The industrials sector includes plenty of manufacturing, as at
the Dow Chemical facility in Spain. But it also includes
companies in the business of supporting traditional industrial
firms as well. Source: The Dow Chemical Company
If the word "industrials" makes you think of big factories
with smokestacks, that's not entirely misplaced. Companies in the
industrials sector are generally engaged in providing big-ticket
products and services to other businesses and to governments.
A lot of these companies are what we might call "old school":
railroads, defense contractors, construction-equipment
makers. But there's plenty of cutting-edge technology to be
found here, too.
Aerospace firms and chemical companies -- and giant
conglomerates built around a knack for invention -- are all part
of today's industrials space.
What is the industrials sector?
Simply put, the industrials sector consists of companies whose
businesses are dominated by one or more of these kinds of
- Manufacturing and distributing "capital goods," such as
defense materials, aircraft, construction equipment, and
- Providing commercial services or supplies, such as
printing, office services, or employment services
- Providing transportation services, such as airline
services, shipping, or transportation infrastructure
In other words, the industrials sector includes the heavy
manufacturing and commercial transportation services that you'd
expect -- but it also includes companies like
, best known for its credit reports, that provide data and
services to other businesses.
How big is the industrials sector?
It's huge. The sector includes big-name heavyweights like
, with a market cap of $257 billion,
and its $91 billion market cap, and
, with a market cap of $52.6 billion, as well as a host of
smaller (but still big) companies.
, the market cap of all of the companies in the industrials
sector was about $3.28
as of Aug. 12, 2014.
How do industrials companies work?
It varies widely. But industrials companies that are engaged
in heavy manufacturing have some things in common.
involved in heavy manufacturing are very high. A company like
has to maintain factories full of specialized equipment, a
skilled workforce, and contracts with suppliers of commodities
and parts. Those represent substantial costs, month after month
-- costs that are very hard to cut when sales slip.
The fixed costs involved in manufacturing huge vehicles like
Caterpillar's 777G dump truck are substantial. Source:
Many companies with high fixed costs tend to be
-- profits decline dramatically (and may even disappear) when
sales fall during economic downturns. This can lead to
second-order effects: A provider of services that includes
cyclical industrial companies among its clients may not have
especially high fixed costs, but it may see business decline when
its clients have to cut back during downturns.
But not all industrials companies with high fixed costs are
cyclical in this way. A defense contractor like
that is dependent on business from government entities may be
relatively insulated from economic ups and downs. But those
companies face another kind of risk: Shifting political winds can
have dramatic effects on their bottom lines.
For investors, the upshot is this: Few of these companies will
be "high fliers" with rapid growth. But the best of them will
give you solid growth if you catch them at the right point of the
business cycle -- and many pay decent dividends, giving their
stocks a long-term appeal.
What drives the industrials sector?
As noted above, firms like defense contractors can be
insulated from economic cycles. But for most of the firms in this
sector, their business is business -- their customers or clients
are other businesses.
And those businesses aren't always industrial firms. For
United Parcel Services
, the rise of Internet retailers like
has been a huge boon -- but if Amazon's sales were to fall
sharply, UPS would feel considerable pain.
But long story short, the answer is the same as it is for most
businesses: Assuming it's well-managed and its products are
competitive, the biggest factor affecting most of these companies
will be the cycles of the economy in the regions in which they do
for the next decade
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Industrials: Investing Essentials
originally appeared on Fool.com.
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