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3 Machinery Stocks Set to Beat Earnings Estimates in Q4

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·7 min read
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Quite a few machinery stocks have reported fourth-quarter earnings so far, and the recurring highlights across the players have been strong demand in end markets, inflationary pressures and supply chain headwinds.

All of these trends were highlighted in the fourth-quarter performance of Caterpillar Inc.’s CAT, which is seen as a bellwether for the global economy. The world's largest manufacturer of heavy industrial equipment beat both earnings and revenues in the quarter under review. The metrics also improved year over year. Sales were up in all the three primary segments due to volume gains and favorable price. However, CEO Jim Umpleby stated that had it not been for the supply chain constraints, the company’s top line would have been even stronger. Margins came in lower than expected due to higher freight costs and production inefficiencies. Material costs were higher but were within expectations.

Some manufacturing companies that are yet to report their quarterly numbers include Deere & Company DE, The Middleby Corporation MIDD and Chart Industries GTLS. It will be interesting to see how they fare.

Key Factors at Play in Q4

Per the Federal Reserve, total industrial production rose at an annual rate of 4% in the fourth quarter. Manufacturing output increased at an annual rate of 5%. Also, per the Institute for Supply Management’s (“ISM”) report, the Purchasing Managers Index (PMI) averaged 60.2 in the fourth quarter. This expansion in manufacturing activity on the back of the broader economic recovery has been evident from the order growth witnessed by the machinery manufacturers in the quarter. The requirement from the U.S. residential construction sector was a significant contributor to demand for companies dabbling in construction equipment. The ongoing recovery in the non-residential construction sector also contributed to the demand.

Higher agricultural prices favored the companies making agricultural and irrigation equipment. Higher metal prices have led to miners spending more on mining equipment. Growth in demand for products across several end markets, including process automation, residential heating, ventilation and air conditioning and water treatment end markets, is likely to have been a tailwind for some companies.

However, many of the companies stated that due to the ongoing supply chain challenges and labor shortage, they could not capitalize on the elevated demand levels. Manufacturers have been witnessing tight labor availability for some positions and incurring higher labor costs to attract staff to meet the escalating demand. COVID-19 related worker absenteeism also remains an issue. Higher costs for raw material, labor, fuel, and transport have weighed on their margins in the quarter, offsetting the gains from pricing actions and stronger volumes. Anticipation that inflationary pressure and supply chain issues will persist in the ongoing year has featured in their outlooks as well. The companies intend to implement price hikes, focus on improving productivity and efficiency, and diversify supplier bases to mitigate these impacts.

Q4 Expectations

Machinery stocks are housed under the broader Zacks Industrial Products sector. Per the latest Earnings Trend report, 88.5% of the companies in the sector (constituting nearly 83.1% of the sector’s market capitalization) have reported earnings. While 91.3% topped sales estimates, 82.6% beat on earnings. Earnings increased 12.3% year over year on 11.2% higher revenues. Overall earnings for the Industrial Products sector are expected to rise 5.6% on a 9.7% sales increase. Margins are expected to dip 0.4%, reflecting the inflationary cost pressures.

The projected growth for the quarter reflects a deceleration from a 32.9% rise in earnings on a 14.1% increase in revenues, which was witnessed in the third quarter.

How to Pick Winners?

Given the large number of players operating in the industrial space, picking the right stocks is not an easy task. But our proprietary methodology makes it fairly simple. One can trim down the list with the combination of a favorable Zacks Rank — Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — and a positive Zacks Earnings ESP. You can uncover the best stocks to buy or sell before they report with our Earnings ESP Filter.

Earnings ESP — the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate — is our proprietary methodology for determining stocks that have high chances of delivering earnings surprises in their next announcements. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as much as 70%.

3 Machinery Stocks That Match the Criteria

Below we list three industrial stocks that have the right combination of elements to pull off an earnings surprise this time around:

Deere has an Earnings ESP of +9.75% and a Zacks Rank #3. The company is scheduled to report first-quarter 2022 results on Feb 18.

Higher agricultural commodity prices and the consequent pick-up in farm income are expected to have led to higher demand for new agricultural equipment. These factors might have favored Deere’s top-line performance. The need to replace old equipment and preference for the company’s products equipped with advanced technologies and features are also likely to have provided a boost to the to-be-reported quarter’s performance. However, supply challenges, rising raw material and logistics costs are likely to have weighed on DE’s margins.

Deere’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 33.6%. The Zacks Consensus Estimate for the quarter’s earnings is pegged at $2.28, indicating a decline of 41% from the prior-year quarter.

Deere & Company Price and EPS Surprise

Deere & Company Price and EPS Surprise
Deere & Company Price and EPS Surprise

Deere & Company price-eps-surprise | Deere & Company Quote

Middleby is scheduled to report fourth-quarter 2021 results on Feb 22. The company has an Earnings ESP of +3.18% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Middleby surpassed the Zacks Consensus Estimate in three of the trailing four quarters and missed once, the average surprise being 4.54%. The consensus estimate for fourth-quarter earnings is pegged at $2.07, which suggests growth of 27.8% from the prior-year quarter.

Strong incoming order growth across all segments and a robust backlog level are likely to get reflected in the to-be-reported quarter’s revenues. The company has been busy on the acquisition front lately to strengthen its product lines, solidify its presence across regions and expand its customer base. These acquired assets are expected to have contributed to sales in the quarter under review. However, supply-chain restrictions (especially component parts), labor issues, high cost of raw material, and shipping delays are likely to have acted as headwinds.

The Middleby Corporation Price and EPS Surprise

The Middleby Corporation Price and EPS Surprise
The Middleby Corporation Price and EPS Surprise

The Middleby Corporation price-eps-surprise | The Middleby Corporation Quote

Chart Industries has an Earnings ESP of +16.13% and a Zacks Rank #3. It is slated to report fourth-quarter 2021 results on Feb 24.

Chart Industries surpassed the Zacks Consensus Estimate in two of the trailing four quarters and missed twice, the average surprise being 15.4%. The consensus estimate for GTLS’ fourth-quarter earnings is pegged at 67 cents, which suggests a 47% plunge from the prior-year quarter.

GTLS is likely to have benefited from a record backlog and strong order levels that reflect the broad-based demand across its end markets. The company’s recent acquisitions and pricing actions may have provided a boost to revenues. However, some projects have been shifted to 2022 due to order delays and supply chain complications that will lead to some revenues being pushed into 2022. Additionally, inflated costs, including material, labor, additional freight and gas increases might have hurt margins. The company has been hiring additional people and raised incentives for workers, which are expected to have led to higher labor costs.

Chart Industries, Inc. Price and EPS Surprise

Chart Industries, Inc. Price and EPS Surprise
Chart Industries, Inc. Price and EPS Surprise

Chart Industries, Inc. price-eps-surprise | Chart Industries, Inc. Quote

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Caterpillar Inc. (CAT) : Free Stock Analysis Report

Deere & Company (DE) : Free Stock Analysis Report

The Middleby Corporation (MIDD) : Free Stock Analysis Report

Chart Industries, Inc. (GTLS) : Free Stock Analysis Report

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