Zacks Industry Outlook Highlights: AO Smith, Caterpillar, Deere, Illinois Tool Works and Lincoln Electric Holdings - Press Releases
For Immediate Release
Chicago, IL – May 13, 2015 – Today, Zacks Equity Research discusses the Industrial Machinery, including AO Smith Corp. (AOS), Caterpillar Inc. (CAT), Deere & Company (DE), Illinois Tool Works, Inc. (ITW) and Lincoln Electric Holdings Inc. ( LECO).
Industry: Industrial Machinery
Link: https://www.zacks.com/commentary/45709/industrial-machinery-stock-outlook---may-2015
Economic activities around the globe have been jittery in the March quarter, with uncertainties prevalent in a number of developed as well as developing countries. In the emerging world, questions remain about China’s growth outlook, Brazil’s economy has lost momentum and oil exporting nations are forced to deal with the effects of lower oil prices. Lower oil prices are having an impact on the demand for industrial machinery as well, both directly as well indirectly.
In Apr 2015, the World Economic Outlook, published by the International Monetary Fund (IMF), highlighted the worsening operating conditions in some developed and emerging nations. This, consequently, will hurt industrial activities, thus posing a major headwind for the machinery industry. The world economy is predicted to grow 3.5% in 2015 and 3.8% in 2016. Advanced economies are projected to grow 2.4% in both 2015 and 2016, while emerging nations will likely grow by 4.3% in 2015 and 4.7% in 2016.
Across nations, the level of industrial activities is measured in terms of industrial production -- output of the manufacturing, mining and utilities sectors. A brief discussion on the prospects of the machinery industry in different nations has been provided below.
Prospects in the United States
As per the Federal Reserve reports, operating environment for the U.S.-based machinery makers was difficult in first-quarter 2015. Industrial production declined 1% year over year due to weakness in the mining and utilities industries.
Also, export demands for the U.S. machinery were weak in the quarter. According to the U.S. Census Bureau report published in May 2015, machinery shipments decreased by 2.2% in the quarter. Shipments for farm, mining and industrial machineries fell 48%, 13.9% and 0.7%, respectively. New machinery orders were down 9.3%, while order backlog inched up 0.1%.
The job market, however, showed signs of recovery. As per the Bureau of Labor Statistics report, new job additions averaged 197,000 for first-quarter 2015 while unemployment rate stood at 5.5% at the end of the quarter.
Presently, market sentiments are shaky in the U.S. as fluctuating currency movements and uncertain global growth will likely hurt the country’s export businesses. Lower oil prices add to the woes by adversely impacting oil and gas drilling activities of the oil producing companies. This, in turn, has lowered capital spending on purchase of machinery and equipments.
According to the IMF, the U.S. economy is projected to grow by 3.1% in both 2015 and 2016.
Japan
The latest report by Japan’s Cabinet Office shows that total machinery orders in Feb 2015 declined 1.4% over the previous month. Private-sector machinery orders fell 10.4%, while the same excluding volatile orders edged down 0.4%, raising concerns over the future of capital investments by companies. Orders from government clients decreased 21.9%. The agency predicts a 2.5% decline in total machinery orders for first-quarter 2015.
In Nov 2014, the government had delayed its second sales tax hike of 2% by 18 months, primarily on account of the shrinking economy. The IMF predicts the economy to grow by a meagre 1% in 2015 and 1.2% in 2016.
Emerging Nations
China : The country’s industrial production growth rate declined to 5.6% in Mar 2015 from 6.8% recorded in both February and January. The weakness was triggered by soft domestic demands during the period.
Gross Domestic Product (GDP) growth rate also slowed to 7% in Jan-Mar quarter as against the year-ago quarter. Exports growth was a paltry 5%, while imports shrank 17%. The IMF projects the Chinese economy to grow by 6.8% in 2015 and 6.3% in 2016.
India : The country’s industrial production in Feb 2015 increased 5% from the year-ago month on the back of a 5.2% increase in manufacturing and 2.5% in the mining sector. Industrial production growth in January was 2.8%. GDP growth in the December-ending quarter was 7.5%.
Expectations of strong demand, policy improvements and better monsoon conditions will act as the primary growth drivers for the country, going forward. The new government has already taken certain measures to successfully boost the country’s foreign capital inflow. According to the IMF, the country is projected to grow by 7.5% in both 2015 and 2016.
Brazil : The country’s industrial production in Mar 2015 declined 3.5% from the year-ago quarter. The fall was worse in February at 9.4% while being down 5.2% in January.
For 2015, the country projects a gloomy outlook as a result of low private investments, inadequate infrastructure and high labor costs. The IMF predicts the country’s output to decline by 1% in 2015, and grow by 1% in 2016. The recovery is dependent on foreign direct investments and expansion of industries like tourism, steel and electricity.
Eurozone
The Eurozone’s industrial production (excluding construction) in Feb 2015 managed to rise 1.1% over the prior month, while increasing 1.6% year over year, as per Eurostat’s data released in Apr 2015.
According to the VDMA Machine Makers’ Association, German machine tool orders in the Jan–Mar period grew 2%. Domestic orders were down 2%, while international orders climbed 3%. The IMF projects the Euro Area to grow by 1.5% in 2015 and 1.6% in 2016.
Zacks Industry Rank
According to the Zacks Industry classification, Machinery is broadly grouped under the Industrial Products sector, one of the 16 broad Zacks sectors. More than 260 industries are ranked under the 16 Zacks sectors based on the earnings outlook of constituent companies in each industry. To learn more visit: About Zacks Industry Rank.
As a guideline, industries with Zacks Industry Rank of #88 and lower are considered to have a positive outlook; those between #89 and #176 have a neutral outlook, while the ones with #177 and higher possess a negative outlook.
The machinery industry is further sub-divided into five industries at the expanded level: machine tools and related products (with Zacks Industry Rank #94), machinery – construction and mining (#95), machinery – electrical (#97), machinery – farm (#98) and machinery – general industries (#99). Considering the Zacks Industry Ranks of all the machinery-related industries, it can be deduced that sub segments of the machinery industry hold a neutral outlook.
Earnings Trend of the Sector
The Industrial Products sector accounts for 2.2% of the S&P 500 index’s total market capitalization and is expected to bring in 2.1% of the index’s estimated total earnings this year.
As of May 8, 2015, roughly 84% of the total Industrial Products companies in the S&P 500 group reported their results for the Jan-Mar quarter. Earnings inched up 0.1% year over year with a beat ratio of 66.7%, while revenues declined 4.4%.
Taking into consideration the prevalent headwinds, earnings for the Industrial Products sector are anticipated to decline by 8.2% in the quarter, while revenues are predicted to fall by 6.9%.
Key Players in the Machinery Industry
A brief discussion on few billion-dollar machinery companies:
AO Smith Corp. (AOS): The company, with a market capitalization of $6.1 billion, operates in the electrical machinery industry. This Zacks Rank # 2 (Buy) company manufactures and markets residential and commercial water heating equipment.
Caterpillar Inc. (CAT): The company operates in the construction and mining machinery industry with a current market capitalization of $52.7 billion. It manufactures construction and mining equipment, diesel and natural gas engines and industrial gas turbines.
Deere & Company (DE): The company, with a $30.5 billion business, operates in the farm machinery industry. It produces and distributes agricultural and forestry equipment, construction equipment and engines.
Illinois Tool Works, Inc. (ITW): The company, with a $35.8 billion market capitalization, operates in the general machinery industry. It is a worldwide manufacturer of highly engineered products and specialty systems.
Lincoln Electric Holdings Inc. (LECO): With a market capitalization of $5.1 billion, the company operates in the machine tools and related products industry. It specializes in manufacturing and selling welding and cutting products. Lincoln Electric has Zacks Rank # 3 (Hold) and Style Scores of ‘B’ for Growth and Value.
Going Forward
Effective governmental policies as well as huge investments in infrastructure development will improve industrial products demand and also create new jobs, going forward. Such measures, along with emphasis on growing trade relations, will prove to be a boon for the machinery industry.
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