higher production costs and rise in competitive threats from international players.
Despite these possible headwinds, we believe that the country’s industrial machinery has strong growth potential and offers solid investment options for investors seeking exposure in the space. Before proceeding further, we like to mention here that industrial machinery is grouped under Industrial Products, one of the 16 broad Zacks sectors.
Industrial Products — At the Apex
Last year, the sector gained 18.6% while it has rallied roughly 0.9% in the last three months. The industrial stocks’ performance has been impressive in the fourth quarter of 2017. Earnings in the quarter grew 34.8% year over year while revenues increased 14.5%. Both earnings and revenue beat in the quarter came in at 83.3%.
Currently, the sector is in the top 6%, holding the first position among all the Zacks sectors. This clearly shows that the majority of the industries within this sector performed well in the past few months and looks poised for growth in the coming quarters. Per the Zacks Earnings Trends report dated Mar 7, earnings for industrial stocks are projected to grow 23.7% in the first quarter of 2018 while sales are likely to increase 12.3%.
Currently, the machinery industry dealing with material handling products and electrical products is in the top 2% of the 265 industries comprising the Zacks sectors while those dealing with construction and mining equipment and thermal products are in the top 5%.
Other machinery industry that primarily deals with manufacturing and supplying farm equipments is in the top 14%, industrial electronics in 22%, industrial tools and providing related services in 11% and companies serving general industrial purposes in 30%.
Going by the Zacks rule, we see that machinery sub-industries mentioned above, fall in the top half. These sub-industries can be of interest to investors seeking exposure in the machinery industry.
What’s Driving Industrial Machinery?
We believe that healthy domestic requirements and strong export orders play a key role in determining the demand for industrial machineries in any country. Per the U.S. Census Bureau report, new orders for U.S.-manufactured machinery increased 11.4% year over year in January 2018 led by growth in orders for farm, construction, mining, industrial, material handling and metal working machineries.
Also, the country’s industrial production increased 3.7% year over year in January driven by impressive growth in mining, manufacturing and utilities output. The latest report issued by the Institute for Supply Management reveals that Purchasing Managers’ Index or manufacturing index grew roughly 2.9% in February over the previous month. We believe that these economic indicators point toward healthy operating conditions in the industry.
Also, the U.S. machinery companies will gain from the implementation of the government’s $1 trillion investment plan for infrastructure improvement, strengthening housing market and new job additions. Moreover, efforts aimed to improve trade relations across nations will be a boon for machinery companies.
Industrial Machinery Stocks in Focus
We have zeroed in on five industrial machinery stocks that sport favorable Zacks Rank Zacks Rank of #1 (Strong Buy) or 2 (Buy) and have market capitalization of more than $1 billion. In addition, the stocks selected have yielded positive returns in double-digits in the last three months, outperforming gain recorded by the sector. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rexnord Corporation (RXN - Free Report) : The company, with $3.1 billion market capitalization, manufactures water management and process and motion control equipments. The company is poised to benefit from solid product demand, its supply-chain optimization and footprint-repositioning programs and synergistic gains from buyouts. It carries a Zacks Rank #2.
In the last three months, the company’s shares have yielded 25.7% return. Also, in the last 60 days, the company’s Zacks Consensus Estimate has been positively revised by 7.2% to $1.34 for fiscal 2018 (ending March 2018) and by 11.7% to $1.72 for fiscal 2019.
Applied Industrial Technologies, Inc. (AIT - Free Report) : The company sports a Zacks Rank #1 and has $2.9 billion market capitalization. It primarily distributes industrial products to original equipment manufacturer and maintenance, repair, and operations customers. A strengthening industrial market, lower corporate taxes, buyout gains and benefits from restructuring actions are prime tailwinds in the near term for the company.
In the last three months, its shares have gained 21.5%. In the last 60 days, the stock’s Zacks Consensus Estimate was raised 0.9% to $3.45 for fiscal 2018 (ending June 2018) and by 19.7% to $4.13 for fiscal 2019.
Roper Technologies, Inc. (ROP - Free Report) : The company, with a $29.1 billion market capitalization, sports a Zacks Rank #1. Its product portfolio includes scientific imaging products and software, radio frequency products, services and application software, industrial technology products and energy systems and control products and solutions. Solid products along with meaningful buyouts and asset-light business model will prove advantageous for the company.
In the last three months, its shares have rallied 12.1%. In the last 60 days, the company’s Zacks Consensus Estimate has been positively revised by 9.7% to $11.07 for 2018 and by 9.2% to $12.02 for 2019.
Zebra Technologies Corp. (ZBRA - Free Report) : The company carries a Zacks Rank #2 and has $7.7 billion market capitalization. Its core operations include mobile computing, scanning, printing and providing services. Focus on development of new products, building healthy relationships with customers, anticipated improvement in Chinese operations and strengthening businesses in transportation & logistics, retail/e-commerce, healthcare and manufacturing end markets will work in its favor in the quarters ahead.
In the last three months, its shares have gained 39%. The stock’s Zacks Consensus Estimate is pegged at $9.10 for 2018 and $9.64 for 2019, reflecting increase of 15.5% and 16.7%, respectively, from their tallies 60 days ago.
SPX FLOW, Inc. (FLOW - Free Report) : The company, with market capitalization of $2.3 billion and Zacks Rank #2, specializes in supplier of industrial products and solutions to customers in food and beverage, power and energy and industrial end markets. Solid product line, focus on margin expansion and growth investments will be advantageous for the company.
In the last three months, its shares have rallied 17.2%. In the last 60 days, the company’s Zacks Consensus Estimate has been positively revised by 6.9% to $2.47 for 2018 and by 4.4% to $3.07 for 2019.
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