The Zacks Industrial Services
industry is riding on an improving overall economy. Increased investments in e-commerce and digital capabilities, and growth in end markets will further boost the industry.
Rising Demand a Boon
Industrial Services primarily includes providers of industrial equipment products and MRO (maintenance, repair and operations) services. These items (repair components, cutting fluids, lubricants, safety supplies and other consumables) are utilized in production and plant maintenance but are not directly related to customer’s core products or services.
Customers of this industry primarily belong to commercial, government, healthcare and manufacturing space. Given that MRO inventory accounts for as much as 40% of their annual budget, improved outlook and increased customer spending bode well for Industrial Services. Further, the evolution of e-commerce has significantly impacted MRO demand with every passing year. In the United States, business investment and exports are two major indicators of MRO spending. Business investment is likely to grow supported by favorable financial conditions, expanding global markets, lower capital costs and an improving regulatory climate.
Improvement in end markets like recovery in manufacturing activity, residential and non-residential construction; ongoing revival in the oil and gas industry and economic growth will continue to drive the industry. The recent tax reform is likely to lead to higher capital spending and attract incremental foreign capital to the United States, in turn, bolstering exports.
Inflation Remains a Headwind
Inflation has hit Industrial Services hard, particularly metal-based products. In fact, the recent heightened trade tariffs resulted in the industry dealing with higher costs of raw material and threat of undercutting business spending. Also, distributors continue to pass along higher prices to customers. However, it may not always be possible or adequate to cover rising product inflation in an intensely competitive environment, consequently limiting margins. With United States and China coming to a truce over the trade war, this will provide a relief to the industry.
Industry Outperforms S&P 500, Valuation Inexpensive
The Industrial Services industry, which is a 17-stock group within the Zacks Industrial Products
Sector, has outperformed its own sector and the S&P 500 over the past year. Notably, the industry has gained 10.2%, while the S&P 500 dipped 0.9%. Meanwhile, the Industrial Products sector declined 16.8%.
The industry's valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its enterprise value to earnings before interest depreciation and amortization (EV/EBITDA).
The industry currently has a forward 12-month EV/EBITDA ratio of 10.2, which looks inexpensive when compared with the market at large. The trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.0. A comparison of the industry’s EV/EBITDA ratio with that of its broader sector ensures that the industry is trading at a decent discount. The Industrial Products sector’s forward 12-month EV/EBITDA ratio of 12.3 is above the Industrial Services industry’s 10.2.
How to Play the Industry?
Earnings estimate revisions is the most crucial factor impacting stock prices. Stocks with rising earnings estimates have a tendency to perform better than other stocks in the group, even if the industry fundamentals remain sluggish. We have zeroed in on four such stocks below:
(HSC - Free Report
) : The Zacks Consensus Estimate for fiscal 2018 earnings per share has moved 2% up over the past 90 days. In a year’s time, this Zacks Rank #1 stock has gained 26%. Furthermore, this Camp Hill, PA-based company delivered average four-quarter positive earnings surprise of 13.58%.
HD Supply Holdings, Inc.
(HDS - Free Report
) : The Zacks Consensus Estimate for fiscal 2019 earnings per share has moved 1% up over the past 90 days. Currently, this Atlanta, GA-based company has a Zacks Rank #2 and average four-quarter positive earnings surprise of 6.91%.
(ARGKF - Free Report
) : This Glasgow, U.K-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2018 earnings has climbed 2% over the past 90 days.
DMC Global Inc.
(BOOM - Free Report
) : The Zacks Consensus Estimate for fiscal 2018 earnings per share has moved 4% north over the past 90 days. In a year’s time, this Zacks Rank #2 stock has surged 59%. Moreover, this Boulder, CO-based company delivered average four-quarter positive earnings surprise of 42.16%.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?