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4 Top Industrial Stocks to Watch in September

Lee Samaha, The Motley Fool

With signs of an industrial slowdown appearing all around us, it's time to take a step back and examine the big picture.

We know that a slew of companies served notice of slowing demand in short-cycle industries in the last quarter. But is that the start of a lengthy downtrend, or is it just a sentiment-led pause? Let's take a look at some important data points that investors can use to gauge what's going on.

A hand holding a crystal ball toward the horizon

Image source: Getty Images.

1. Caterpillar: A font of monthly sales data

Everyone knows that company quarterly earnings reports contain a wealth of useful data and commentary, but some companies also report monthly sales data. Caterpillar (NYSE: CAT) will release its retail sales figures in the middle of the month. Investors will be particularly focused on the number from its resource industries segment: Caterpillar is relying on capital spending in the mining industry, to help to offset potential weakness in construction spending growth and a delay in spending in the Permian basin in its energy and transportation segment.

This is a particular concern because Cummins (NYSE: CMI) recently gave some cautious commentary on the length and strength of the recovery in the mining capital spending cycle.

Caterpillar retail sales growth in total machines, resource industries, construction industries, and energy & transportation

Data source: Caterpillar presentations. Chart by author.

2. Fastenal: A barometer for industrial supply companies

Industrial supply companies usually set the tone for industrial earnings season, and this quarter was no different. Fastenal (NASDAQ: FAST) and MSC Industrial Direct (NYSE: MSM) spooked the market with their disappointing earnings in the second quarter -- when industrial activity slows, the first thing to get hit is revenue at industrial supply companies. Neither company will report earnings in September, but Fastenal will soon report sales data for July, and the market will be keeping a close eye on it.

Fastenal's average daily sales growth, in manufacturing and construction

Data source: Fastenal presentations. Chart by author.

3. FedEx: Will it blame the economy again?

FedEx (NYSE: FDX) has not had a great year so far, and has notably underperformed its greatest rival United Parcel Service (NYSE: UPS) in 2019. FedEx CEO Fred Smith has been vocal in blaming the impact of weakening end markets on his company's performance. In this context the market will be looking for Smith's commentary on global trade trends and their impact on FedEx's international volumes. It will say a lot about the outlook for trade in the third quarter.

From a stock-specific perspective, investors will be focusing on monitoring progress in the ongoing integration of TNT Express -- in the previous quarter, the European business faced margin challenges due to an unfavorable sales mix -- and judging how well the company is dealing with margin pressure from burgeoning e-commerce deliveries.

4. AAR Corp.: Can aerospace growth offset weakness elsewhere?

With a market cap of around $1.5 billion, AAR Corp. (NYSE: AIR) is far from being a household name. However, as an aviation parts supplier and an MRO (maintenance, repair, and operations) services company, it has its finger on the pulse of the aviation aftermarket.

This is an extremely important sector for industrial markets because it's been the area of strength for the largest of the industrial conglomerates. For example, United Technologies (NYSE: UTX) has disappointed with its non-aerospace segments (Otis and Carrier) so far in 2019. But good progress at Pratt & Whitney and Collins Aerospace led to management nudging its full-year EPS guidance range higher on the last earnings call.

Honeywell International (NYSE: HON) also saw a bit of weakness in its short-cycle businesses in its second-quarter earnings. But here again, strength in the commercial aviation aftermarket helped management to raise full-year earnings guidance. Meanwhile, General Electric (NYSE: GE) is also relying on aviation spares to help support GE Aviation, particularly as LEAP engine production may be curtailed if the Boeing 737 MAX doesn't get back into service.

There's no two ways about it: The last thing the giants of the industrial sector need to see is a slowing in the commercial aviation aftermarket. This is why AAR's earnings report close to the end of September (the first of its fiscal 2020) will be very interesting for investors. On one hand, there's actually some upside potential -- the grounding of the 737 MAX may lead to more parts and MRO needed for legacy aircraft as they are flown more.

On the other hand, if a slowing in the industrial economy bleeds through into a slowdown in cargo and passenger traffic, it could challenge the profit outlook for many industrial companies; AAR's earnings will give an early look.

Looking ahead

This article has focused on potential negative trends, but that's because the warning signs were established in previous quarters. However, it's important to note that a change in sentiment on global trade can happen pretty quickly. Moreover, if it really is all about companies pausing spending, rather than a fundamental slowdown, then conditions could reverse soon enough. Time will tell, and these companies' data points will help provide an early look at the future.

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Lee Samaha owns shares of Honeywell International. The Motley Fool owns shares of and recommends FedEx. The Motley Fool owns shares of MSC Industrial Direct. The Motley Fool recommends Cummins and Fastenal. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com