4 Machinery Growth Stocks To Buy As Manufacturing Picks Up
Zacks Investment Research | Oct 04, 2017 05:03AM ET
U.S manufacturing activity, which accounts for about 12% of the economy, has been witnessing sustained expansion for 13 consecutive months. The primary gauge of manufacturing activity, Manufacturing PMI released by The Institute for Supply Management (ISM), accelerated to 60.8 in September, marking its highest level since May 2004. This upbeat reading was fueled by a rise in new orders, production and employment.
Upbeat Numbers Instill Optimism
The index of national factory activity of 60.8 in September rose from 58.8 reading in August, ahead of market expectations of 58. A reading above 50 indicates increased factory activity. In September, of the 18 manufacturing industries, growth was witnessed across 17 industries, led primarily by Textile Mills; Machinery and Nonmetallic Mineral Products. Such a high number of industries reporting expansion suggest underlying economic strength.
Also, industrial production — a measure of the level of output of manufacturing, mining and utilities sectors in a country — grew at an annual rate of 4.7% in the second quarter. In July, industrial production grew 2.2% supported by 1.2% growth in manufacturing industry and 10.2% in mining, offset partially by 0.6% fall in utilities. However, industrial production dipped 0.9% in August due to the impact of Hurricane Harvey, which hit the Gulf Coast of Texas late in the month.
U.S. GDP Tops Expectations in Q2
U.S. economic output grew at a 3.1% annual rate in the second quarter, marking its quickest pace in two years. It was a substantial acceleration from 1.2% growth in the first quarter. Overall, the economy grew 2.1% in the first half of 2017. With this, the U.S. economy recorded its eighth year of growth since the Recession — the third-longest economic expansion in U.S. history.
According to projections from investment banks, both Harvey and Irma have the ability to knock off between 0.6% and 0.8% from the U.S. GDP growth in the third quarter. Estimates for the quarter is just above 2.2%. However, rebuilding activity is expected to boost GDP growth in the fourth quarter and in early 2018.
Manufacturing Jobs Created
According to the ADP National Employment Report, private companies created 237,000 jobs in August, logging the best pace since March. The manufacturing industry, which created 16,000 jobs, produced record employment in the private sector.
Additionally, per the U.S. Bureau of Labor Statistics non-firm payroll for the month of August increased by 156,000. Manufacturing employment rose by 36,000 in August, the highest monthly job addition in five years. Manufacturing has added 155,000 jobs since a recent employment low in November 2016.
Growth in manufacturing sector employment is in line with President Trump’s electoral promises and immediate actions on assuming office. During his campaign, the President had promised to improve the manufacturing industry by creating jobs through a combination of higher infrastructure spending, tax cuts, and deregulation.
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Sector Positioning, Performance
The Machinery industry is broadly grouped under the sector (one of the 16 broad Zacks sectors). Year to date, the industrial products sector has clocked a gain of 16.4%, outperforming the S&P 500’s climb of 11.9%. The sector had exhibited strength following the election of President Trump, primarily factoring in his promised pro-growth policies. Other tailwinds includes strengthening in housing, automotive and commercial construction markets.
The sector had logged growth of 18.8% in second-quarter 2017 and expected to deliver growth of 8.8% in the third quarter. (Read more: Handicapping the Q3 Earnings Season )
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). Over 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: the complete list of today’s Zacks #1 Rank stocks here .
Notably, the stock carries Growth Score of A. Moreover, the company has been witnessing an upward trend in earnings estimate revision. In the past 60 days, the Zacks Consensus Estimate for earnings for both fiscal 2017 and 2018 have increased 1%. For 2017, earnings growth is pegged at 23.5% and for fiscal 2018, at 25%.
Further, the stock has a long-term expected EPS growth rate of 13.5%. The company has outpaced the Zacks Consensus Estimate in the four trailing quarters, delivering an average positive earnings surprise of 39.7%.
AGCO shares have gained 30.2% year to date, ahead of the industry it belongs to clocked a rise of 15.5%.
To Conclude
The latest reading of the ISM survey reinforces the belief that manufacturing activities are growing at a rapid pace and are likely to carry on the momentum in the days ahead. Hence, picking manufacturing stocks seems to be a smart option at this moment.
Picking any of the above-mentioned stocks with compelling growth prospects might offer solid returns in this market and satisfy your investment appetite.
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