Manufacturing activity has somewhat slowed in recent times, but the good thing is that it is still growing, signaling that the sector is still trying to overcome challenges like rising costs and inflationary pressures. Higher interest rates are already cooling the demand for goods, and people have once again started spending more on services.
However, demand for goods is still high and that’s the reason factory orders have been steadily growing month over month. Given this situation, stocks like Hubbell Incorporated HUBB, The LGL Group, Inc. LGL, Franklin Electric Co., Inc. FELE and Ferguson plc FERG are likely to benefit in the near term.
Factory Orders Rise in June
The Institute of Supply Management’s survey showed that factory orders grew in July, although at a slower pace. Factory orders rose 2% in June, which is definitely good news given the rising concerns about the economy slipping into recession.
Orders rose across a large number of segments. Orders for computers and electronic products jumped 1.7%, while orders for electrical equipment, appliances and components rose 2.8%.
Also, orders for transportation equipment jumped a solid 5.2% in June. This was mainly because of a surge in orders for military aircraft. Inventories, however, increased at a slower pace of 0.4% compared to 1.3% in May.
The Commerce Department also said that orders excluding non-defense goods, which include military aircraft, rose 0.7%. It was earlier reported that orders for non-defense goods increased 0.5%.
The Commerce Department also reported a 0.7% increase in shipments of manufactured goods in June.
Manufacturing Activity Growing Amid Challenges
The report comes as the Commerce Department also said that orders for long-lasting durable goods (intended to last at least three years) manufactured in U.S. factories jumped 1.9% in June to a seasonally adjusted $272.6 billion.
Economists had expected a decline in orders for consumer goods owing to rising costs that are driving up prices. However, it appears that this hasn't had an impact because stronger demand, despite rising prices, has been driving production at American factories.
Even in the face of obstacles like increased raw material costs and the supply-chain crisis, manufacturing activity is holding its ground. Orders for manufactured items are increasing as a result of higher demand and rising costs, in spite of being a major determinant, which hasn’t made much of a difference.
Even though the economy shrank by 1.3% on an annualized basis in the second quarter, robust business spending on equipment is spurring domestic demand.
People spent more on capital goods during the height of the COVID-19 pandemic because they were working and learning from home. This led to an increase in demand for goods, which is currently creating pressure on the supply chain.
Having said that, people have resumed increasing their expenditure on services as the economy continues to recover. However, the increase in spending on services hasn't affected consumer demand, which is boosting industrial orders.
Factory orders should continue to grow as the U.S. economy reopens further. This thus makes it a good time to invest in fundamentally sound stocks that stand to benefit from rising orders. We have handpicked five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hubbell Incorporated is engaged in the design, manufacture and sale of electrical and electronic products to commercial, industrial, utility and telecommunications markets. HUBB’s products include plugs, receptacles, connectors, lighting fixtures, high voltage test and measurement equipment and voice and data signal processing components.
Hubbell Incorporated’s expected earnings growth rate for the current year is 20.3%. The Zacks Consensus Estimate for current-year earnings has improved 3.4% over the past 60 days. HUBB has a Zacks Rank #2.
The LGL Group, Inc. operates through its principal subsidiary M-tron Industries, Inc., which designs and manufactures customized electronic components used primarily to control the frequency or timing of electronic signals in communications systems. LGL has operations in Orlando, Florida, Yankton, South Dakota, Yantai, China and Noida, India.
The LGL Group’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 27.8% over the past 60 days. LGL has a Zacks Rank #2.
Franklin Electric Co., Inc. is a global leader in the production and marketing of systems and components for the movement of water and automotive fuels. FELE has produced high-quality industrial pumps, filters and accessories. By introducing the new Little Giant PondWorks program, Franklin Electric Co now brings the same exceptional knowledge, experience, and quality to the recreational water gardening and outdoor living markets.
Franklin Electric Co’s expected earnings growth rate for the current year is 32.4%. The Zacks Consensus Estimate for current-year earnings has improved 18.1% over the past 60 days. FELE sports a Zacks Rank #1.
Ferguson plc is a distributor of plumbing and heating products to professional contractors and consumers primarily in the United States, UK, Nordics, Canada and Central Europe. FERG, formerly known as Wolseley plc, is headquartered in Zug, Switzerland.
Ferguson’s expected earnings growth rate for the current year is 43.4%. The Zacks Consensus Estimate for current-year earnings has improved 10.6% over the past 60 days. FERG has a Zacks Rank #2.
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