Zacks Industry Outlook Highlights Siemens, W.W. Grainger, Andritz and Global Industrial
For Immediate Release
Chicago, IL – December 4, 2023 – Today, Zacks Equity Research discusses Siemens SIEGY, W.W. Grainger, Inc. GWW, Andritz ADRZY and Global Industrial Co. GIC.
Industry: Industrial Services
Link: https://www.zacks.com/commentary/2192482/4-industrial-services-stocks-to-watch-amid-industry-wide-challenges
The Zacks Industrial Services industry is bearing the brunt of the contraction in order levels, as customers remain cautious about spending. Supply-chain constraints and flared-up input costs have added to its woes.
Despite this current setback, the rise in e-commerce activities will be a key catalyst for the industry. Companies like Siemens, W.W. Grainger, Inc., Andritz and Global Industrial Co. are poised to deliver growth, backed by their initiatives to capitalize on this demand and efforts to gain market share. The companies have also been improving their productivity and efficiency to improve 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 routine maintenance work, emergency maintenance and spare part inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve various 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. They are not directly related to customers’ core products or services. These companies reduce MRO supply-chain costs and improve customers' plant floor productivity by offering inventory management, and process and procurement solutions.
Trends Shaping the Future of the Industrial Services Industry
Contraction in Manufacturing Activity a 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 0.6% in October 2023, with manufacturing output falling 0.7%. Overall, industrial production has slipped 0.7% over the 12 months ended October 2023.
The index for durable goods manufacturing was down 1.3% in October, registering a 1.6% decline in the 12 months ended October 2023. The Institute for Supply Management’s manufacturing index was 46.7% in October, contracting for the 12th month in a row. The average for the 12 months ended October 2023 is 47.4%. Customers have been curbing their spending amid the ongoing uncertainty in the global economy and persisting inflationary trends.
The New Orders Index was 45.5% in October, languishing in the contraction territory for 14 months. Companies are still managing outputs appropriately as order softness continues. The industry has also been bearing the brunt of supply-chain issues. Some industry players have recently noted that supply-chain issues are easing. However, the delivery of goods from suppliers to manufacturing organizations has improved lately.
Pricing Actions to Combat High Costs: The industry has been experiencing significant inflation levels, including higher labor, freight and fuel prices. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. The 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. Customers’ 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. The pandemic provided a significant push in e-commerce activities.
In 2022, global retail e-commerce sales amounted to $5.7 trillion. Per Statista, the same is expected to see a CAGR of 9.3% over 2022-2027 and reach $8.15 trillion in 2027. In 2022, e-commerce accounted for nearly 19% of retail sales worldwide and is expected to be 25% by 2027. 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 Dull Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. The Zacks Industrial Services Industry, an 18-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #156, which places it in the bottom 38% of 250 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.
Before we present a few Industrial services stocks that investors can add to their portfolio, it is worth looking at the industry’s stock-market performance and valuation picture.
Industry vs. Broader Market
The Industrial Services industry has underperformed the Zacks S&P 500 composite but beat its sector over the past year.
Over this period, the industry has risen 8.7% compared with the sector’s growth of 0.7%. The Zacks S&P 500 composite has moved up 12%.
Industry's Current Valuation
Based on 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 21.79X compared with the S&P 500’s 10.92X and the Industrial Products sector’s forward 12-month EV/EBITDA of 15.43X.
Over the last five years, the industry traded as high as 33.49X and as low as 6.04X, with the median being 13.24X.
4 Industrial Services Stocks to Keep an Eye On
Global Industrial Company: The company reported an 18.8% year-over-year improvement in revenues in the third quarter of 2023 and resumed organic revenue growth in the quarter. The top-line performance was led by the company’s e-commerce channel, as recent investments and actions to drive digital transformation and enhance the online shopping experience are bearing fruit.
The company’s results have also benefited from the acquisition of Indoff, which was completed in May 2023. Indoff is a strategic fit for Global Industrial's business and multi-channel sales model. Indoff's network of more than 350 sales partners extends GIC’s sales reach to new customers and markets.
The company also generated a strong cash flow from operations and fully paid off the outstanding balance on the credit facility in the third quarter. The company has been making investments in growth, productivity initiatives, web and direct sales channels to strengthen its competitive position. It has recently been awarded a Vizient contract for floor cleaning equipment, which significantly enhances its healthcare market presence. GIC shares have gained 3.5% in the past three months.
Port Washington, NY-based Global Industrial operates as a value-added industrial distributor of industrial and MRO products in North America. The Zacks Consensus Estimate for fiscal 2023 earnings indicates growth of 8.8% from the year-ago actuals. The estimate has moved up 2% over the past 30 days. GIC has a trailing four-quarter earnings surprise of 8.6% on average. The company currently sports a Zacks Rank #1 (Strong Buy).
Andritz: The company delivered strong year-over-year growth in revenues (aided by growth 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. After entering the green hydrogen market with its first engineering order in the second quarter of 2023, the company booked its first order for the supply of a complete green hydrogen plant in the third quarter.
Given that the company offers a broad product portfolio of sustainable solutions (renewable energy, recycling, biofuels, etc.) that customers need to achieve their ESG goals, the solid and sustained demand from this sector is aiding the company’s growth. The company’s shares have appreciated 3% over the past three months.
Headquartered in Graz, Austria, Andritz offers a broad portfolio of innovative plants, equipment, systems, services and digital solutions for many different industries and end markets. The Zacks Consensus Estimate for ADRZY’s fiscal 2023 earnings indicates growth of 24% from the year-ago period. The estimate has been unchanged over the past 30 days. ADRZY carries a Zacks Rank #2 (Buy) at present.
Siemens: The company reported strong fiscal 2023 results (ended Sep 30, 2023), delivering multiple records. Revenues for the year rose 11% on a comparable basis, backed by order growth of 7%. The Industrial business’ profit and margin surged to the highest levels and the company’s net income also hit a historic high. The free cash flow for Siemens Group was another record. The Digital business continues to grow rapidly and rose 12% in fiscal 2023, enabling the company to outperform its average annual growth of 10%.
SIEGY ended the fiscal year with a record backlog, which will support its top-line growth in fiscal 2024. All its segments are expected to witness growth in fiscal 2024. 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. SIEGY has been capturing market share and witnessing continued strong demand for its hardware and software. This has been instrumental in the 13% gain in its share price over the past three months.
Munich, Germany-based Siemens is a technology group focused on the areas of automation and digitalization in the process and manufacturing industries, intelligent infrastructure for buildings and distributed energy systems, smart mobility solutions for rail transport, and medical technology and digital healthcare services. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings has been revised 2% upward in the past 30 days. The consensus mark indicates year-over-year growth of 1%. The company currently has a long-term estimated earnings growth rate of 5.5% and a Zacks Rank #3 (Hold).
Grainger: The company continues to deliver improved results, aided by margin improvement in the High-Touch Solutions North America (N.A.) and Endless Assortment segments, and a solid 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 (N.A.) segment will continue to benefit from pricing actions and volume growth.
The Endless Assortment segment is gaining from customer acquisitions at its MonotaRO business Cost-control measures undertaken by GWW will sustain margins. The company also focuses 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. Its shares gained 10.6% in the last three months.
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 2023 earnings has inched up 0.3% in the past 30 days. The consensus mark indicates growth of 22.6% from the year-ago quarter’s reported number. GWW currently has a trailing four-quarter earnings surprise of 6.2%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #3 at present.
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W.W. Grainger, Inc. (GWW) : Free Stock Analysis Report
Global Industrial Company (GIC) : Free Stock Analysis Report
Siemens AG (SIEGY) : Free Stock Analysis Report
Andritz (ADRZY) : Free Stock Analysis Report