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3 Industrial Stocks to Surprise this Earnings Season - Earnings ESP

Headwinds that plagued fourth-quarter 2014 results are anticipated to hurt the results for first-quarter 2015 as well. Economic activities around the globe have been jittery in the quarter, with uncertainties prevailing in some advanced countries as well as major emerging nations. While China is still struggling to revive its financial markets, Brazil continues to face the adversities of drought.

As regard to oil-exporting nations, drilling activities have been severely hit by lower oil prices . Moreover, lower oil prices have weakened the demand in industries that directly or indirectly source businesses from the energy sector.

Now, with the onset of first-quarter 2015 earnings season, all eyes are on this week's earnings releases, especially that of the finance sector. As on Apr 17, roughly 12% of all the S&P 500 companies have released their results for the Jan-Mar quarter. Earnings have grown nearly 13.6% year over year, while revenues have inched up 1.7%.

Despite the initial numbers suggesting improvement over the year-ago tallies, overall expectations from the S&P 500 companies are not very bright this quarter. Currently, earnings are projected to decrease 2% in the first quarter, way below growth of 6.7% recorded in the previous quarter. Revenue is predicted to decline 4.8%, worse than 0.1% fall in the last quarter of 2014. However, with many oil/energy as well as industrial products stocks yet to report earnings, results can vary from the projected figures.

Industrial Products Sector: Performance So Far and Outlook

Presently, market sentiments are shaky in the U.S. as fluctuating currency movements and dampered global growth are likely to hurt the country's export businesses. Lower oil prices add to the woes, curtailing the capital expenditure on purchase of machinery and equipments.

In first-quarter 2015, operating environment for the U.S.-based industrial equipment makers was difficult. Industrial production in the quarter declined 1% over the year-ago comparable period due primarily to weakness in the mining and utilities industries.

Let us take a look at the performance of Industrial Products sector so far in first-quarter 2015. Roughly 8% of the total Industrial Products companies in the S&P 500 group reported their results as of Apr 17. Earnings managed 4.1% year-over-year growth with a beat ratio of 50%, while revenues edged up 0.9%.

Taking into consideration the prevalent headwinds, earnings for the Industrial Products sector are anticipated to decline by 12.3% in the quarter, while revenues are predicted to fall by 6%.

How to Pick?

Amid such a gloomy environment, choosing the right stocks with a potential to beat earnings estimates can be a daunting task. However, we are providing below simple guidelines to pick such stocks.

The Industrial Products sector includes machinery, pollution control, industrial products-services, construction building services, and containers and glass industries. In this diversified sector, selecting stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP can help.

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chances of positive earnings surprise are as high as 70%.

Here are three Industrial Products stocks currently equipped with the right combination of elements to post an earnings beat:

Deere & Company ( DE ): The company, with a $30.2 billion business, operates in the farm machinery industry. It is engaged in the worldwide production and distribution of agricultural and forestry equipment, construction equipment and engines.

The industrial equipment maker is well-positioned to leverage benefits from recovery in the U.S. construction sector. Also, the company's cost-reduction efforts and share buyback plans will ultimately improve shareholders' wealth. However, the company is not immune to adverse impact from falling crop prices, which affects farm income. This will impact the rate of purchase of agricultural equipment by farmers.

Deere & Company currently carries a Zacks Rank #3. Earnings ESP for second-quarter fiscal 2015 is +3.80%, with the Zacks Consensus Estimate pegged at $1.58 per share and the Most Accurate Estimate at $1.64 per share.

The stock is currently valued at a forward P/E multiple of 16.65 versus 16.97 for the industry. The company offers a solid 29.5% return on equity above the industry return of 21.1%. Earnings are estimated to grow by 8.6% in the next 5 years.

Deere & Company is slated to release second-quarter fiscal 2015 results on May 22, 2015 before the market opens.

Xylem Inc. ( XYL ): The company, with a market capitalization of $6.5 billion, operates in the machinery-general industry. It is one of the leading global providers of water solutions. The company is involved in the full water-process cycle, including collection, distribution and returning of water to the environment.

The company, with strong presence in the North American markets, also reaps benefits from growing demand for water solutions in Europe and Asia Pacific. Moreover, the company remains committed to rewarding its shareholders handsomely through dividends and share buybacks.

Xylem carries a Zacks Rank #3. Earnings ESP for first-quarter 2015 is +3.23%, with the Zacks Consensus Estimate pegged at 31 cents per share and the Most Accurate Estimate at 32 cents.

The stock is currently valued at a forward P/E multiple of 18.89. The company offers return of 16.5% on equity and 10.7% on investments. Earnings are expected to grow 9.1% over the next 5 years.

Xylem Inc. will release first-quarter 2015 results on Apr 30, 2015 before the market opens.

Zebra Technologies Corp. ( ZBRA ): The company, operating in the machinery industry, is a leading manufacturer and seller of printers and related products. Well-known products of the company include thermal printers, radio frequency identification products and real-time locating systems. The company has a diversified customer base which includes governments, retailers, manufacturers, transportation companies and healthcare institutions, among others. The company currently has a $5 billion market capitalization.

Zebra Technologies currently carries a Zacks Rank #3. Earnings ESP for first-quarter 2015 is +7.41, with the Zacks Consensus Estimate pegged at $1.08 per share and the Most Accurate Estimate at $1.16 per share.

The company's return profile is quite impressive, with return on equity being 17.9% and on investments 10.2%. It is currently valued at a forward P/E multiple of 17.20. Earnings are estimated to grow 8.5% in the next 5 years.

Zebra Technologies is expected to release first-quarter 2015 results on May 5, 2015.

Going Forward

Effective governmental policies as well as huge investments in infrastructure development can improve industrial products demand and also create new jobs. Until we ride through the difficult economic environment, choosing some possible winners on the basis of a solid Zacks Rank and a positive Zacks Earnings ESP might work wonders for some interested investors this earnings season.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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