Despite the ongoing U.S.-China trade turbulence and concerns regarding the global economy, the U.S. manufacturing sector has held its ground and managed to deliver persistent growth for 34 straight months.
Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for June came down to 51.7% from 52.1% registered in May but surpassed the estimate of 51.3. Even though it has dipped from May, it remains above 50 – which indicate expansion in the sector. Further, the PMI has averaged 56% over the last 12 months.
The New Orders Index registered 50.0% in June, down from 52.7% in May. The sector witnessed a decline after experiencing growth for 41 straight months. Backlog of Orders Index was at 47.4% in June, which is 0.2 percentage point higher than the 47.2% reported in May – which was the lowest level of performance since October 2016. Order backlogs contracted for a second consecutive month, but at a slower rate in June. Production Index was 54.1% in the month, up from 51.3% in May and continues to improve for 34 straight months. The employment index was pegged at 54.5%, up from the May reading of 53.7%. This marked growth for the 33rd consecutive month.
Per IHS Markit, US Manufacturing PMI was 50.6 in June 2019, a tad higher than May's final 50.5. Still it was the second-lowest figure since September 2009.
Nonetheless, the truce in trade war is likely to lift the industrial sector. Further, a possible rate cut by the Fed in July in order to sustain U.S. economic expansion will act as a tailwind. A drop in interest rate will reduce the cost of funds thereby bolstering investments in the manufacturing sector.
The industrial sector seems well poised to sustain the momentum this year as well, supported by improvement in its end markets like residential and non-residential construction; mining driven by ongoing recovery in the commodities, oil and gas industry; and overall economic growth. Further, manufacturers have increased capital spending and hiring driven by massive tax overhaul, deregulatory measures and strong domestic economy.
Despite the above-mentioned headwinds, the Zacks Industrial Products sector has rallied 20% year to date, ahead of the S&P 500’s growth of 12.1%.
Earnings for the Industrial Products Sector, one of the 16 broad Zacks sectors, rose 1.2% in the first quarter of 2019 amid input cost inflation. Per the latest Earnings Trends report, the sector’s earnings are expected to rise 0.4% in the second quarter of 2019. Even though growth is muted, the performance will be better considering that eight of the 16 Zacks Sectors are expected to report declines. The scenario is likely to improve in the back half of the year, with projected growth of 5.5% in earnings for the third quarter, followed by rise of 12.8% in the fourth quarter. Overall for the year, earnings growth projected for the sector is 4.2%.
We have handpicked five industrial stocks which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 or 2, offer the best investment opportunities for investors. You can see the complete list of today’s Zacks #1 Rank stocks here.
These companies have delivered solid returns year-to-date and have a positive earnings surprise history trend and positive earnings growth projections for the ongoing year.
The chart below shows price performance of our five picks so far this year.
Hubbell Incorporated HUBB: This Shelton, CT-based company has a Zacks Rank #2 and a VGM Score of B. It has gained 31.5% year to date. The company has estimated long-term earnings growth rate of 10%. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 11.25%. The Zacks Consensus Estimate for the fiscal has gone up 0.2% over the past 90 days. The company has an average positive earnings surprise of 4.74% in the trailing four quarters.
Brady Corporation BRC: The Zacks Ranked #2 stock carries a VGM Score of B. The stock has gained 12.6% year to date. The Milwaukee, WI-based company has estimated long-term earnings growth rate of 7.5%. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 17.65% and also moved up 3.2% over the past 90 days. The company has an average positive earnings surprise of 9.22% in the trailing four quarters.
Myers Industries, Inc. MYE: This Akron, OH-based company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 6.58%. The Zacks Consensus Estimate for the fiscal has gone up 1.3% over the past 90 days. The company has an average positive earnings surprise of 19.38% in the trailing four quarters. The stock has gone up 26.8% year to date.
Tetra Tech, Inc. TTEK: This Pasadena, CA-based company currently has a Zacks Rank #2 and a VGM of A. The Zacks Consensus Estimate for the company’s fiscal 2019 earnings per share increased 2.3% in the past 90 days. The estimate reflects a 15.53% year-over-year improvement. The company has an average positive earnings surprise of 8.22%, over the trailing four quarters. The stock has appreciated 57.6% so far this year.
Unifirst Corporation UNF: This Wilmington, MA-based company company has a Zacks Rank #1 and a VGM Score of B, at present. The Zacks Consensus Estimate for the ongoing year’s earnings per share reflects year-over-year growth of 15.17%. The Zacks Consensus Estimate also moved up 9.2% over the past 90 days. It has an average positive earnings surprise of 19.53% over the last four quarters. The stock has appreciated 33% so far this year.
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