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4 Industrial Services Stocks to Watch Amid COVID-19 Crisis

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The Zacks Industrial Services industry has been impacted by the coronavirus-induced slowdown in the form of supply challenges and weak demand. However, the recent improvement in manufacturing activities and business sentiment indicates that a recovery is imminent.

It is worth mentioning that rise in e-commerce activities will also drive the industry. Technological advancements and rising use of e-commerce solutions continue to grow at a rapid pace. The industry players including Ashtead Group PLC (ASHTY), W.W. Grainger, Inc. (GWW), SiteOne Landscape Supply, Inc. (SITE) and MSC Industrial Direct Co., Inc. (MSM) have been making efforts to capitalize on this scenario.

About the Industry

The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. These items (repair components, cutting fluids, lubricants, safety supplies and other consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. The industry participants serve a wide array of customers including commercial, government, healthcare and manufacturing.

What’s Shaping the Future of Industrial Services Industry

Lingering COVID-19 Related Woes: The COVID-19 pandemic has induced significant volatility and uncertainty that have severely impacted businesses, and the industrial services industry has been no exception to the trend. The primary impacts of the COVID-19 pandemic on the industry include disruptions or closures of customer and suppliers’ facilities, and supply chains. Meanwhile, the industry players have been making every effort to bolster financial condition, conserve cash and optimize profitability. These companies have been implementing cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees or reducing work hours, delaying salary increases and hiring. The industry players are also scaling back advertising spend, eliminating non-essential travel, and deferring certain discretionary capital expenditures. These initiatives are likely to help the industry sustain margins in the wake of weak demand.

Rebound in Manufacturing Instills Optimism: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity have historically correlated to changes in the Metalworking Business Index (“MBI”) and the Industrial Production Index (“IP”). The MBI is a sentiment index developed from a monthly survey of the U.S. metalworking industry, focusing on durable goods manufacturing. The index has been above 50 (which indicates expansion) since September after being impacted by COVID-19 related disruptions earlier. Gains have been witnessed in production and new orders activity. The IP index, which measures short-term changes in industrial production, rose at an annual rate of 8.4% in the last quarter of 2020. The improvement in business sentiment and operational activity instills optimism regarding the industry’s recovery from the pandemic induced sluggishness. Further, roll out of vaccine and the recently passed stimulus package have been stoking confidence regarding the economic revival.

E-Commerce is a Game-Changer: MRO demand has been significantly impacted by evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is on the rise. Customers basically want to execute their business activities in the most efficient way possible, which often means online. Per Statista, revenues in the e-commerce market are expected to witness a CAGR of 6.3% over the 2021-2025 time period. To capitalize on this trend, the players in the industrial services industry have increased their focus on making investments in e-commerce and digital capabilities.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Industrial Services Industry, which is a 23-stock group within the broader Zacks Industrial Products Sector, currently carries a Zacks Industry Rank #183, which places it at the bottom 28% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In a year’s time, the industry’s earnings estimates for the current year have gone down 49%.

Despite bleak near-term prospects of the industry, we will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector & S&P 500

The Industrial Services industry has outperformed its own sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 50.5% compared with the sector’s growth of 31.6%. Notably, the Zacks S&P 500 composite has rallied 21.1% in the same time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 19.61x compared with the S&P 500’s 17.54x and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.88x. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio

Over the last five years, the industry has traded as high as 19.96x and as low as 8.19x, with the median being at 11.55x.

4 Industrial Services Stocks to Keep an Eye on

Ashtead Group: This London, U.K. based company engages in construction, industrial, and general equipment rental business. It offers a broad range of construction and industrial equipment across a wide variety of applications to a diverse customer base. The company is well-poised to deliver strong results backed by its diverse end markets and products, lower debt levels, and efforts to strengthen market position. Moreover, initiatives to optimize cash flow, reduce capital expenditure and operating costs are likely to yield results. Backed by a good quality fleet and a strong financial position, the company is well positioned to navigate through the turbulent times. It also continues to invest in digital transformation program that will enhance customer experience.

The Zacks Consensus Estimate for 2021 earnings has been revised upward by 20% in the past 90 days. The stock has gained 58.7% over the past year. It carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price: ASHTY

SiteOne Landscape Supply: The company is a national wholesale distributor of landscape supplies in the United States and has a growing presence in Canada. It has been gaining from the ongoing strength in residential repair and upgrade demand, owing to stay-at-home orders that are compelling homeowners to invest in their outdoor living spaces. Growth across the business combined with effective cost management and successful acquisitions position the company well for growth. Continued strength in repair & upgrade and steady maintenance demand also bode well. The company also remains focused on its e-commerce initiatives, including the relaunch of its website and the implementation of a B2B e-Commerce platform.

The Zacks Consensus Estimate for earnings for fiscal 2021 of this Roswell, GA-based company has gone up 13% in the past 90 days. Shares of the company have appreciated 71.3% over the past year. The company has a trailing four-quarter earnings surprise of 121%, on average. It currently carries a Zacks Rank #2.

Price: SITE

Grainger: Grainger is a broad line, business-to-business distributor of MRO supplies and other related products and services to around 3.5 million businesses and institutions globally. The Lake Forest, IL-based company is well-poised to gain from efforts to increase customer base through incremental marketing investments and effective marketing strategies. Grainger continues its efforts to strengthen relationships with both large and mid-sized customers to improve sales force effectiveness. Investments in e-commerce and digital capabilities will also yield results. Surge of COVID-19 pandemic related product sales such as personal protective equipment (PPE) and safety products continues to drive its top line, while cost control measures undertaken by the company will sustain margins.

Notably, Grainger has gained 16.9% over the past year. This Zacks Ranked #3 (Hold) stock has an estimated long-term earnings growth rate of 9.9%. The company’s consensus estimate for 2021 earnings has moved up 1% in the past 90 days. It has a trailing four-quarter earnings surprise of 2%, on average.

Price: GWW

MSC Industrial Direct Co., Inc.: Headquartered in Melville, NY, the company distributes metalworking and MRO products in the United States, Canada, Mexico and the U.K. The company is progressing well with its “Mission Critical” project that is driving improving sales trend and productivity gains amid the uncertain macro environment. The company-wide project has been initiated to accelerate market share capture and improve profitability over the period through fiscal 2023. Per the plan, the company is investing in its market-leading metalworking business by adding to metalworking specialist team, introducing value-added services to customers, expanding vending, building sales force, and diversifying customers and end markets.

Critical structural cost reductions implemented by the company are expected to improve Return on Invested Capital. It also maintains a balanced capital allocation philosophy and a conservative balance sheet. Further, the company continues to invest in technology and growing its e-commerce channel, which generates around 60% of its revenues.

The Zacks Ranked #3 stock has gained 12.6% over a year’s time. The Zacks Consensus Estimate for the company’s 2021 earnings has been revised upward by 3% in the past 90 days. The company has a trailing four-quarter earnings surprise of 8.5%, on average.

Price: MSM

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SiteOne Landscape Supply, Inc. (SITE) : Free Stock Analysis Report

MSC Industrial Direct Company, Inc. (MSM) : Free Stock Analysis Report

W.W. Grainger, Inc. (GWW) : Free Stock Analysis Report

Ashtead Group PLC (ASHTY) : Free Stock Analysis Report

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