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3 Industrial Services Stocks Countering Industry Challenges
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The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector as customers remain cautious about spending. Flared-up input costs have added to the woes.
Despite this current setback, the rise in e-commerce activities will be a key catalyst for the industry. Companies like W.W. Grainger, Inc. (GWW - Free Report) , Global Industrial Company (GIC - Free Report) and DMC Global (BOOM - Free Report) are positioned for growth by leveraging strategies to capitalize on this demand. The companies have also been focusing on lowering costs, increasing productivity and efficiency, and investing in automation and digitization, which will aid growth.
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
Prolonged Contraction in Manufacturing Activity is Concerning: The manufacturing sector contributes around 70% to the industry's revenues. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s last update, industrial production inched up 1.6% in the 12 months ended June 2024. The durable goods manufacturing index was up 0.2% during the period. The Institute for Supply Management’s manufacturing index had languished in the contraction territory for 16 consecutive months until February 2024. March saw a slight uptick to 50.3%, but the index slipped to the contraction territory again, with a 49.2% reading in April. It has decelerated since and was 46.8% in July. The average for the 12 months ended July 2024 is 48.1%. Demand remains weak, as companies are not willing to spend in capital and inventory due to current federal monetary policy and inflationary conditions. The New Orders Index also has contracted for the fourth consecutive month in July. The Index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022. Notably, some industry players have reported that supply-chain issues have been gradually easing, with improvements in lead times. 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 Expected to be a Growth Driver: 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 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 service companies are heavily investing in improving their digital capabilities and increasing their share in e-commerce.
Zacks Industry Rank Indicates Dull 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 #227, which places it in the bottom 10% of 251 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 underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has fallen 3.0% against the sector’s growth of 7.8%. The Zacks S&P 500 composite has moved up 18.6%.
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 25.77X compared with the S&P 500’s 14.99X and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.92X. 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 29.00X and as low as 6.04X, the median being 19.17X.
3 Industrial Services Stocks to Keep an Eye on
Grainger: The company’s second-quarter revenues and earnings increased 3% and 5%, respectively. It continues to deliver robust 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 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 indicates growth of 6.3% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 3.15%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #3 (Hold) at present.
Price & Consensus: GWW
Global Industrial Company: The company delivered a 6.8% increase in second-quarter revenues, with organic revenues improving 1.8%. This marks the fourth consecutive quarter of revenue growth amid cautious customer spending that is weighing on the industry. The e-commerce channel continues to be strong and the company is seeing robust growth in its enterprise business on account generation and healthy retention rates. The Indoff acquisition completed last year is a strategic fit with Global Industrial's business model, contributing to the company’s revenues. The acquired business also extended GIC’s reach to new customers and markets. Strong core product alignment, along with new service capabilities and project-related expertise, strengthens General Industrial’s overall value proposition. The company has been making investments in sales, marketing, merchandising and customer service to gain market share, strengthen its competitive position and boost revenues.
The Zacks Consensus Estimate for the Port Washington, NY-based company’s fiscal 2024 earnings has been revised 2% upward in the past 30 days. The consensus mark indicates year-over-year growth of 7%. General Industrial has a long-term estimated earnings growth rate of 16% and a Zacks Rank #3.
DMC Global: In its second-quarter results, the company saw sequential improvement in sales and EBITDA, surpassing its guidance. Despite weak construction spending, the Arcadia business saw a sequential rise in revenues, and its ongoing efforts to improve operational efficiencies and lower costs led to a significant rebound in margins. Arcadia posted its strongest gross margin since its December 2021 acquisition by DMC Global. DynaEnergetics, DMC Global’s energy products business’ revenues dipped as expected, owing to a decline in well completions. Its efforts to adjust costs with anticipated activity levels, combined with automation initiatives and product enhancements, are expected to drive improvements in the EBITDA margin in the back half of the year. The NobelClad segment received a record order from the petrochemical industry in the second quarter. The segment is pursuing additional large-order opportunities and is witnessing strong demand for its Cylindra cryogenic transition joints. BOOM’s debt-to-adjusted EBITDA leverage ratio was at 1.1X at the end of the second quarter of 2024.
The Zacks Consensus Estimate for Broomfield, CO-based DMC Global’s earnings has been unchanged over the past 30 days. BOOM has a trailing four-quarter earnings surprise of 26.2% on average. The company currently carries a Zacks Rank #3.
Price & Consensus: BOOM
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3 Industrial Services Stocks Countering Industry Challenges
The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector as customers remain cautious about spending. Flared-up input costs have added to the woes.
Despite this current setback, the rise in e-commerce activities will be a key catalyst for the industry. Companies like W.W. Grainger, Inc. (GWW - Free Report) , Global Industrial Company (GIC - Free Report) and DMC Global (BOOM - Free Report) are positioned for growth by leveraging strategies to capitalize on this demand. The companies have also been focusing on lowering costs, increasing productivity and efficiency, and investing in automation and digitization, which will aid growth.
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
Prolonged Contraction in Manufacturing Activity is Concerning: The manufacturing sector contributes around 70% to the industry's revenues. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s last update, industrial production inched up 1.6% in the 12 months ended June 2024. The durable goods manufacturing index was up 0.2% during the period. The Institute for Supply Management’s manufacturing index had languished in the contraction territory for 16 consecutive months until February 2024. March saw a slight uptick to 50.3%, but the index slipped to the contraction territory again, with a 49.2% reading in April. It has decelerated since and was 46.8% in July. The average for the 12 months ended July 2024 is 48.1%. Demand remains weak, as companies are not willing to spend in capital and inventory due to current federal monetary policy and inflationary conditions. The New Orders Index also has contracted for the fourth consecutive month in July. The Index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022. Notably, some industry players have reported that supply-chain issues have been gradually easing, with improvements in lead times. 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 Expected to be a Growth Driver: 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 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 service companies are heavily investing in improving their digital capabilities and increasing their share in e-commerce.
Zacks Industry Rank Indicates Dull 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 #227, which places it in the bottom 10% of 251 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 underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has fallen 3.0% against the sector’s growth of 7.8%. The Zacks S&P 500 composite has moved up 18.6%.
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 25.77X compared with the S&P 500’s 14.99X and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.92X. 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 29.00X and as low as 6.04X, the median being 19.17X.
3 Industrial Services Stocks to Keep an Eye on
Grainger: The company’s second-quarter revenues and earnings increased 3% and 5%, respectively. It continues to deliver robust 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 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 indicates growth of 6.3% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 3.15%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #3 (Hold) at present.
Price & Consensus: GWW
Global Industrial Company: The company delivered a 6.8% increase in second-quarter revenues, with organic revenues improving 1.8%. This marks the fourth consecutive quarter of revenue growth amid cautious customer spending that is weighing on the industry. The e-commerce channel continues to be strong and the company is seeing robust growth in its enterprise business on account generation and healthy retention rates. The Indoff acquisition completed last year is a strategic fit with Global Industrial's business model, contributing to the company’s revenues. The acquired business also extended GIC’s reach to new customers and markets. Strong core product alignment, along with new service capabilities and project-related expertise, strengthens General Industrial’s overall value proposition. The company has been making investments in sales, marketing, merchandising and customer service to gain market share, strengthen its competitive position and boost revenues.
The Zacks Consensus Estimate for the Port Washington, NY-based company’s fiscal 2024 earnings has been revised 2% upward in the past 30 days. The consensus mark indicates year-over-year growth of 7%. General Industrial has a long-term estimated earnings growth rate of 16% and a Zacks Rank #3.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: GIC
DMC Global: In its second-quarter results, the company saw sequential improvement in sales and EBITDA, surpassing its guidance. Despite weak construction spending, the Arcadia business saw a sequential rise in revenues, and its ongoing efforts to improve operational efficiencies and lower costs led to a significant rebound in margins. Arcadia posted its strongest gross margin since its December 2021 acquisition by DMC Global. DynaEnergetics, DMC Global’s energy products business’ revenues dipped as expected, owing to a decline in well completions. Its efforts to adjust costs with anticipated activity levels, combined with automation initiatives and product enhancements, are expected to drive improvements in the EBITDA margin in the back half of the year. The NobelClad segment received a record order from the petrochemical industry in the second quarter. The segment is pursuing additional large-order opportunities and is witnessing strong demand for its Cylindra cryogenic transition joints. BOOM’s debt-to-adjusted EBITDA leverage ratio was at 1.1X at the end of the second quarter of 2024.
The Zacks Consensus Estimate for Broomfield, CO-based DMC Global’s earnings has been unchanged over the past 30 days. BOOM has a trailing four-quarter earnings surprise of 26.2% on average. The company currently carries a Zacks Rank #3.
Price & Consensus: BOOM