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3 Industrial Services Stocks Set to Withstand Industry Turmoil
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The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector and cost inflation. Even though there has been a slight pickup in orders recently, it remains to be seen whether this will be sustained. The rise in e-commerce will likely support the industry. Companies like Siemens (SIEGY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) and Andritz (ADRZY - Free Report) are poised to deliver growth, backed by their initiatives to capitalize on this demand. The companies have also been focusing on increasing their productivity and efficiency to counter the impacts of inflationary costs on their margins.
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 part inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve a wide array of customers, ranging from commercial, government and 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.
Trends Shaping the Future of the Industrial Services Industry
Contraction in Manufacturing Activity Creates Concern: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s latest update, industrial production dipped 0.1% year over year in January 2024, with manufacturing output falling 0.5% mainly due to winter weather. Overall, industrial production has remained flat over the 12 months ended January 2024. The durable goods manufacturing index, however, saw a modest increase of 0.1% in January, showing a 0.3% improvement over the 12 months ending in January 2024. The Institute for Supply Management’s manufacturing index was 49.1% in January. Despite remaining below 50 (which indicates contraction) for the 15th month in a row, the reading was an improvement from the seasonally adjusted 47.1% recorded in December 2023. The average for the 12 months ended January 2024 is 47.2%, reflecting lower customer spending amid the inflationary trends. However, the New Orders Index expanded to 52.5% in January, improving from 47% in December and the best performance since May 2022. Notably, some industry players have reported that supply-chain issues have been gradually easing. The delivery of goods from suppliers to manufacturing organizations was reported to be faster for the sixteenth consecutive month in January. 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 inflation levels, including higher prices for labor, freight and fuel. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. Industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and the diversification of the supplier base to mitigate some of these headwinds.
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customer demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers want to execute their business activities in the most efficient way possible, which often means online. According to Statista, global e-commerce sales were $5.8 trillion in 2023, and this figure is expected to reach $8 trillion by 2027, seeing a CAGR of 8.4%. The United States is expected to lead the retail e-commerce development, witnessing a CAGR of 11.82% over 2024-2028. The current valuation of the U.S e-commerce market is $843 billion U.S. dollars and it is anticipated to surpass the $1-trillion mark in 2026. India and Mexico are expected to follow suit, seeing a CAGR of 11.79% and 11.71%, respectively. To capitalize on this trend, industrial services companies are heavily investing in improving their digital capabilities and increasing their share in e-commerce.
Zacks Industry Rank Indicates Dulll Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bearish prospects in the near term. The Zacks Industrial Services Industry, a 19-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #152, which places it in the bottom 39% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors can add to their portfolio, it is 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 outperformed its sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has risen 17.8% compared with the sector’s growth of 13.2%. The Zacks S&P 500 composite has moved up 24.8%.
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 22.07X compared with the S&P 500’s 11.28X and the Industrial Products sector’s forward 12-month EV/EBITDA of 17.16X. 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 33.49X and as low as 6.04X, with the median being 19.80X.
3 Industrial Services Stocks to Buy
Siemens: The company recently reported solid first-quarter fiscal 2024 results (ended Dec 31, 2023), witnessing revenue growth in most industrial businesses. Siemens reported profit increases in nearly all industrial businesses, led by Smart Infrastructure, which reached its highest-ever quarterly profit on a strong operating performance, combined with positive effects of past portfolio activities. Free cash flow in the quarter was a solid €1.0 billion, a substantial year-over-year increase of 200%, mainly driven by improvements in working capital management in all industrial businesses. The industrial business is expected to continue its profitable growth. In Digital Industries, global demand in the automation businesses, particularly in China, will pick up in the second half of the fiscal year as customer destocking by customers is over. In Smart Infrastructure, order intake remains high, supported by strong demand from data center customers. The company recently expanded partnerships with Microsoft and AWS to make artificial intelligence even more accessible and help its customers in their digital and sustainability transformation.
The Zacks Consensus Estimate for the Munich, Germany-based company’s fiscal 2024 earnings has been revised 3% upward in the past 30 days. The consensus mark indicates year-over-year growth of 10%. SIEGY has a trailing four-quarter earnings surprise of 33.5%, on average. The company currently has a long-term estimated earnings growth rate of 6.5% and flaunts a Zacks Rank #1 (Strong Buy).
Grainger: The company continues to deliver improved results, aided by margin improvements in its segments, as well as a strong operating performance. GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America segment will continue to benefit from pricing actions and continued volume growth. The Endless Assortment segment is gaining from customer acquisitions at its Zoro and MonotaRO businesses. Cost-control measures undertaken by GWW will sustain margins. The company is also focused on improving the end-to-end customer experience by investing in its e-commerce and digital capabilities, and executing improvement initiatives within its supply chain.
Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies, and other related products and services. The Zacks Consensus Estimate for 2024 earnings has moved up 1% in the past 30 days. The consensus mark indicates growth of 7% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 6.5%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #2 (Buy) at present.
Price: GWW
Andritz: The company delivered strong year-over-year growth in revenues (aided by improvements in all four business areas), earnings and net income in third-quarter 2023. Order intake increased in the business areas of Hydro, Metals and Separation. Given that ADRZY offers a broad product portfolio of sustainable solutions (renewable energy, recycling, biofuels, etc.), the solid and sustained demand from this sector is aiding the company’s growth. Andritz recently announced that it foresees its revenues to be more than 10 billion EUR by 2026, with growth in all business areas. The EBITA margin and net margins will likely be above 9% and 6%, respectively. The company has made 11 acquisitions from 2021 to 2023. It has outlined plans to continue its mergers and acquisitions strategy, focusing on existing business areas while emphasizing service and digitalization initiatives.
Headquartered in Graz, Austria, Andritz offers a broad portfolio of innovative plants, equipment, systems, services and digital solutions for different industries and end markets. The Zacks Consensus Estimate for ADRZY’s fiscal 2024 earnings has been revised upward by 3.7% over the past 30 days. ADRZY currently carries a Zacks Rank #2.
Price: ADRZY
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3 Industrial Services Stocks Set to Withstand Industry Turmoil
The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector and cost inflation. Even though there has been a slight pickup in orders recently, it remains to be seen whether this will be sustained. The rise in e-commerce will likely support the industry. Companies like Siemens (SIEGY - Free Report) , W.W. Grainger, Inc. (GWW - Free Report) and Andritz (ADRZY - Free Report) are poised to deliver growth, backed by their initiatives to capitalize on this demand. The companies have also been focusing on increasing their productivity and efficiency to counter the impacts of inflationary costs on their margins.
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 part inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve a wide array of customers, ranging from commercial, government and 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.
Trends Shaping the Future of the Industrial Services Industry
Contraction in Manufacturing Activity Creates Concern: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s latest update, industrial production dipped 0.1% year over year in January 2024, with manufacturing output falling 0.5% mainly due to winter weather. Overall, industrial production has remained flat over the 12 months ended January 2024. The durable goods manufacturing index, however, saw a modest increase of 0.1% in January, showing a 0.3% improvement over the 12 months ending in January 2024. The Institute for Supply Management’s manufacturing index was 49.1% in January. Despite remaining below 50 (which indicates contraction) for the 15th month in a row, the reading was an improvement from the seasonally adjusted 47.1% recorded in December 2023. The average for the 12 months ended January 2024 is 47.2%, reflecting lower customer spending amid the inflationary trends. However, the New Orders Index expanded to 52.5% in January, improving from 47% in December and the best performance since May 2022. Notably, some industry players have reported that supply-chain issues have been gradually easing. The delivery of goods from suppliers to manufacturing organizations was reported to be faster for the sixteenth consecutive month in January. 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 inflation levels, including higher prices for labor, freight and fuel. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. Industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and the diversification of the supplier base to mitigate some of these headwinds.
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customer demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers want to execute their business activities in the most efficient way possible, which often means online. According to Statista, global e-commerce sales were $5.8 trillion in 2023, and this figure is expected to reach $8 trillion by 2027, seeing a CAGR of 8.4%. The United States is expected to lead the retail e-commerce development, witnessing a CAGR of 11.82% over 2024-2028. The current valuation of the U.S e-commerce market is $843 billion U.S. dollars and it is anticipated to surpass the $1-trillion mark in 2026. India and Mexico are expected to follow suit, seeing a CAGR of 11.79% and 11.71%, respectively. To capitalize on this trend, industrial services companies are heavily investing in improving their digital capabilities and increasing their share in e-commerce.
Zacks Industry Rank Indicates Dulll Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bearish prospects in the near term. The Zacks Industrial Services Industry, a 19-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #152, which places it in the bottom 39% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors can add to their portfolio, it is 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 outperformed its sector but lagged the Zacks S&P 500 composite over the past year.
Over this period, the industry has risen 17.8% compared with the sector’s growth of 13.2%. The Zacks S&P 500 composite has moved up 24.8%.
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 22.07X compared with the S&P 500’s 11.28X and the Industrial Products sector’s forward 12-month EV/EBITDA of 17.16X. 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 33.49X and as low as 6.04X, with the median being 19.80X.
3 Industrial Services Stocks to Buy
Siemens: The company recently reported solid first-quarter fiscal 2024 results (ended Dec 31, 2023), witnessing revenue growth in most industrial businesses. Siemens reported profit increases in nearly all industrial businesses, led by Smart Infrastructure, which reached its highest-ever quarterly profit on a strong operating performance, combined with positive effects of past portfolio activities. Free cash flow in the quarter was a solid €1.0 billion, a substantial year-over-year increase of 200%, mainly driven by improvements in working capital management in all industrial businesses. The industrial business is expected to continue its profitable growth. In Digital Industries, global demand in the automation businesses, particularly in China, will pick up in the second half of the fiscal year as customer destocking by customers is over. In Smart Infrastructure, order intake remains high, supported by strong demand from data center customers. The company recently expanded partnerships with Microsoft and AWS to make artificial intelligence even more accessible and help its customers in their digital and sustainability transformation.
The Zacks Consensus Estimate for the Munich, Germany-based company’s fiscal 2024 earnings has been revised 3% upward in the past 30 days. The consensus mark indicates year-over-year growth of 10%. SIEGY has a trailing four-quarter earnings surprise of 33.5%, on average. The company currently has a long-term estimated earnings growth rate of 6.5% and flaunts a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: SIEGY
Grainger: The company continues to deliver improved results, aided by margin improvements in its segments, as well as a strong operating performance. GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America segment will continue to benefit from pricing actions and continued volume growth. The Endless Assortment segment is gaining from customer acquisitions at its Zoro and MonotaRO businesses. Cost-control measures undertaken by GWW will sustain margins. The company is also focused on improving the end-to-end customer experience by investing in its e-commerce and digital capabilities, and executing improvement initiatives within its supply chain.
Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies, and other related products and services. The Zacks Consensus Estimate for 2024 earnings has moved up 1% in the past 30 days. The consensus mark indicates growth of 7% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 6.5%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #2 (Buy) at present.
Price: GWW
Andritz: The company delivered strong year-over-year growth in revenues (aided by improvements in all four business areas), earnings and net income in third-quarter 2023. Order intake increased in the business areas of Hydro, Metals and Separation. Given that ADRZY offers a broad product portfolio of sustainable solutions (renewable energy, recycling, biofuels, etc.), the solid and sustained demand from this sector is aiding the company’s growth. Andritz recently announced that it foresees its revenues to be more than 10 billion EUR by 2026, with growth in all business areas. The EBITA margin and net margins will likely be above 9% and 6%, respectively. The company has made 11 acquisitions from 2021 to 2023. It has outlined plans to continue its mergers and acquisitions strategy, focusing on existing business areas while emphasizing service and digitalization initiatives.
Headquartered in Graz, Austria, Andritz offers a broad portfolio of innovative plants, equipment, systems, services and digital solutions for different industries and end markets. The Zacks Consensus Estimate for ADRZY’s fiscal 2024 earnings has been revised upward by 3.7% over the past 30 days. ADRZY currently carries a Zacks Rank #2.
Price: ADRZY