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4 Machinery Stocks Likely to Beat This Earnings Season


For quite some time, global macroeconomic headwinds have wreaked havoc on the machinery industry. Factors like fluctuating currency movements (particularly a strong greenback) and softening economic conditions, particularly in formerly fast-growing markets like China, have dampened the performance of this space.

Also, the fragile energy industry led to a pullback in demand for steel, heavy equipment and other materials, which again hurt the machinery companies.

Weakness in this space substantiates a deceleration in the economy, while raising concerns about the U.S.’s ability to generate a sustained growth in the face of a faltering global economy.

Per Federal Reserve data released last month, industrial production — a comprehensive gauge of output across U.S. factories, mines and power plants — decreased for the second month in a row in March, falling 2% from the prior year period. Output has declined in six of the last seven months. Within this index, manufacturing output, which accounts for the biggest share, fell 0.3% in March.

Another matter of concern is the weakening export demand for the U.S.-manufactured machinery, which continues to be hurt by a
lethargic global economy and a robust dollar.

To add insult to injury, the International Monetary Fund (“IMF”) continued to trim its global economic growth forecast. In a report released last month, the IMF reduced its growth projections for the U.S. economy by 20 basis points (bps) to 2.4% for 2016, while cutting global growth forecast by 20 bps to 3.2% for the same year.

However, some trends indicate that it is not all bad. In fact, major headwinds of the space are showing signs of leveling off. Lately, the dollar has weakened against many other currencies, and oil prices have stabilized quite a lot this year.

Also, according to The Institute for Supply Management, for the first time since Aug 2015, economic activity in the manufacturing sector actually expanded in March. The March PMI (Purchasing Managers' Index) came in at 51.8%, up 2.3% from 49.5% in February. Readings over 50% indicate that more companies are expanding their businesses, relative to those cutting their operations.

The Machinery industry is broadly grouped under the Industrial Products sector (one of the 16 broad Zacks sectors). For first quarter 2016, our growth estimates paint a grim picture for the space. Overall, the sector is expected to log a 23.4% drop in earnings for the quarter, on 9.4% lower sales. For a detailed account of the earnings outlook for this sector as well as others, please read our latest Earnings Trends report.

In view of these mixed factors, it will be interesting to see how some of the machinery stocks fare in their upcoming releases in the coming fortnight. In addition to beats and misses, investors will also be interested in companies’ outlooks and their steps to overcome the headwinds.

Among major industry players, A.O. Smith Corp. (AOS) registered an earnings beat of 7.8% on strong underlying revenue growth and cost productivity. Other players such as ABB Ltd. (ABB), Eaton Corporation plc (ETN) and Illinois Tool Works Inc. (ITW) registered modest earnings beats of 4.6%, 3.5% and 2.4%, respectively.

Companies that posted more impressive beats in their quarterly reports include Ingersoll-Rand Plc (IR), Reliance Steel & Aluminum Co. (RS) and W.W. Grainger, Inc. (GWW), topping estimates by 35.1%, 17.1% and 11.2% respectively.
On the other hand, giants like Ball Corporation (BLL) and Dover Corporation (DOV) missed estimates by 14.5% and 11.9%, respectively.

At this juncture, we have selected some companies that have the potential to beat earnings in their upcoming releases. An earnings beat should help these stocks gain investor confidence and show a favorable price movement. Picking out and investing in such stocks before they report earnings can substantially boost your portfolio returns.

Likely Winners This Season

Picking the best stocks from the machinery space that have the potential to beat earnings estimates this season is a fairly simple task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.

Earnings ESP – the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate – is our proprietary methodology for distinguishing stocks that have a high chance of beating estimates in their next earnings reports. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

For investors seeking to profit from this strategy, we have highlighted four Machinery stocks that are currently equipped with the right combination of elements to post an earnings beat:

Emerson Electric Co. (EMR) is a Zacks Rank #2 stock with an Earnings ESP of +3.18%. The Zacks Consensus Estimate for second-quarter fiscal 2016 results currently stands at 63 cents. The company has registered positive earnings surprises in two of the last four quarters with a negative average surprise of 1.9%. Although the surprise history for the stock has been unimpressive, it is poised for a beat this quarter.

Headquartered in Emeryville, CA, Emerson is a diversified global manufacturing and technology company. Emerson’s results are expected to benefit from favorable trends in the U.S. construction market as well as positive developments at the company’s Commercial & Residential Solutions segment.

Emerson is slated to report its second-quarter fiscal 2016 results before market opens on May 3.

SPX FLOW, Inc. (FLOW) is a global supplier of engineered flow components, process equipment and turn-key systems. In addition, the company provides after-market parts and services to its vast customer base in the food & beverage, power & energy and industrial end-markets. The company’s earnings growth is supported by the company’s geographically diversified business and a large client base.

This Zacks Rank #2 stock holds an Earnings ESP of +50.00%. The Zacks Consensus Estimate for the to-be-reported quarter currently stands at a loss of 2 cents.

SPX FLOW is slated to report its first-quarter 2016 results before market opens on May 4.

Nordson Corporation (NDSN) is a Zacks Rank #3 stock with an Earnings ESP of +3.26%. The Zacks Consensus Estimate for second-quarter fiscal 2016 results currently stands at 92 cents. The company has had a choppy earnings history, registering positive earnings surprises in just one of the last four quarters, with a negative average surprise of 3.8%. Although the surprise history for the stock has been unimpressive, the company seems poised for a beat this quarter.

Nordson Corporation is one of the world's leading producers of precision dispensing equipment that applies adhesives, sealants and coatings to a broad range of consumer and industrial products during manufacturing operations.

Nordson is slated to report its second-quarter fiscal 2016 results after market closes on May 17.

Regal Beloit Corporation (RBC) is a Zacks Rank #2 stock with an Earnings ESP of +0.92%. The Zacks Consensus Estimate for the quarter results currently stands at $1.09. The company has had a fairly decent earnings history, registering positive earnings surprises in three of the last four quarters, with an average beat of 2.7%.

Regal Beloit is a leading manufacturer of electrical and mechanical motion control and power generation products serving markets.

Regal Beloit is slated to report its first-quarter 2016 results before market opens on May 9.

Bottom Line

While challenges in the form of macroeconomic headwinds and growth concerns remain issues, a number of machinery companies are poised to defy the odds and get back on the growth track. A sneak peek at the space for some outperformers, backed by a solid Zacks Rank and a positive Zacks Earnings ESP, could be a great idea for investors to gain from this earnings season.

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 >>


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
 
EMERSON ELEC CO (EMR): Free Stock Analysis Report
 
SPX FLOW INC (FLOW): Free Stock Analysis Report
 
NORDSON CORP (NDSN): Free Stock Analysis Report
 
REGAL BELOIT (RBC): Free Stock Analysis Report
 
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