The Industrial Products sector is anticipated to see a lackluster earnings season, thanks to the prevalent slowdown in the manufacturing sector. The sector has been displaying contraction for the past five months, mainly due to the protracted U.S.-China trade war and waning global demand.
Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) was 47.2% in December — the lowest PMI reading since 46.3% in June 2009 — the last month of the Great Recession. This follows a reading of 48.1% in November and 48.3% in October.
Notably, a reading above 50 denotes expansion in the manufacturing sector and below 50 indicates contractions. The PMI remained below 50 for five consecutive months, averaging 47.9% during October-December 2019. This is expected to have weighed on the Industrial Products sector’s fourth-quarter performance.
The New Orders Index registered 46.8% in December, marking the lowest reading since 46% in April 2009. During the October-December period, the index averaged 47.7%.
Production Index came in at 43.2% in December — the index’s worst performance since April 2009 — when it stood at 36.7%. In the final quarter of 2019, this index averaged 46.2%.
The Employment Index registered 45.1% in December — the index’s lowest reading since 44.6% in January 2016. The index’s average in the last three months of 2019 stood at 46.5%. Notably, the new orders, production and employment indices all shrunk for the fifth consecutive month in December.
Given that steel is a primary raw material, every company involved in manufacturing has borne the brunt of higher steel prices, thanks to tariffs.
This trend is anticipated to have continued in the fourth quarter as well, consequently trickling down to the sector’s bottom line. Nevertheless, the manufacturing companies are striving to sustain their margins through pricing actions and cost control, increasing productivity and eliminating waste.
Per the latest Earnings Trends, the Industrial Products sector’s fourth quarter revenues are expected to inch up 0.8%, while earnings are likely to drop 5.1%. However, the slump is not restricted to this sector, as 10 of the 16 Zacks sectors are expected to log declines this earnings season.
Selecting Potential Winners
Amid this backdrop, it is wise to select industrial stocks that are well positioned to beat earnings in their upcoming releases. Nonetheless, given the wide range of companies in this space, the task is by no means easy. One way to do it is by picking stocks, which have the combination of a Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
With the Zacks Stock Screener, five such industrial stocks have been identified.
Dover Corporation DOV provides equipment and components, specialty systems, consumable supplies, software and digital solutions, and support services worldwide. This Downers Grove, IL-based company has an Earnings ESP of +1.72% and carries a Zacks Rank #3, at present. The company, which is slated to report fourth-quarter results on Feb 4, delivered a positive earnings surprise of 6.7%, on average, over the last four quarters. The Zacks Consensus Estimate for the to-be-reported quarter is $1.46, indicating 2.1% year-over-year growth.
Dover Corporation Price and EPS Surprise
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