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Manufacturing Activity on a Roll: 5 Industrial Stock Picks

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The manufacturing sector which accounts for about 12% of the U.S. economy is on a roll this year, backed by the strong data provided by the Institute for Supply Management (“ISM”). Per ISM’s latest report, Purchasing Managers’ Index (“PMI”) for September rose 59.8% — exhibiting strong growth in manufacturing for the 25th consecutive month. The upbeat performance continues to be led by strong production output and continued strength in new orders, signaling strong economic momentum.
 
The PMI has averaged 59.2% over the last 12 months ranging from a low of 57.3% in April 2018 to a high of 61.3% in August 2018. Notably, a reading above 50% indicates expansion in manufacturing economy. The PMI reading of 59.8% for September corresponds to a 5.1% increase in real gross domestic product (GDP) on an annualized basis. Of the 18 manufacturing industries, 15 reported growth in September.
 
New Orders Index registered 61.8% in September, indicating growth in new orders for the 33rd consecutive month. Notably, the New Orders Index has remained at 60% or above for the 17th straight month. Despite manufacturers remaining concerned about impact of tariffs, demand remains strong on the back of steadily rising wages, low tax rates and robust labor market conditions.
 
 
Upbeat Industrial Production Numbers Instil Optimism
 
In addition, industrial production — a measure of the level of output of manufacturing, mining and utilities sectors  — rose 0.4% in August for its third consecutive monthly increase. Manufacturing output moved up 0.2% and was 3.1% higher than its prior-year level. 
 
Capacity utilization for the industrial sector climbed 78.1% in August, which is 1.7 percentage points lower than its long-run (1972–2017) average. Mining output rose 0.7% in August – advancing more than 14% over the past 12 months, aided by substantial increases in the oil and gas sector. The index for utilities moved up 1.2% in August
Industrial production had also gone up 0.4% in July. This along with August performance instils optimism about the sector’s third=quarter 2018 performance. Notably, industrial production grew at an annual rate of 6% in second-quarter 2018.
 
These abovementioned strong data numbers is an indication that the sector is on a firm footing. Further, the fact that capacity utilization remains below its long-term average indicates that further improvement can be expected from the metric. Ongoing momentum in new orders, strong housing and commercial construction markets, growth in job additions, positive consumer confidence, and the Trump administration’s economic policies such as tax cuts bode well for the sector.
 
Sector Position & Performance
 
All the machinery industries are broadly clubbed under the Zacks Industrial Products Sector, one of the 16 broad Zacks sectors. The sector’s earnings surged 33.8% in second-quarter 2018 on the back of 12.8% increase in revenues. Per Zacks’ projections, the sector is expected to log 18.5% growth in earnings in the third quarter of 2018 on the back of a 7.6% rise in revenues. In fourth-quarter 2018, the sector’s earnings are expected to rise 17.6%, followed by 9.9%, 8.8% and 10.8% in the first, second and third quarters of 2019, respectively. (Read more: Q3 Earnings Season Brings Growth Deceleration)
 
This sector has been outperforming the S&P 500 market in recent times. In the past three months, the sector has gained 8.1%, exceeding the S&P 500’s growth of 6.7%.
 
 
We note that the industrial products sector is currently enjoying a place in the top 50% of the 16 broad Zacks sectors. (To learn more visit: About Zacks Sector Rank)
 
Consequently, investing in the industrial space makes perfect sense at this point. We have zeroed in on five industrial stocks which have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Our research shows that stocks with an impressive VGM Score of A or B when combined with a Zacks Rank 1 or 2, offer the best upside potential.
 
 
Industrial Stocks to Bet on
 
Atkore International Group Inc. (ATKR - Free Report) : Harvey, IL-based Atkore International manufactures and distributes electrical raceway products. This Zacks #1 Ranked stock has a VGM Score of B. It has gained 31% over the past year. The company has an estimated long-term earnings growth rate of 10%. The Zacks Consensus estimates for earnings for both fiscal 2018 and fiscal 2019 have moved up 11% over the past 90 days. The projected earnings growth for fiscal 2018 and 2019 is pegged at 93% and 6.8%, respectively. The company also has an average positive earnings surprise history of 24.46% over the trailing four quarters.
 
Luxfer Holdings PLC (LXFR - Free Report) : Based in Salford, the U.K., Luxfer Holdings PLC is a materials technology company specializing in design, manufacture and supply of high-performance materials, components and gas cylinders. It currently has a Zacks Rank #1 and a VGM Score of B. Its shares have returned 89% over the past year. It has an estimated long-term earnings growth rate of 10%. Over the past 90 days, the Zacks Consensus estimates for earnings for fiscal 2018 and 2019 have moved north 12% and 10%, respectively. The Zacks Consensus Estimate for earnings for the current fiscal exhibits year-over-year growth of 42% while the same for the next fiscal is pegged at 16%. The company has delivered an average positive earnings surprise of 11.04% over the trailing four quarters.
 
W.W. Grainger, Inc. (GWW - Free Report) : Lake Forest, IL-based Grainger distributes maintenance, repair, and operating (MRO) supplies, and other related products and services. The stock has a Zacks Rank #2 and a VGM Score of B. The company has a long-term estimated growth rate of 12.5%. Its estimates for fiscal 2018 and fiscal 2019 have undergone positive estimate revisions of 8% and 7%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings projects year-over-year growth of 40% for fiscal 2018 and 11% for fiscal 2019. The company has an average positive earnings surprise history of 21.5% over the trailing four quarters. Its shares have surged 97% over the past year.
 
Harsco Corporation (HSC - Free Report) : Camp Hill, PA-based Harsco Corporation provides industrial services and engineered products globally. It currently has a Zacks Rank #1 and VGM Score of B. Its shares have gained 36% over the past year. The company’s estimates for fiscal 2018 and fiscal 2019 have moved north 3% and 7%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings for fiscal 2018 projects year-over-year growth of 66% while the same for the next fiscal is pegged at 18%. The company has an average positive earnings surprise history of 17.80% over the trailing four quarters.
 
UFP Technologies, Inc. (UFPT - Free Report) : Newburyport, MA-based UFP Technologies designs and manufactures a range of high-performance cushion packaging and specialty foam, and plastic products. It has a Zacks Rank #1 and VGM Score of B. The company’s estimates for fiscal 2018 and fiscal 2019 have moved north 5% and 6%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings for the fiscal 2018 projects year-over-year growth of 56% while the same for the next fiscal is pegged at 37%. The company has delivered an average positive earnings surprise of 47.3% over the trailing four quarters. The stock has rallied 40% over the past year.
 
5 Companies Verge on Apple-Like Run
 
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2018 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs. A bonus Zacks Special Report names this breakthrough and the 5 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains.
 


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