The stock market is focused closely on the fiscal chaos in
Washington, but below the surface the economy has shown strength.
The ISM Manufacturing Production Index has been hot in recent
months and above 60 the past three months. This type of
strength has not happened since 2011 and bodes well for
industrial shares. Further Alcoa (
) and RPM International (
) recorded stronger than expected Q3 profits confirming healthy
The economy is expanding solidly:
The graphic following displays the relationship between the
year over year change in the ISM Manufacturing Production Index
and the year over year change in the price of the Zacks Machinery
Sector Index. Notice the two series tend to track each
other. Strong growth is a plus for the price of machinery
The year ago comparison for the ISM Production index is easy
over the next few months and should help to promote strength in
the year over year growth rate to the benefit of machinery
stocks. The ISM Production Index averaged 53.0 in Q4 2012
and 54.5 in Q1 2013, but this was helped by a quirky 57.6 in
The next chart displays the relationship between the Machinery
Index and an index of the ISM based on growth. The ISM
index was based at a value of 100 in December of 1997 and the
difference between the Production Index and 50 was added to the
index value over time. As a result, the index shows a level
of "growth". Notice that growth has shown some acceleration
in recent months, but the trend has been positive since the
trough of the Great Recession. Weakness in the machinery
stocks in 2011 and 2012 seemed linked into credit stress in
Europe and not the trend in U.S. growth.
Machinery stocks to think about:
The table below displays a number of industrial machinery
related stocks. The table contains the name, ticker symbol,
Zacks Rank, earnings per share revisions, and EPS levels for this
year and next.
(click table to enlarge)
The two Zacks Rank #1 (Strong Buy) stocks are Manitex
) and Middleby (
). These stocks are seeing the strongest upward revisions
to their earnings estimates based on the Zacks Rank
methodology. At the same time, there are five Zacks
Rank #2 (Buy), one Zacks Rank #3 (Hold), and one Zacks Rank #4
(Sell). There are no Zacks Rank #5 (Strong Sell).
Generally, a number of stocks in the sector are seeing upward
revisions to their earnings estimates given the number of Rank #1
and Rank #2 companies. This is consistent with the strength
in the ISM Production Index which has been arguing for vibrant
economic growth. Signs of improved growth in China, Japan,
and Europe add to the constructive backdrop.
Earnings Estimate Revisions:
Earnings estimates for the sector have not been revised
materially over the past 30 days for either 2013 or 2014.
The largest increases in 2014 EPS estimates have come at Colfax (
) followed by Ingersoll Rand (
), while the Illinois Tool Works (
) and Parker Hannifin (
) have seen their 2014 estimates cut. Looking at
2013, EPS estimates for ITW and Xylem (
) have increased, while numbers were reduced for PH.
The table below displays three metrics of valuation for each
company - the 12 month forward PE ratio, the PEG ratio, and the
price to sales ratio.
(click table to enlarge)
Usually, a stock with a low PE ratio is seen consistent with
attractive valuation and a stock with a high PE ratio is
consistent with poor value. The table indicates that MNTX
and Babcock and Wilcox (
) have the lowest PE ratios, while MIDD and CFX have the largest
PE ratios. Relative to the median, MNTX and Dover (
) are trading at a discount to their median. MNTX appears
to be the cheapest stock out right and relative to its median
Like the PE ratio, a low PEG ratio is seen as a sign of value
and a high PEG ratio is viewed as an indication of poor
value. The PEG ratio is the price to earnings ratio
relative to the growth rate in earnings per share.
When the PEG ratio is above 1.0, the market is paying more for
earnings than the growth rate, while when the PEG ratio is below
1.0, the market is paying less for earnings than the growth rate.
It is a way to filter out high growth stocks, which may
have a high PE ratio because of their earnings prospects.
MNTX and BWC have the lowest PEG ratios, while XYL and PH
have the highest PEG ratios. Only BWC is trading at a
discount to its median value. Based on the peer group, MNTX and
BWC appear to be the most inexpensive stocks.
Most traders view a low price to sales ratio as a sign of
value and a high price to sale ratio as expensive. MNTX and
BWC have the lowest price to sales ratios, while MIDD and ITW
hold the highest price to sales ratios. Again MTNX and BWC
are the cheapest relative to the peer group. ITW has the
narrowest premium to its median in terms of the price to sales
Trying to summarize value, each stock was ranked by its
position based on the value metrics. A one was given to the
company with the lowest value metric, while a nine was given to
the company with the highest value metric. An average was
taken across the three measures. The company with the
lowest average was MNTX followed by BWC. The most expensive
shares were ITW, XYL, and MIDD.
Mixing value and the Zacks Rank:
The analysis suggests that MNTX is the most inexpensive stock
followed by BWC. When these are combined with Zacks Rank,
it appears that MNTX is the best candidate for purchase.
MNTX is a Zacks Rank #1 (Strong Buy) and combines inexpensive
valuation with upward earnings estimate revisions. BWC may
also be worth a look. It is a Zacks Rank #2 (Buy), and also
offers attractive valuation. MIDD is a Zacks Rank #1,
but is richly priced to its peer group. The market is
paying up for its earnings outlook.
IR may be of special interest. It was on the inexpensive
side of its peer group and is a Zacks Rank #2. Going
deeper, it is expected to spin off its security unit, Allegion,
by the end of this year. Spin off stocks have a tendency to
outperform the market and have been a hot investment idea this
year. A purchase of IR may provide a play on the spin
off investing strategy and provide an additional catalyst for
price strength. IR was trading below the median valuation
of the peer group in all three of the classifications.
More details on names of interest:
For those who are not familiar with MNTX, it is a leading
provider of engineered lifting solutions. The stock has
traded sideways through 2013. From a chart perspective, a
rally over $13 would suggest a new leg higher. It is a very
small $134 mln market cap. MNTX has not missed an earnings
estimate in the past 10 quarters. It matched three times and beat
BWC provides advanced engineering, manufacturing, and
construction solutions related to the energy industry. The
stock has been stair stepping higher this year, but has stalled
recently in the face of the government shutdown and debt ceiling
controversy. It is a $3.6 bln market cap. Although
BWC has value and strong earnings estimate revisions, it has only
beaten earnings estimates seven out of the past ten quarters.
Technical traders may examine the old set of highs
from early August between $31.50 and $32.00 for support. Over
$34.50, momentum buyers will likely take a look.
IR provides products, services and solutions for air quality,
transportation and protection for food and perishables, security
for homes and commercial properties, and increased industrial
productivity and efficiency. Like BWC, it has been trending
higher through the year, but run into a soft patch with the
recent turmoil in Washington. The $59 area has been pivotal
in recent months.
Manitex, Babcock and Wilcox, and Ingersoll Rand are candidates
to lift your portfolio. Look for these machinery stocks to
flex their muscles after the fiscal fiasco in Washington
ALCOA INC (AA): Free Stock Analysis Report
BABCOCK&WILCOX (BWC): Free Stock Analysis
COLFAX CORP (CFX): Free Stock Analysis Report
DOVER CORP (DOV): Free Stock Analysis Report
INGERSOLL RAND (IR): Free Stock Analysis
ILL TOOL WORKS (ITW): Free Stock Analysis
MIDDLEBY CORP (MIDD): Free Stock Analysis
MANITEX INT INC (MNTX): Free Stock Analysis
PARKER HANNIFIN (PH): Free Stock Analysis
RPM INTL INC (RPM): Free Stock Analysis
XYLEM INC (XYL): Free Stock Analysis Report
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