5 Stocks To Buy Post-Machinery Industry's Solid Show In Q3
Zacks Investment Research | Nov 24, 2017 02:31AM ET
The third-quarter earnings season is drawing to an end, with 470 S&P members that represent almost 96.2% of the index’s total market capitalization, having reported their numbers. Of these, 72.3% beat EPS estimates. Earnings are up 6.6% year over year. Among the sectors, Energy, Industrial Products, Technology, Construction, Business Services and Medical sectors fared well in the quarter.
The machinery industry falls under Industrial Products sector, which reported 16.7% earnings growth in the quarter. A few companies in the sector are yet to report. Earnings are expected to grow 18.7% in the quarter, almost in line with second quarter’s earnings growth of 18.8%.
The sector’s performance in the third quarter was backed by increased infrastructure spending and upbeat economic data. An improving global economy was also a catalyst. Also, investment in equipment continues to rise. However, the sector was adversely impacted by supply chain disruptions arising from factory infrastructure damages caused by two back-to-back hurricanes, Harvey and Irma. We believe that declining unemployment rate, improving consumer spending and stabilizing oil prices will support growth of the industrial sector going forward.
Driving Factors in Detail
Industrial production, one of the leading economic indicators for the industrial stocks, rose 0.9% in October. Manufacturing increased 1.3% while mining output fell 1.3%, as Hurricane Nate caused a short-term decline in oil and gas drilling and extraction. Industrial activity rose in October as normal operations resumed after hurricanes Harvey and Irma hit production in September and October. Also, industrial production grew 2.9% over the past 12 months, which bodes well for machinery stocks.
Further, the national factory activity index reading of 60.8 in September rose from 58.8 in August. It also exceeded market expectations of 58. A reading above 50 indicates increased factory activity.
According to the Bureau of Economic Analysis, U.S. GDP improved at an annual rate of 3% in third-quarter 2017. An increase in inventory investment and lower trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction.
Also, the U.S Architecture Billings Index (ABI), an economic indicator that provides an approximately nine to 12 month glimpse into the future of non-residential construction spending activity, was 51.7 in October, up from 49.1 in the previous month and representing sustainable growth in architectural activity.
According to the ADP National Employment Report, private companies created 235,000 jobs in October, reflecting resurgence in construction jobs. The manufacturing industry created 22,000 jobs, while the construction industry created the highest — 62,000 jobs — in the private sector.
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Sneak Peek at How Some Machinery Stocks Fared in Q3
The world's largest manufacturer of construction and mining equipment, Caterpillar, Inc. (NYSE:CAT) posted upbeat results for the third quarter led by strong demand for its construction equipment in North America and robust sales in China.
Another construction and mining related equipment maker, Terex Corporation (NYSE:TEX) recorded a year-over-year surge in sales in the third quarter on improved sales and backlog growth.
Leading manufacturer of cranes and lift solutions The Manitowoc Company, Inc. (NYSE:MTW) posted earnings in the third quarter, a reversal from its prior-year quarter’s loss driven by order growth backed by improvement in U.S. energy and commercial construction markets.
Upbeat Projections
Per our projections, the Industrial Products sector’s earnings are expected to further accelerate in the fourth quarter with 20.5% growth. Earnings are expected to grow 12.1% in first-quarter 2018, 12.8% in the second quarter and 9.7% in third-quarter 2018. (Read more: About Zacks Sector Rank ).
This sector has also been outperforming the S&P 500 market in recent times. Year to date, the sector has gained around 54.1%, above the S&P 500 index’s growth of 16.5%.
Therefore, we believe investors will benefit by grabbing industrial stocks, as the sector is likely to perform better in the near term.
How to Make the Right Choice?
Will it be prudent to invest on any industrial stock? The answer is no. So, let’s have a look at industrial stocks that have witnessed robust growth and still have a long way to go.
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