Capital Goods Orders Impress: 3 Stock Picks

Zacks

Durable orders posted impressive gains in July, lifted by large orders for aircraft. The metric increased 22.6% in July, following an upward revision for gains in June to 2.7%. The sole jarring note in the report was the decline in orders for non-military capital goods. These orders dipped 0.5% in July.

Aircraft, Auto Orders Shine

The major driver of growth in July was transportation orders, which moved up 74.2%, the largest-ever increase. This in turn was lifted by a 318% increase in civilian aircraft bookings. This is the highest increase in orders since Jan 2011. The Boeing Company (BA) said that it received orders for 324 aircraft in July, another record number, making a significant contribution to this upsurge.

At the same time, orders for the auto sector increased the highest in five years. Motor vehicles and auto parts orders increased 10.2%, following a 1.3% decline in June.

Decline in Non-Defense Orders

The decline in orders for non-defense capital goods orders was the sole blot in the durable orders report. Orders for business equipment dipped 0.5% in July, contrary to most estimates which predicted a marginal increase.

However, the decline in orders was accompanied by a revision to the June numbers. The increase in non-defense capital goods orders for June was revised upward to 5.4%. This is the largest upward revision since Jan 2011.

Moreover, capital goods orders increased at an annualized rate of 14.9% over the last six months. This is the fastest pace of increase since Jun 2013. During the same period, shipments increased 10.8%. This is the largest advance experienced since 2011 end.

Capital Goods Orders Revision Crucial

There are several reasons why revisions in capital goods orders are more significant than the more noticeable gains being reported. Firstly, the primary growth driver of durable orders is aircraft bookings. These orders will take a considerable amount of time to execute and may be cancelled during this period. In the long term, this is certainly good news. However, these orders may not result in higher production right now.

Additionally, sales surveys are better indicators of the automotive sector. This is particularly significant because this is an advance report, which may be revised significantly later.  

This is why the revisions in business equipment orders are important. Firstly, they are firmer indicators for an earlier period. Further, companies must be reasonably confident that they can sell the goods they produce using such equipment. This bodes well for the economy as a whole.

Our Choices

Overall, data for capital goods orders looks promising. Analysts believe that the second half of the current year will witness a higher level of capital expenditure. Below we present three stocks which will gain from this trend, each of which also has a good Zacks Rank.

ITT Corporation (ITT) is a global multi-industry leader in high-technology engineering and manufacturing. It is engaged in the design, manufacture and sale of a wide-range of engineered products and the provision of services.

The company is headquartered in New York City and employs approximately 8,500 people worldwide. ITT continues to benefit from ongoing restructuring initiatives. In 2013, the company posted sales and revenues of $2.5 billion. ITT reported strong first-quarter 2014 results with growth across both top and bottom lines.

ITT holds a Zacks Rank #2 (Buy) and has expected earnings growth of 21%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 19.82.

IDEX Corporation (IEX) is an applied solutions company that specializes in a diverse range of applications such as fluid and metering technologies; health and science technologies; and fire, safety and other products built to customer specifications.

Serving high-growth niche markets, the company operates under three business segments. These are Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. IDEX sells its products to original equipment manufacturers (OEMs), as well as to direct end-use customers across the globe.

The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 14.6%. It has a P/E (F1) of 21.93.

Nordson Corporation (NDSN) 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.

The company also manufactures technology-based systems for curing and surface treatment processes. Headquartered in Westlake, Ohio, Nordson markets its products via a direct operations network spread across 30 countries. The company purchased Avalon Laboratories Holding Corp. earlier this month.  

Apart from a Zacks Rank #2 (Buy), Nordson has expected earnings growth of 14.1%. It has a P/E (F1) of 21.09.

The uptrend in orders for commercial capital goods is a welcome sign for the economy. The spurt in aircraft orders is primarily due to foreign purchases while the capital goods metric is an indicator of strong domestic demand. In such a business environment, these stocks would make good additions to your portfolio.

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