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4 Industrial Services Stocks to Watch Amid Supply Chain Woes
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The Zacks Industrial Services industry is facing a few near-term challenges in the form of supply chain constraints and input cost headwinds. However, the ongoing improvement in manufacturing activities and business sentiment instill hope that the industry will ride through this turbulent scenario.
It is worth mentioning that the rise in e-commerce activities will act as a key catalyst for the industry. Technological advancements and the rising use of e-commerce solutions continue to grow at a rapid pace. The industry players, including Ashtead Group PLC (ASHTY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) , SiteOne Landscape Supply, Inc. (SITE - Free Report) and ScanSource, Inc. (SCSC - Free Report) , have been making efforts to capitalize on this trend.
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'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. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. By offering inventory management, process and procurement solutions, these companies reduce MRO supply chain costs and improve customers' plant floor productivity.
What's Shaping the Future of Industrial Services Industry
Supply Chain Issues and Cost Woes Persist: The COVID-19 pandemic has impacted factory productivity and the supply chain. These supply chain and capacity challenges have led to higher transportation and labor costs due to the need to deliver finished goods to customers in a timely manner. Restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have in certain cases resulted in higher costs and delays, both for obtaining raw materials and components and shipping finished goods to customers. The companies have been witnessing tight labor availability for some positions and incurring higher labor costs to meet the high levels of demand. COVID-19 related worker absenteeism also remains an issue. Inflationary cost pressures add to the woes. Meanwhile, the industry players have been focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency and diversification of supplier base to mitigate some of these headwinds.
Momentum in Manufacturing Activity: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (“MBI”) and the Industrial Production Index (“IP”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focused on durable goods manufacturing. The index has been above 50, which indicates expansion lately. Gains have been witnessed in production and new orders activity. Backlog remains near historic highs. Per the Federal Reserve, total industrial production rose at an annual rate of 4% in the fourth quarter of 2021. Manufacturing output increased at an annual rate of 5%. The recent trend in these indices reflects the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. The ongoing improvement in business sentiment and operational activity instills further optimism in the industry’s prospects.
E-Commerce Acting as a Key Catalyst: MRO demand has been 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 on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online. The pandemic has led to a significant push in e-commerce activities. In 2020, over 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 approximately $4.9 trillion. This is expected to go up 50% over the next four years and attain a level of around $7.4 trillion dollars by 2025. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim prospects in the near term. The Zacks Industrial Services Industry, which is a 25-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #203, which places it at the bottom 18% of 254 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2022 has moved down 31% to $1.98 over the past six months.
Before we present a few Industrial services stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
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 fallen 48.9% compared with the sector’s decline of 3%. The Zacks S&P 500 composite has gained 11.9% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 34.18x compared with the S&P 500’s 14.80x and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.00x. 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 has traded as high as 34.68x and as low as 8.30x, with the median being at 11.33x.
4 Industrial Services Stocks to Keep an Eye on
Grainger: The company is well-poised to gain from efforts to increase customer base through incremental marketing investments and effective marketing strategies. Grainger is witnessing continued growth with large and mid-sized customers in the United States. Its focus on re-engaging lapsed customers and acquiring new ones. Investments in e-commerce and digital capabilities will yield results. Increased e-commerce sales as well as strong demand for non-pandemic products will continue to drive the top line. Cost control measures undertaken by the company will sustain margins. Backed by these tailwinds, the shares of the company have appreciated 26.2% over the past year.
Lake Forest, IL-based Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services. This company currently has a Zacks Rank#2 (Buy) and an estimated long-term earnings growth rate of 13%. The Zacks Consensus Estimate for 2022 earnings has moved up 5% in the past 90 days. The consensus mark indicates year-over-year growth of 24%. GWW currently has a trailing four-quarter earnings surprise of 1.65%, on average.
Price: GWW
ScanSource: The company’s leadership position in large, niche markets along with sustained growth from innovative technology offerings across hardware, software, connectivity and cloud provide it with a competitive edge. The Specialty Technology Solutions segment is benefiting from strong market demand, increases in big deals and market share gains. Digital acceleration and technology refresh initiatives with end-users are driving demand for the company’s channel partners. The Modern Communications & Cloud segment is gaining on the shift to cloud and subscriptions. The company’s shares have gained 10.5% in a year’s time backed by these trends. The company has immense growth potential in both its segments. Its cost-control efforts will bolster margins. Its strategy to grow through acquisitions and alliances and enhance technology offerings and service capabilities is commendable.
The Zacks Consensus Estimate for the ScanSource’s2022 earnings has been revised upward by 6.7% in the past 90 days. The consensus mark indicates year-over-year growth of 27%. The Greenville, SC-based company, which distributes technology products and solutions, has a trailing four-quarter earnings surprise of 34.7%, on average. The company currently carries a Zacks Rank #2.
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. Improved construction markets will bolster results. 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. Its shares have appreciated 22.9% in a year’s time.
The Zacks Consensus Estimate for 2022 earnings for this London, U.K. based company that engages in construction, industrial, and general equipment rental business has been revised upward by 2.5% in the past 90 days. The estimate indicates year-over-year growth of 36.5%. ASHTY currently carries a Zacks Rank #3 (Hold).
Price: ASHTY
SiteOne Landscape Supply: The company has been gaining from robust demand, as customers are spending more time at home and investing in their outdoor living spaces. This has aided the stock in appreciating 12.6% in a year’s time. In addition to organic growth, it has been enhancing its business through acquisitions to increase its customer base, broaden product lines and expand its geographic reach. It will gain from its focus on cost reduction and driving operational excellence, product category management, enhancing supply chain efficiency and strengthening pricing. The company has been investing more in sophisticated information technology systems and data analytics.
The Zacks Consensus Estimate for earnings for fiscal 2022 indicates year-over-year growth of 6%. The estimate has remained stable over the past 90 days. The company has a trailing four-quarter earnings surprise of 130.9%, on average. This Roswell, GA-based company, which is a national wholesale distributor of landscape supplies, currently carries a Zacks Rank #3.
Price: SITE
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4 Industrial Services Stocks to Watch Amid Supply Chain Woes
The Zacks Industrial Services industry is facing a few near-term challenges in the form of supply chain constraints and input cost headwinds. However, the ongoing improvement in manufacturing activities and business sentiment instill hope that the industry will ride through this turbulent scenario.
It is worth mentioning that the rise in e-commerce activities will act as a key catalyst for the industry. Technological advancements and the rising use of e-commerce solutions continue to grow at a rapid pace. The industry players, including Ashtead Group PLC (ASHTY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) , SiteOne Landscape Supply, Inc. (SITE - Free Report) and ScanSource, Inc. (SCSC - Free Report) , have been making efforts to capitalize on this trend.
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'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. The industry participants serve a wide array of customers ranging from commercial, government, healthcare to manufacturing. By offering inventory management, process and procurement solutions, these companies reduce MRO supply chain costs and improve customers' plant floor productivity.
What's Shaping the Future of Industrial Services Industry
Supply Chain Issues and Cost Woes Persist: The COVID-19 pandemic has impacted factory productivity and the supply chain. These supply chain and capacity challenges have led to higher transportation and labor costs due to the need to deliver finished goods to customers in a timely manner. Restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have in certain cases resulted in higher costs and delays, both for obtaining raw materials and components and shipping finished goods to customers. The companies have been witnessing tight labor availability for some positions and incurring higher labor costs to meet the high levels of demand. COVID-19 related worker absenteeism also remains an issue. Inflationary cost pressures add to the woes. Meanwhile, the industry players have been focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency and diversification of supplier base to mitigate some of these headwinds.
Momentum in Manufacturing Activity: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (“MBI”) and the Industrial Production Index (“IP”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focused on durable goods manufacturing. The index has been above 50, which indicates expansion lately. Gains have been witnessed in production and new orders activity. Backlog remains near historic highs. Per the Federal Reserve, total industrial production rose at an annual rate of 4% in the fourth quarter of 2021. Manufacturing output increased at an annual rate of 5%. The recent trend in these indices reflects the recovery in economic conditions related to the gradual lifting of government-imposed restrictions on economic activity and the abatement of the COVID-19 pandemic. The ongoing improvement in business sentiment and operational activity instills further optimism in the industry’s prospects.
E-Commerce Acting as a Key Catalyst: MRO demand has been 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 on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online. The pandemic has led to a significant push in e-commerce activities. In 2020, over 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 approximately $4.9 trillion. This is expected to go up 50% over the next four years and attain a level of around $7.4 trillion dollars by 2025. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.
Zacks Industry Rank Indicates Bleak Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim prospects in the near term. The Zacks Industrial Services Industry, which is a 25-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #203, which places it at the bottom 18% of 254 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2022 has moved down 31% to $1.98 over the past six months.
Before we present a few Industrial services stocks that investors can keep an eye on, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
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 fallen 48.9% compared with the sector’s decline of 3%. The Zacks S&P 500 composite has gained 11.9% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 34.18x compared with the S&P 500’s 14.80x and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.00x. 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 has traded as high as 34.68x and as low as 8.30x, with the median being at 11.33x.
4 Industrial Services Stocks to Keep an Eye on
Grainger: The company is well-poised to gain from efforts to increase customer base through incremental marketing investments and effective marketing strategies. Grainger is witnessing continued growth with large and mid-sized customers in the United States. Its focus on re-engaging lapsed customers and acquiring new ones. Investments in e-commerce and digital capabilities will yield results. Increased e-commerce sales as well as strong demand for non-pandemic products will continue to drive the top line. Cost control measures undertaken by the company will sustain margins. Backed by these tailwinds, the shares of the company have appreciated 26.2% over the past year.
Lake Forest, IL-based Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services. This company currently has a Zacks Rank#2 (Buy) and an estimated long-term earnings growth rate of 13%. The Zacks Consensus Estimate for 2022 earnings has moved up 5% in the past 90 days. The consensus mark indicates year-over-year growth of 24%. GWW currently has a trailing four-quarter earnings surprise of 1.65%, on average.
Price: GWW
ScanSource: The company’s leadership position in large, niche markets along with sustained growth from innovative technology offerings across hardware, software, connectivity and cloud provide it with a competitive edge. The Specialty Technology Solutions segment is benefiting from strong market demand, increases in big deals and market share gains. Digital acceleration and technology refresh initiatives with end-users are driving demand for the company’s channel partners. The Modern Communications & Cloud segment is gaining on the shift to cloud and subscriptions. The company’s shares have gained 10.5% in a year’s time backed by these trends. The company has immense growth potential in both its segments. Its cost-control efforts will bolster margins. Its strategy to grow through acquisitions and alliances and enhance technology offerings and service capabilities is commendable.
The Zacks Consensus Estimate for the ScanSource’s2022 earnings has been revised upward by 6.7% in the past 90 days. The consensus mark indicates year-over-year growth of 27%. The Greenville, SC-based company, which distributes technology products and solutions, has a trailing four-quarter earnings surprise of 34.7%, on average. The company currently carries a Zacks Rank #2.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price: SCSC
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. Improved construction markets will bolster results. 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. Its shares have appreciated 22.9% in a year’s time.
The Zacks Consensus Estimate for 2022 earnings for this London, U.K. based company that engages in construction, industrial, and general equipment rental business has been revised upward by 2.5% in the past 90 days. The estimate indicates year-over-year growth of 36.5%. ASHTY currently carries a Zacks Rank #3 (Hold).
Price: ASHTY
SiteOne Landscape Supply: The company has been gaining from robust demand, as customers are spending more time at home and investing in their outdoor living spaces. This has aided the stock in appreciating 12.6% in a year’s time. In addition to organic growth, it has been enhancing its business through acquisitions to increase its customer base, broaden product lines and expand its geographic reach. It will gain from its focus on cost reduction and driving operational excellence, product category management, enhancing supply chain efficiency and strengthening pricing. The company has been investing more in sophisticated information technology systems and data analytics.
The Zacks Consensus Estimate for earnings for fiscal 2022 indicates year-over-year growth of 6%. The estimate has remained stable over the past 90 days. The company has a trailing four-quarter earnings surprise of 130.9%, on average. This Roswell, GA-based company, which is a national wholesale distributor of landscape supplies, currently carries a Zacks Rank #3.
Price: SITE