For Immediate Release
Chicago, IL - September 09, 2015 - Today, Zacks Equity Research discusses the Industrial Machinery, including Pentair plc ( PNR ), AGCO Corporation ( AGCO ), AO Smith Corp. ( AOS ), Rexnord Corporation ( RXN ) and John Bean Technologies Corporation ( JBT ).
Industry: Industrial Machinery
Macroeconomic headwinds continue to weigh on the outlook for the industrial machinery space. This unfavorable macro backdrop is characterized by a weakening global economic outlook, particularly in the formerly fast-growing markets like China and soft commodity prices.
The level of industrial activities is measured in terms of industrial production, which comprises output of the manufacturing, mining and utilities sectors. Here's a brief discussion on the machinery industry in different nations:
The United States
Market sentiment is shaky in the U.S. as fluctuating currency movements and uncertain global growth are anticipated to hurt the country's export businesses. Weak oil prices add to the woes, curtailing capital expenditures for purchase of machinery and equipment.
As per the reports of Federal Reserve, operating environment for the U.S.-based industrial equipment manufacturers was difficult in second-quarter 2015. Industrial production in the quarter declined 1.4% year over year, primarily due to weakness in the mining and utilities industries. In July, the country's industrial production grew 1.3% year over year.
Export demands for the U.S. machinery edged down 0.9% for the seven months ended Jul 2015. According to the U.S. Census Bureau report, shipments for farm machinery fell 41%, while that for mining and industrial declined 32% and 7%, respectively. New machinery orders were down 8.5%, while order backlog decreased 8.3%.
The International Monetary Fund ("IMF") has reduced its growth projections for the U.S. economy to 2.5% for 2015 and 3% for 2016.
The report by Japan's Cabinet Office shows that total machinery orders for second-quarter 2015 fell 2.5% sequentially. Private-sector machinery orders declined 9% in the quarter, while the same, excluding volatile orders, were down 7.9% in July. This triggered concerns over the future of capital investments by companies. Orders from overseas clients decreased 5.7% in the quarter. The agency predicts core machinery orders to edge up 0.3% in the third quarter, while total machinery order is expected to grow 2%.
The IMF predicts the economy to grow by a meager 0.8% in 2015 and 1.2% in 2016.
China: The country's industrial production increased 6.3% year over year in the first seven months of 2015, driven by improvement in mining, manufacturing and utilities sectors. In July, industrial production was up 6%.
In the first seven months of 2015, the country's exports fell 0.8% year over year, while imports shrank 14.6%, indicating weak demand in international and domestic markets. In July alone, exports were down 8.3% year over year, while imports fell 8.1%. The IMF projects the Chinese economy to grow by 6.8% in 2015 and 6.3% in 2016.
India: The country's industrial production in Jun 2015 increased 3.8% year over year. Expectations of strong demand, policy improvements and better monsoon conditions are factors that will influence the country's growth, going forward. The new government is working toward making the country a prime manufacturing hub for all nations across the world.
Apart from boosting foreign capital inflows in the country, these strategies will serve to improve the domestic job markets as well as demand for industrial products. According to the IMF, the country is projected to grow by 7.5% in both 2015 and 2016.
Brazil: The country's industrial production declined 8.9% year over year in Jul 2015, while declining 6.6% in the first seven months of the year. For 2015, the country projects a gloomy outlook as a result of low private investments, inadequate infrastructure and high labor costs. The IMF predicts the country's output to decline by 1.5% in 2015, and inch up 0.7% in 2016. The recovery is dependent on foreign direct investments and expansion of industries like tourism, steel and electricity.
Industrial production (excluding construction) in the Eurozone fell 0.4% sequentially in Jun 2015, while increasing 1.2% year over year. German machine tool orders during Apr-Jun grew 10% year over year, driven by a 3% increase in domestic demand and 14% growth in international demand. The IMF projects the Euro Area to grow by 1.5% in 2015 and 1.7% in 2016.
Zacks Industry Rank - Negative
According to the Zacks Industry classification, Machinery is broadly grouped under the Industrial Products sector, one of the 16 broad Zacks sectors. The Zacks sectors comprise 265 industries that are ranked on the basis of the earnings outlook of constituent companies in each industry. To learn more visit: About Zacks Industry Rank .
As a rule, industries in the top 50% of all Zacks industries outperform the bottom half by a wide margin. Going by this rule, industries with Zacks Industry Rank of 132 and lower would fall in the top half, while those with Zacks Industry Rank of 133 and higher would be in the bottom half.
The machinery industry is sub-divided into 9 industries at the expanded level: machine tools and related products (with Zacks Industry Rank #243), construction and mining (#249), electrical utilities (#245), electrical (#145), farm (#106), general industries (#241), material handling (#207), print trading (#249) and thermal processing (#106).
This means that the outlook for the industry remains negative.
Earnings Trend of the Sector
The Industrial Products sector accounts for 2% of the S&P 500 index's total market capitalization and is expected to bring in 2.1% of the index's estimated total earnings for third-quarter 2015.
As of Sep 4, 2015, all the Industrial Products companies in the S&P 500 group reported their results for the Apr-Jun quarter. Earnings declined 16% year over year with a beat ratio of 58.3%, while revenues fell by 9.8%.
Taking into consideration the prevalent headwinds, earnings for the Industrial Products sector are anticipated to decline by 23.4% in the third quarter, while revenues are predicted to fall by 11%.
Key Players in the Machinery Industry
Stocks with high investment rankings can be of interest to investors who seek exposure in the machinery industry. In the S&P 500 group, machinery-company Pentair plc ( PNR ), with a market capitalization of $9.6 billion, carries a favorable Zacks Rank #2 (Buy). The stock has strong earnings growth potential, roughly 9.3%, over the next 5 years.
Non-S&P 500 billion-dollar stocks in the machinery industry which sport a Zacks Rank #1 (Strong Buy) are AGCO Corporation ( AGCO ), AO Smith Corp. ( AOS ) and Rexnord Corporation ( RXN ). Also, John Bean Technologies Corporation ( JBT ) carries a Zacks Rank #2.
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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.