Market conditions were unfavorable for industrial equipment makers in the first three quarters of 2015. Thereafter, per the Federal Reserve report, industrial production in the U. S. declined 0.6% sequentially in November due to a fall in mining and utilities outputs. In October, the country’s industrial production edged down 0.4%. Another matter of concern is the weakening export demand for the U. S.-manufactured machinery. According to the U. S. Census Bureau, export demands for U. S. machinery edged down 2.2% for the 10 months ended Oct 2015. Shipments for farm
machinery fell 42.4%; while for mining and industrial they declined 35% and 2.7%, respectively. New machinery orders were down 7.6%, while order backlog decreased 8.6%. The International Monetary Fund (“IMF”) has reduced its growth projections for the U. S. economy by 20 basis points (bps) to 2.8% for 2016, while projecting 2.6% growth in 2015. Japan According to the report from Japan’s Cabinet Office, total machinery orders for third-quarter 2015 fell 4% sequentially.
Private-sector machinery orders declined 6.3% in the quarter; excluding volatile orders, they were down 10%. This triggered concerns over the future of capital investments by companies. Orders from manufacturing and government clients fell 15.3% and 16.2%, respectively.
The agency predicts core machinery orders to grow 2.9% in the fourth quarter, while total machinery order is expected to inch up 0.3%. The IMF predicts the economy to grow by a meagre 0.6% in 2015 and 1% in 2016, down 20 bps from the previous projections for both years. Emerging Nations China: The country’s industrial production increased 6.2% year over year in Nov 2015 driven by improvement in mining, manufacturing and utilities sectors. In October, industrial production was up 5.6%. In the first 11 months of 2015, the country’s exports fell 3% and imports shrank 15.1%, both year over year, indicating weak demand in international and domestic markets.
In November alone, exports were down 6.8% year over year; while imports fell 8.7%. 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 Oct 2015 increased 9.8% year over year. Expectations of strong demand, improved policies and better monsoon conditions are factors that will influence the country’s growth, going forward. The new government is making concerted efforts to turn the country a prime manufacturing hub for all nations across the world. Apart from boosting foreign capital inflow 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 7.3% in 2015 and 7.5% in 2016. Brazil: For 2015, the country projects a gloomy outlook as a result of low private investments, inadequate infrastructure and high labor costs. In October, the country’s industrial production fell 11.2% year over year. The IMF predicts the country’s output to decline by 3% in 2015 and 1% in 2016, down 150 bps and 170 bps from the respective prior projections.
The recovery is dependent on foreign direct investments and expansion of industries like tourism, steel and electricity. Eurozone Industrial production (excluding construction) in the Eurozone grew 1.9% year over year in Oct 2015, while inching up 0.6% sequentially. German machine tool orders during Jul-Sep quarter fell 1% year over year due to 7% decline in international demand, partially offset by 9% growth in domestic demand. The IMF projects the Euro Area to grow by 1.5% in 2015 and 1.6% in 2016. Zacks Industry Rank 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, top 50% industries 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 #230), construction and mining (#235), electrical utilities (#98), electrical (#180), farm (#196), general industries (#221), material handling (#237), print trading (#98) and thermal processing (#98). Earnings Trend of the Sector Let’s take a look at the Industrial Products sector’s (accounting for 2% of the S&P 500 index’s total market capitalization) performance in third-quarter 2015. As of Dec 4, 2015, all the Industrial Products companies in the S&P 500 group had reported their results for the Jul-Sep quarter.
Earnings declined 23.8% year over year with a beat ratio (percentage of companies coming out with positive surprises) of 63.6%; while revenues fell by 12.2%. Taking into consideration the prevalent headwinds, earnings for the Industrial Products sector are anticipated to decline by 21.7% in the fourth quarter; while revenues are predicted to fall by 11.6%. As for all the Zacks sectors combined, earnings are predicted to decrease 7% for fourth-quarter 2015, while revenues are anticipated to decline 5%. Key Players in the Machinery Industry Stocks with high investment rankings might interest investors who seek exposure in the machinery industry. However, the difficult operating conditions prevalent in the industry have weakened the companies’ investment value for the next few quarters. Here we have briefly discussed some stocks that hold strong long-term potential and might attract long-term investors. In the S&P 500 group, machinery company Pentair plc ( PNR ), with a market capitalization of $8.1 billion, has strong earnings growth potential, roughly 11% over the next 5 years.
Lincoln Electric Holdings Inc’s ( LECO ) earnings are predicted to grow 8%; while earnings of Caterpillar Inc. ( CAT ) and Illinois Tool Works, Inc. ( ITW ) are anticipated to grow 5.8% and 8.7%, respectively. Zacks “Profit from the Pros” e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research.
Subscribe to this free newsletter today . Find out What is happening in the stock market today on zacks. com. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report PENTAIR PLC (PNR): Free Stock Analysis Report LINCOLN ELECTRC (LECO): Free Stock Analysis Report CATERPILLAR INC (CAT): Free Stock Analysis Report ILL TOOL WORKS (ITW): Free Stock Analysis Report To read this article on Zacks.
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