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
The Industrial Products sector put up an impressive 34.8% growth in earnings in fourth-quarter 2018. We are in the midst of first-quarter earnings season, investors remain eager to know about the performance of the sector this time around.
Of the 83.3% of the S&P 500 participants that have reported so far, a 38.4% earnings growth has been recorded on the back of a 14.1% rise in revenues. The beat ratio is an impressive 69.2% for both the metrics. Per our latest projections, the sector will put up an earnings growth of 36.5% while revenues will advance 15.8% in first-quarter 2018. (Read more: All Around Earnings Strength )
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). In 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: About Zacks Sector Rank ) The industrial products sector, with a Zacks Sector Rank #1, enjoys a position in the top half.
How to Identify the Outperformers?
The encouraging figures suggest that there are a number of companies likely to beat our first-quarter 2018 earnings estimates. Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.
But with a wide range of industrial stocks thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings. The Zacks methodology makes the task simple, by combining a favorable Zacks Rank - Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .
You can see the complete list of today's Zacks #1 Rank stocks here.
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of a Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.
You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.
Our Key Picks
We have handpicked six industrial stocks that have the right combination of elements to post an earnings beat in the March ending quarter.
Headquartered in Latham, NY, Plug Power Inc. PLUG is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of hydrogen fuel cell systems used primarily for the material handling and stationary power market.
The company's Zacks Rank #3 and an Earnings ESP of +18.92%, makes an earnings beat likely this quarter. The Zacks Consensus Estimate for first-quarter 2018 is at a loss of 7 cents per share. The company is expected to fare better than the loss of 13 cents incurred in the prior-year quarter.
Plug Power is expected to release first-quarter 2018 results on May 8, before the market opens.
Headquartered in Beloit, WI, Regal Beloit Corp. RBC is a leading manufacturer of electrical and mechanical motion control as well as power generation products serving markets globally. The company has an average positive earnings surprise of 2.88% in the trailing four quarters. The company is likely to deliver an earnings beat when it reports first-quarter fiscal 2018 results, given its Zacks Rank #3 and Earnings ESP of +0.03%. The Zacks Consensus Estimate for earnings the to-be-reported quarter is $1.26, a projected 17.8% year-over-year growth.
Regal Beloit is expected to release first-quarter fiscal 2018 results on May 7, after the market closes .
Milwaukee, WI-based Rexnord Corporation RXN designs, manufactures, and markets process and motion control, and water management products worldwide. The company has delivered earnings beat in the trailing four quarters, leading to an average positive earnings of 12.55%.
Rexnord's Zacks Rank #2 and an Earnings ESP of +1.82% makes us confident of an earnings beat this quarter. The Zacks Consensus Estimate for earnings in the to-be-reported quarter is at 39 cents, a projected 11.4% growth.
Rexnord is scheduled to release fourth-quarter 2018 results on May 15, before the opening bell.
Manitowoc, WI-based The Manitowoc Company, Inc. MTW provides engineered lifting equipment for the construction industry in the Americas, Europe, Africa, Middle East, and Asia Pacific. The company has a positive average earnings surprise of 110.4% in the trailing four quarters. Manitowoc's Zacks Rank #3 and Earnings ESP of +13.04% makes us reasonably confident of an earnings beat this quarter. The Zacks Consensus Estimate for earnings for the to-be-reported quarter is at a loss of 23 cents, an improvement over a loss of 68 cents suffered in the prior-year quarter.
Manitowoc is scheduled to release first-quarter fiscal 2018 results on May 7.
Headquartered in Westlake, OH, Nordson Corp. NDSN engineers, manufactures, and markets products and systems to dispense, apply, and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids. The company has an average positive earnings surprise of 3.91% in the past four quarters.
The company is likely to beat estimates in the to-be-reported quarter as it has a Zacks Rank #3 and an Earnings ESP of +0.12%. The Zacks Consensus Estimate for the quarter is pegged at $1.42, a projected 5.2% year-over-year growth.
Nordson is expected to release second-quarter fiscal 2018 results on May 21, after the closing bell.
Headquartered in Sarasota, FL, Sun Hydraulics Corp. SNHY is a leading global industrial technology company that develops and manufactures solutions for both the hydraulics and electronics markets. The company beat the Zacks Consensus Estimate in the trailing four quarters with an average positive earnings surprise history of 17.71%.
The company is likely to beat estimates in the to-be-reported quarter as it has a Zacks Rank #1 and an Earnings ESP of +0.55%. For the quarter, the Zacks Consensus Estimate is pegged at 48 cents, projecting 26% year-over-year growth.
Sun Hydraulics is scheduled to release first-quarter fiscal 2018 results on May 7, after the market closes.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report The Manitowoc Company, Inc. (MTW): Free Stock Analysis Report Plug Power, Inc. (PLUG): Free Stock Analysis Report Rexnord Corporation (RXN): Free Stock Analysis Report Regal Beloit Corporation (RBC): Free Stock Analysis Report Nordson Corporation (NDSN): Free Stock Analysis Report Sun Hydraulics Corporation (SNHY): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research