4 Industrial Stocks Set to Surprise this Earnings Season

A peek into fourth-quarter 2015 earnings clearly shows how uncertain global economic conditions played spoilsport for the industrial stocks. Macro headwinds were characterized by fluctuating currency movements, weakening economic conditions, particularly in the formerly fast-growing markets like China, and soft commodity prices.
 
As on Feb 5, roughly 62.2% of all S&P 500 companies have released their results for the Oct-Dec quarter. Earnings have declined 5.7% year over year, while revenues have fallen 5.2%.
 
Considering the current headwinds, overall bottom-line expectations for the S&P 500 companies are worse than the initial numbers. Currently, earnings are projected to fall 6.1% in the fourth quarter, poorer than a 2.6% decline recorded in the previous quarter. Revenues are anticipated to decrease 3.9%, better than the decline of 6.2% recorded in third-quarter 2015.
 
What’s in Store for the Industrial Products Sector This Quarter
 
Market conditions remained unfavorable for industrial equipment makers in the first three quarters of 2015, and were no different in the last quarter as well. Per the Federal Reserve report, industrial production in the U.S. declined 3.4% year over year due to a fall in mining and utilities outputs in fourth-quarter 2015.
 
Another matter of concern is the weakening export demand for the U.S.-manufactured machinery. According to the U.S. Census Bureau, export demands for U.S. machinery fell 2.5% year over year in 2015. Shipments for farm machinery fell 39.2%; while that for mining and industrial declined 36.4% and 1%, respectively. New machinery orders were down 7.2%, while order backlog decreased 8.9%.
 
As of Feb 5, roughly 68.2% of industrial products stocks in the S&P 500 Group reported results for the fourth quarter, recording decline of 18.5% and 12.4% in earnings and revenues, respectively. Taking into consideration the prevalent headwinds, earnings for the Industrial Products sector are anticipated to decline 18% in the quarter; while revenues will likely fall 11.9%. Amid such an uncertain environment, choosing the right stocks with a potential to beat earnings estimates can be a daunting task.
 
Guide to Select the Right Stock
 
The Industrial Products sector includes containers & glass, industrial products & services, machinery-electrical, machinery and pollution control industries. In this diversified sector, stocks with high investment rankings can be of interest to investors seeking exposure in the sector. But it is advisable to choose stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) and a positive Earnings ESP (the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate), as these two factors increase the probability of a stock surprising estimates in the quarter.
 
Below we have listed four Industrial Products stocks, currently equipped with the right combination of elements to post an earnings beat for Oct-Dec quarter:
 
Global Brass and Copper Holdings, Inc. (BRSS): The company, with a $455.5-million market capitalization, is primarily engaged in conversion, fabrication, distribution, and processing of copper and brass products. The company has a solid customer base in the U.S., the Asia Pacific and Mexico.
 
The company, with a Zacks Rank #3 and a positive Earnings ESP of 13.04%, seems a suitable pick for investors seeking exposure in this industry. Moreover, the stock promises solid return of 106.5% on equity and 10.7% on investments. These prospects are again supported by the company’s efforts to diversify its product portfolio, improve quality and build a sound customer base. Dividend yield presently stands at 0.71%.
 
The stock is currently valued at a forward P/E multiple of 9.78, below 19.79 for the industry.  The company’s solid return profile and estimated 5-year earnings growth rate of 10% improve its prospects.
 
Global Brass and Copper Holdings is expected to release fourth-quarter 2015 results on Mar 14, 2016.
 
Berry Plastics Group, Inc. (BERY): The company is engaged in manufacture and distribution of plastic consumer packaging and engineered materials for its vast customer base in the U.S. as well as in foreign markets. Currently, the company has a market capitalization of $3.4 billion.
 
The stock, with a Zacks Rank #3 and a positive Earnings ESP of 5.13%, seems a good investment option. In addition, the stock offers return of 5.7% on investments and 4.1% on assets. Profitability growth, estimated at roughly 20% for the coming 5 years, is supported by the company’s geographically diversified business, solid product portfolio and large client base. The stock is currently valued at a forward P/E multiple of 12.95 versus 14.29 for the industry.
 
Berry Plastics Group will release first-quarter fiscal 2016 (ended Dec 2015) results on Feb 10, before the market opens.
 
Codexis, Inc. (CDXS): The company, with a $160-million market capitalization, is involved in development of biocatalysts for use in the pharmaceutical and fine chemicals markets. The company supplies its products in the U.S. as well as internationally.
 
Codexis is worth considering as it carries a favorable Zacks Rank #2 and a positive Earnings ESP of 20%. Also, the company is anticipated to offer solid earnings growth, roughly 15%, over the next 5 years.
 
Codexis is slated to release fourth-quarter 2015 results on Mar 1, 2016.
 
Northwest Pipe Co. (NWPX): The company primarily manufactures welded steel pipe and tube products for its large customer base in the U.S., Mexico and Canada. End-markets served include public water agencies, energy, construction, agriculture, and other commercial and industrial markets. Currently, the company has a market capitalization of $82 million.
 
Northwest Pipe is a suitable pick for investors interested in industrial stocks, as it carries a Zacks Rank #3 and a positive Earnings ESP of 30.23%. Currently, the stock seems undervalued at a Price-to-Sales ratio of 0.28 compared with 1.02 for the industry. It also offers solid earnings growth potential of 10% over the next 5 years.
 
Northwest Pipe is expected to release fourth-quarter 2015 results on Mar 8, 2016.
 
 
Going Forward
 
As per International Monetary Fund’s (“IMF”) January report, the global economy is predicted to grow 3.4% in 2016 and 3.6% in 2017, both down 20 basis points (bps) from the earlier forecasts.
 
We believe that global uncertainties are likely to restrict growth momentum of advanced nations, while also adversely impacting the progress of emerging/developing nations in the near-to-medium term. Such macro headwinds might dim the outlook of industrial products stocks as well.
 
Factors like effective governmental policies, huge infrastructural investments, creation of more jobs and emphasis on trade relations will play an important role in combating these headwinds. Until then, choosing some possible winners on the basis of a solid Zacks Rank and a positive Zacks Earnings ESP might work wonders for interested investors this earnings season.
 
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GLOBAL B&C HLD (BRSS): Free Stock Analysis Report
 
BERRY PLASTICS (BERY): Free Stock Analysis Report
 
CODEXIS INC (CDXS): Free Stock Analysis Report
 
NORTHWEST PIPE (NWPX): Free Stock Analysis Report
 
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