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Manufacturing Expands in August: 4 Industrial Stocks to Buy

Zacks

The U.S. market has exhibited signs of improvement since the new government came to power, primarily factoring in President Donald Trump’s promised pro-growth policies. Year to date, the country’s major stock indexes have yielded healthy returns, including 11.6% by the S&P 500, 18.6% by the Nasdaq Composite and roughly 7.5% by the NYSE Composite.

Also, the country’s Gross Domestic Product (GDP) grew at an annualized rate of 3% in the second quarter of 2017, the strongest growth registered since the first quarter of 2015. The country’ GDP in the first quarter had advanced 1.4%.

Riding on the government’s promised growth policies, especially the proposed $1 trillion spending on infrastructure improvement, the industrial products sector has gained 8.8% year to date. Other tailwinds are the strengthening housing, automotive and commercial construction markets as well as steady growth in new job additions, with roughly 156,000 added in August. Of this, roughly 36,000 new jobs were added in the manufacturing industry.

We believe that few economic indicators, including manufacturing data and industrial production, point toward healthy operating conditions in the sector.

What Manufacturing Data Reveals?

The latest report issued by the Institute for Supply Management reveals that Purchasing Managers’ Index (PMI) or manufacturing index expanded to 58.8% in August, increasing 2.5 percentage points from 56.3% recorded in July. Though new orders dipped 0.1%, production improved 0.4%, backlog of orders grew 2.5% and employment 4.7%.

Notably, PMI reading above 50% indicates expansion of the manufacturing sector and vice versa. The August PMI represents growth in the manufacturing sector consecutively for the last 12 months. It also represents growth in the overall economy for 99 consecutive months. Machinery industry expanded in August, following healthy demand growth for light construction equipments while transportation and electrical equipments exhibited healthy sales growth and higher orders, respectively.

On a broader note, industrial production — a measure of the level of output of manufacturing, mining and utilities sectors in a country — grew at an annual rate of 4.7% in the second quarter. In July, industrial production grew 2.2% supported by 1.2% growth in manufacturing industry and 10.2% in mining, offset partially by 0.6% fall in utilities.

Industrial Stocks in Focus

Below we discuss four industrial stocks that seem to be good investment options for investors seeking exposure in the sector. The chosen stocks have favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong long-term earnings growth prospects, among other favorable aspects. You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar Inc. CAT – The company, with market capitalization of $69.6 billion, primarily serves customers in the construction, road building, mining, forestry, energy, transportation and material-handling industries. It stands to benefit from strengthening U.S. construction market, increased infrastructure and residential investment in China, improved order activities and strict cost discipline. For 2017, the company anticipates revenues and earnings to be $42-$44 billion and $5 per share, respectively, up from its earlier projections of $38-$41 billion and $3.75 per share.

The company currently sports a Zacks Rank #1 and promises returns of 18.5% on equity and 7% on capital. Dividend yield at present is 2.65%. Its earnings are anticipated to grow 9.5% in the next three to five years.

We believe that healthy growth prospects led to positive revision in earnings estimates for Caterpillar. Over the last 60 days, its Zacks Consensus Estimate has increased 22.5% to $5.22 for 2017 and 25% to $6.69 for 2018.

Caterpillar, Inc. Price and Consensus

Caterpillar, Inc. Price and Consensus | Caterpillar, Inc. Quote

Terex Corporation TEX – The company provides industrial equipments to its vast customer base in the construction, infrastructure and surface mining industries. It anticipates benefiting from improving product mix, cost-reduction initiatives, sound capital allocation policy and its transformation plans. For 2017, the company anticipates earnings to be within $1.05-$1.15 per share, higher than the earlier projected range of 80-95 cents.

It currently has $3.5 billion market capitalization and sports a Zacks Rank #1. The company’s earnings are anticipated to grow 19.7% in the next three to five years. At present, it yields 5% return on equity and 2.8% on capital. Dividend yield is currently at 0.8%.

Over the last 60 days, the stock’s Zacks Consensus Estimate has been revised 18.6% upward for 2017 and 16.1% for 2018. The estimates now stand at $1.15 for 2017 and $1.95 for 2018.

Terex Corporation Price and Consensus


Terex Corporation Price and Consensus | Terex Corporation Quote

Sun Hydraulics Corporation SNHY – The company’s products are primarily used in the industrial, mobile hydraulics markets and fluid power industry. It is poised to gain from its existing product portfolio, new product launches, improving operational efficiency and promotional activities. Per its Vision 2025 plan, it aims to generate more than $1 billion in revenues and achieve high profitability. For 2017, the company increased its revenue guidance to a range of $315-$330 million from $295-$310 million projected previously. It also raised its operating margin expectation to 22-24% from 20-22%.

It currently has $1.3 billion market capitalization and sports a Zacks Rank #1. It promises returns of 13.2% on equity and 9.5% on capital. Dividend yield at present is 0.7%. Over the last 60 days, its Zacks Consensus Estimate has increased 14.8% to $1.55 for 2017 and 12.9% to $1.75 for 2018.

Sun Hydraulics Corporation Price and Consensus

Sun Hydraulics Corporation Price and Consensus | Sun Hydraulics Corporation Quote

Altra Industrial Motion Corporation AIMC – The company’s product portfolio, including clutches & brakes, couplings, and gearing & power transmission components, are primarily used in the energy, general industrial, material handling, metals, mining, special machinery, transportation, and turf and garden industries.

The company is poised to gain from its diversified product portfolio, improving end-market conditions, synergistic benefits from acquired assets and savings from cost-reduction initiatives. For 2017, the company increased its revenue guidance to $850-$865 million from the previous projection of $840-$855 million while earnings are anticipated to be $1.95-$2.05 per share, up from the earlier forecast of $1.83-$1.93.

Currently, the company has a market capitalization of $1.4 billion and carries a Zacks Rank #2. In addition, the stock’s earnings are projected to grow nearly 8% in the next three to five years. Return on equity is 16.5% and return on capital is 8.6%. Dividend yield at present is 1.48%. Over the last 60 days, its Zacks Consensus Estimate has increased 5.7% to $2.03 for 2017 and 6% to $2.28 for 2018.

Altra Industrial Motion Corp. Price and Consensus

Altra Industrial Motion Corp. Price and Consensus | Altra Industrial Motion Corp. Quote

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