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Caterpillar Stuck, Buy These 6 Industrial Stocks Instead

Caterpillar Inc.CAT appears to be slouching toward a third consecutive year of revenue decline as the company slashed its 2015 revenue outlook yet again citing weakness in its main industry sectors- mining and energy. If its guidance for revenue decline of 5% in 2016 materializes, the company's revenue would drop for four years in a row for the first time in its nine-decade long operations.

Shares of Caterpillar fell 6.27% to close at $65.80 yesterday, the biggest decline in S&P 500. Caterpillar, which is considered the bellwether of industrial companies, weighed heavily on the indices. The Standard & Poor's 500 index fell 6.52 points, or 0.3%, to 1,932.24. The Dow Jones industrial average lost 78.57 points, or 0.5%, dropping to 16,201.32. The Nasdaq composite fell 18.27 points, or 0.4%, to 4,734.48.

What's Wrong with Caterpillar?

Caterpillar's sales continue to bear the brunt of weak mining demand as mining companies keep on reducing their capital expenditures. Lower oil prices too, adversely impacted both engine sales for oil production and demand for construction machines used in energy site preparations. Moreover, construction equipment sales are well below prior peaks in North America, Latin America, Europe, Africa, the Middle East and Asia Pacific.

Lower Sales Expectation, Earnings Not Yet Estimated

For 2015, the company is looking at revenue of $48 billion, which is $1 billion lower than the previous expectation due to broadly weaker business conditions across its three large segments - Construction Industries, Energy & Transportation and Resource Industries. As a reminder, during its second-quarter conference call, Caterpillar had cut down its revenue guidance from $50 billion to $49 billion due to the same reasons mentioned above.

For 2016, the company expects sales to be 5% below 2015 levels with decline across all three of its aforementioned major segments. The most significant decline is anticipated to be in the oil and gas portion of the Energy and Transportation segment.

The earnings guidance will be provided during its third-quarter financial release in late October. Caterpillar cautioned that the decline in sales outlook and higher restructuring costs will have a negative impact on its performance.

Caterpillar Ramps Up Restructuring Actions

To stay profitable in the wake of reduced revenue expectations, Caterpillar has perked up its restructuring actions that are expected to lead to annual savings of $1.5 billion in operating costs, once they are executed. The company will start implementing the actions in late 2015.

Within next year, Caterpillar plans to terminate up to 5000 salaried and management personnel. Through 2018, total 10,000 positions will be eliminated. Caterpillar also plans to close an estimated 20 manufacturing plants, which accounts for slightly more than 10% of its manufacturing square footage.

Caterpillar's efforts to lower Selling, General and Administrative (SG&A) costs will be largely in place and effective in 2016. This will enable it to attain slightly less than half of the $1.5 billion cost reduction target. Lower period manufacturing costs, including savings from additional contemplated facility consolidations and closures, which could impact more than 20 facilities and slightly more than 10% of its manufacturing square footage, will contribute rest of the savings. A portion of these cost reductions are expected to be achieved in 2016, with more savings anticipated in 2017 and 2018.

However, results of these actions will take time to materialize and the slump in mining in the energy sectors is not expected to wane any sooner. Caterpillar currently carries a Zacks Rank #3 (Hold). This could change as the trimming of guidance will eventually lead analysts to revise their projections for 2015 and 2016 downward.

Better Investment Options

Allthough Caterpillar is struggling, several other stocks in the same industrial space are in much better positions at present. We highlight the following industrial stocks, which being armed with a Zacks Rank #2 (Buy) are considerably better options for investment and warrant legitimate consideration as a potential addition into any investor's portfolio. Going by the Zacks model, companies sporting a Rank #2 have strong chances of outperforming the broader market in the near term.

ABB Ltd.ABB

Headquartered in Zurich, Switzerland ABB, is a leading power and automation technology company, offering a wide range of products systems, solutions and services that are designed to boost industrial productivity, power-grid reliability as well as energy efficiency.

ABB has been restructuring its business strategically to drive organic growth while minimizing risks and augmenting competitiveness. The company is a major player in industries like wind energy. Despite the global economic sluggishness, investment in the wind industry is expected to remain robust due to the potential for wind to become a primary renewable energy source.

This Zacks Rank #2 stock has an expected earnings growth of 9.07%. The company has delivered positive earnings surprises in 3 of the last 4 quarters, with the average beat being 3.50%.

Ideal Power, Inc.IPWR

Headquartered in Austin, TX, Ideal Power Inc. develops power conversion solutions with a focus on commercial and industrial grid storage, combined solar and storage, and microgrid applications.

Ideal Power continues to invest heavily in research and development to expand its product offerings, including investment in bi-directional switch development. The company has formed key relationships with leaders in target vertical markets to support their growth initiatives. New channel relationships are expected to significantly increase penetration into target markets and may be complemented by licensing agreements, enabling high volume and international expansion. This Zacks Rank #2 stock has an impressive expected earnings growth of 25%.

AGCO CorporationAGCO

Headquartered in Duluth, GA, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts.

AGCO's prime focus for 2015 will be on controlling expenses and dealer and company inventories. The company's commitment toward its strategic plans including continued investment in new product development, distribution enhancement and factory productivity improvement are likely to propel growth and profits going forward.

This Zacks Rank #2 stock has an expected earnings growth of 10.25%. The company delivered positive earnings surprises in the last four quarters, with an average of 41.27%.

Graco Inc.GGG

Headquartered in Minneapolis, MN, Graco designs, manufactures and markets equipment to pump, meter, mix and dispense various fluids and coatings worldwide.

The company continues to target mid-single-digit organic sales growth, on a constant currency basis, and growth in all reportable segments and regions in 2015. The Americas remains its strongest performing region. Graco recently introduced a new line of chemical injection equipments through which it hopes to gain a strong foothold in the industry to pose a befitting challenge to the market leaders. Moving forward, Graco expects to continuously invest in its businesses to diversify and expand product range in order to strengthen its market position.

This Zacks Rank #2 stock has an expected earnings growth of 11.33%. The company delivered positive earnings surprises in 2 of the past 4 quarters, averaging 0.09%.

Luxfer Holdings PLCLXFR

Headquartered in Salford, the United Kingdom, Luxfer Holdings designs, manufactures, and supplies materials, components, and high-pressure gas-containment devices for environmental, healthcare, protection, and specialty end-markets in Europe, North America and internationally.

For 2015, Luxfer expects to improve profitability aided by its cost-saving actions, especially restructuring of the AF manufacturing business. Also, the company aims to record trading profits in the year.

This Zacks Rank #2 stock has managed to beat the earnings estimates in 3 of the last 4 quarters. Luxfer has a year-over-year earnings growth estimate of 6.07% for the current year, and of 15.86% for next year.

Pentair plcPNR

Pentair plc delivers products, services, and solutions for water and other fluids, thermal management, and equipment protection in the United States, Europe, Asia and other regions. In 2014, Pentair completed the change in place of incorporation from Switzerland to Ireland.

Pentair continues to aggressively manage its cost structure and drive productivity to work through the near-term challenges. It is also investing in its high-performing Technical Solutions and Water Quality Systems segments where it sees strategic organic and inorganic growth opportunities. Pentair's recent acquisition of ERICO will not only expand the company's presence in the commercial and industrial sectors but is also expected to be accretive to its 2016 earnings by more than 40 cents.

This Zacks Rank #2 stock has an expected earnings growth of 9.29%. Pentair has a year-over-year earnings growth estimate of 1.74% for the current year, and of 18.68% for next year.

Bottom Line

While Caterpillar remains affected by the mining and energy slump, several companies in the industrial products space are more than viable options for investment. Lack of consideration for these stocks could be a costly mistake as these seem poised to deliver serious profits in the near future.

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 >>

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

AGCO CORP (AGCO): Free Stock Analysis Report

ABB LTD-ADR (ABB): Free Stock Analysis Report

CATERPILLAR INC (CAT): Free Stock Analysis Report

GRACO INC (GGG): Free Stock Analysis Report

PENTAIR PLC (PNR): Free Stock Analysis Report

LUXFER HOLDINGS (LXFR): Free Stock Analysis Report

IDEAL POWER INC (IPWR): Free Stock Analysis Report

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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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