About the Industry
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities such as routine maintenance work, emergency maintenance and spare parts inventory control, which keep a facility and its equipment in good operating condition. The industry participants serve a wide array of customers, ranging from commercial, government, healthcare to manufacturing. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. By offering inventory management, and process and procurement solutions, these companies reduce MRO supply-chain costs and improve customers' plant floor productivity.
What's Shaping the Future of the Industrial Services Industry?
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers basically want to execute their business activities in the most efficient way possible, which often means online. The pandemic led to a significant push in e-commerce activities. In 2020, more than two billion people purchased goods or services online, recording e-retail sales above $4.2 trillion. In 2021, global retail e-commerce sales amounted to $5.2 trillion. This is expected to attain a level of $8.1 trillion by 2026. To capitalize on this trend, the industrial services industry players are stepping up their investments in e-commerce and digital capabilities.
Easing Supply Chain Disruptions: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity are historically correlated to changes in the Industrial Production Index (IP). Per the Federal Reserve, industrial production decreased 0.2% in November 2022. Overall, industrial production gained 2.5% over the 12-month period ended November 2022. The index for durable goods manufacturing was up 2.7% in the 12-month period ended November 2022. In December, the Institute for Supply Management’s (ISM) manufacturing index touched 48.9%, contracting for the second month in a row. The average for the past 12 months (ended December 2022) is 53.5. Amid the ongoing uncertainty in the global economy and persisting inflationary trends, customers seem to be curbing spending. The manufacturing sector has also been bearing the brunt of supply chain issues. On a positive note, some of the industry players recently noted that supply chain issues are easing. The delivery performance of suppliers to manufacturing organizations was reported to be faster for the third straight month in December. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.
Pricing Actions to Combat High Costs: The industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The companies are currently witnessing labor shortages for some positions and incurring steep labor costs to meet demand. The industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and diversification of the supplier base to mitigate some of these headwinds.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, a 22-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #51, which places it in the top 20% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors canadd to their portfolio, it’s worth taking a look at the industry’s stock-market performance and its valuation picture.
Industry Versus S&P 500 & Sector
The Industrial Services industry has underperformed its own sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has declined 22.2% compared with the sector’s decline of 13% and the Zacks S&P 500 composite’s slump of 19.7%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 27.95X compared with the S&P 500’s 10.29X and the Industrial Products sector’s forward 12-month EV/EBITDA of 15.45X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry traded as high as 36.860X and as low as 6.04X, with the median being 9.05X.
4 Industrial Services Stocks to Bet on
Ashtead Group: The company is well-poised to deliver strong results driven by its diverse end markets and products, lower debt levels and efforts to strengthen its market position. Initiatives to optimize cash flow, reduce capital expenditure and operating costs are likely to contribute to growth. Backed by a good quality fleet and a strong financial position, the company is well-positioned to navigate through turbulent times. It continues to invest in a digital transformation program that will enhance customer experience. It has a strong pipeline of strategic acquisition opportunities to supplement its organic growth plan. Backed by these tailwinds, ASHTY shares have appreciated 19.5% in the past three months.
The Zacks Consensus Estimate for fiscal 2023 earnings for this London, U.K.-based company that engages in construction, industrial, and general equipment rental business has been revised upward by 4% in the past 90 days. The estimate indicates year-over-year growth of 20%. The company has a long-term estimated earnings growth rate of 19%. ASHTY currently carries a Zacks Rank #1 (Strong Buy).
Hillenbrand: Backed by high levels of backlog in Molding Technology Solutions (“MTS”) and Advanced Process Solutions (“APS”), the company is well poised to deliver a solid top-line performance in fiscal 2023. Efforts to drive operational efficiency will continue to aid its bottom-line performance. The company recently announced that it has inked a deal to sell the Batesville business segment. This move, along with the strategic acquisitions of LINXIS Group, Herbold Meckesheim, Peerless Food Equipment and Gabler Engineering in 2022, will make HI a global industrial leader in highly engineered, mission-critical processing solutions. With industry-leading brands in its APS and MTS segments, Hillenbrand is well-positioned to accelerate long-term growth in attractive end markets, including plastics, food, and recycling, all of which are expected to benefit from secular macroeconomic growth trends. The stock has gained 8.6% in the past three months.
Batesville, IN-based Hillenbrand is a global industrial company operating in over 40 countries, catering to a wide variety of industries around the world. Its portfolio includes brands such as Coperion, Milacron Injection Molding & Extrusion, and Mold-Masters. The Zacks Consensus Estimate for HI’s fiscal 2023 earnings indicates growth of 8% from the year-ago actuals. The estimate has moved up 5% over the past 90 days. HI has a trailing four-quarter earnings surprise of 3.6%, on average, and an estimated long-term earnings growth rate of 20%. The stock currently sports a Zacks Rank #1.
Siemens AG: The company delivered strong fiscal 2022 results (ended Sep 30, 2022), driven by increases in order intake and revenues in all four industrial businesses. The company reported a record profit in its industrial business. This has been instrumental in the 39.6% surge in its share price over the past three months. SIEGY has been capturing market share and witnessing continued strong demand for its hardware and software offerings. The company saw a 15% rise in revenues in its digital business revenues in fiscal 2022, higher than its expected average annual growth of 10%. The high order backlog in its industrial businesses poised the company well for improved results in fiscal 2023 as well. Efforts to improve productivity and price hikes for its products, solutions and services, particularly at Digital Industries and Smart Infrastructure will help it negate the impact of high raw material and labor costs.
Munich, Germany-based Siemens is a technology group focused on the areas of automation and digitalization in the process and manufacturing industries, intelligent infrastructure for buildings and distributed energy systems, smart mobility solutions for rail transport, and medical technology and digital healthcare services. This Zacks Ranked #1 stock has a long-term estimated earnings growth rate of 9.8%. The Zacks Consensus Estimate for the company’s 2023 earnings has been revised upward by 4% in the past 90 days. The consensus mark projects year-over-year growth of 73.7%.
Andritz: The company witnessed its highest ever order intake in the first half of 2022. This was driven by increases in all four business areas — Pulp & Paper, Metals, Hydro, and Separation. Despite challenging overall economic conditions, project and investment activity in the industries served by Andritz remains positive. Given that the company offers a broad product portfolio of sustainable solutions (renewable energy, recycling, biofuels, etc.) that customers need to achieve their own ESG goals, the solid and sustained demand from this sector is helping negate the impact of the overall economic slowdown. ADRZY recently acquired DD-TEP in Croatia that will help strengthen its market position for renewable energy equipment, especially with grate technology and enhance its capacity and quality of manufacturing of pressure parts and boiler auxiliary equipment. The company’s shares have appreciated 38% over the past three months aided by these tailwinds.
Headquartered in Graz, Austria, Andritz offers a broad portfolio of innovative plants, equipment, systems, services and digital solutions for many different industries and end-markets. The Zacks Consensus Estimate for ADRZY’s fiscal 2023 earnings indicates growth of 10% from the year-ago period. The estimate has moved up 9% over the past 90 days. ADRZY carries a Zacks Rank #2 (Buy).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.