6 Industrial Stocks With Beat Potential This Earnings Season

Zacks Investment Research | May 03, 2018 04:35AM ET

The upcoming first-quarter earnings for the industrial products sector looks promising on the back of the upbeat manufacturing data, strong housing and commercial construction markets and an improving U.S economy. Industrial production, which is considered one of the leading economic indicators for industrial stocks, jumped 4.5% at an annual rate in the first quarter of 2018. It is a measure of the level of output of manufacturing, mining and utilities sectors in a country.

Manufacturing output increased 3.1% at an annual rate in the first quarter. Another positive development is that mining output has increased for six consecutive quarters.

Manufacturing Activity, New Orders Remain Strong

Per the latest report of the Institute for Supply Management (“ISM”), Purchasing Managers Index ("PMI”) was pegged at 57.3% in March. This indicates strong growth in manufacturing for the 20th consecutive month, led by continued expansion in new orders, production activity, employment and inventories. The PMI is an indicator of the economic health of the manufacturing sector with a reading above 50 signalling increased factory activity.

New orders index is at 61.2, remaining at or above 60 for the 12th straight month. New orders growth has been positive for a span of 28 consecutive months. Of the 18 manufacturing industries, 16 industries reported growth in April orders.

The manufacturing sector accounts for about 12% of the U.S. economy. The April PMI indicates growth for the 108th consecutive month in the overall economy. The index for April translates to an increase of 4.3% in real gross domestic product (GDP) on an annualized basis. The Production Index recorded a reading of 57.2% in April, registering growth in production for 20 straight months.

Steady Growth Forecasted

Healthy order and production levels suggest that the strength exhibited by the manufacturing sector is likely to continue. With the newly implemented tax reform, level of investment will increase and the pace of growth could pick up even further. We believe that implementation of the Trump administration’s growth policies, especially the proposed $1 trillion spending on infrastructure improvement will be a boon for industrial stocks.

The ever evolving nature of technologies applied in agriculture and mining industries sustain strong demand for farming and mining machinery. Increased global demand for food will sustain long-term demand for agricultural equipment. Further, favorable trends resulting from growing, and affluent population along with rising living standards and dietary improvements will provide ample opportunity for long-term growth.

Moreover, healthy growth in demand for packaged foods and beverages across nations, especially in emerging countries, are significantly increasing the use of highly sophisticated food processing and packaging equipment.

Construction machinery demand will remain strong in the years to come aided by population growth, urbanization, increased energy consumption as well as an expanding middle class. Further, rising demand for global infrastructure, such as roads, housing, airports, and energy will help sustain growth.

Impressive Performance, Sector Position

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Written By: Zacks Investment Research

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