U.S. Markets open in 2 hrs 31 mins

Forget Illinois Tool, Buy These 4 Industrial Stocks Instead

Payal Jalan
1 / 3

Forget Illinois Tool, Buy These 4 Industrial Stocks Instead

The Industrial Products sector has solid growth potential and offers some good investment choices. However, one must avoid stocks with poor investment appeal, like Illinois Tool.

The U.S. equity market is currently abuzz with the Trump government’s decision to bring in another $200 billion worth of Chinese goods under its import tariff bracket. This news has heightened speculation about the possible ill effects on international trades, if China chooses to retaliate with similar measures.

However, we find a strengthening U.S. housing market, better job market, tax policy changes introduced last year and infrastructural development quite encouraging. Moreover, the country’s industrial production is on the rise. It increased 4.9% year over year in August 2018, way higher than growth of 2.8% registered in January. This clearly signifies an expanding industrial sector, which comprises the outputs of mining, utilities and manufacturing sectors.

The Zacks Industrial Products sector currently offers a number of investment-friendly options. However, one must avoid stocks that currently have poor investment appeal.

Once such stock is Illinois Tool Works Inc. ITW. The Glenview, IL-based company primarily engages in the manufacturing and distribution of industrial equipments used in various end-markets, including electronics, automotive, commercial food, welding, construction, beverages and others.

In the past year, Illinois Tool’s share price has declined 0.9% versus 11.3% growth of the industry (comprising companies dealing in general industrial machineries) and 5.9% increase in Industrial Products sector.



Year to date, the company’s share price has fallen 12.3%. Much of the damage has been caused by inflation in raw material costs. Anti-inflationary actions, though managed to negate the adverse impacts on a dollar basis, have failed to protect margins. The company predicts its 2018 margins to come within the 24-25% range, down from the previous prediction of 25-25.5%.       

Furthermore, softness in North American auto build, uncertainties around global trade and headwinds arising from unfavorable movements in foreign currencies are working against the company. Forex woes are estimated to adversely influence the company’s earnings by 12 cents per share in the second half of 2018. Also, the company has lowered its earnings guidance to $7.50-$7.70 per share from the previous range of $7.60-$7.80.

In addition, a highly leveraged balance sheet can inflate Illinois Tool’s financial obligations and adversely impact its profitability. In the last five years (2013-2017), the company’s long-term debts have jumped 21.8% (CAGR) while was $6.9 billion at the end of first half of 2018. Also, the company’s total debt to total equity has increased from 65.3% in 2013 to 181.5% in 2017 and was 195.9% at the end of the second quarter of 2018.

All the prevailing headwinds have created skepticism about Illinois Tool’s growth prospects, as reflected in the downward revisions in earnings estimates for both 2018 and 2019. In the past 60 days, the company’s earnings estimates have been lowered by 10 brokerage firms for 2018 while have been reduced by nine firms for 2019. Currently, the Zacks Consensus Estimate for earnings is pegged at $7.64 for 2018 and $8.27 for 2019, reflecting decline of 1.5% and 1.8% from the respective tallies 60 days ago.

Illinois Tool Works Inc. Price and Consensus

Illinois Tool Works Inc. Price and Consensus | Illinois Tool Works Inc. Quote

Apart from the falling estimates, Illinois Tool’s Earnings ESP of -0.08% for 2018 and -0.20% for 2019 raises concerns. Per our proven model, combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the possibilities of an earnings beat by a company. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. Illinois Tool currently carries a Zacks Rank #4 (Sell).

Illinois Tool’s unfavorable VGM Score of C further lowers the stock’s appeal. Companies with favorable VGM Score of A or B when combined with a Zacks Rank #1 or 2 are anticipated to yield solid returns, clearly outperforming the market.

The aspects discussed clearly reflect that Illinois Tool has poor investment appeal.

4 Investment-Worthy Industrial Stocks

Of the many sub-industries in the Industrial Products sector, we have selected the one that comprises companies dealing with the manufacturing and distribution of general industrial machineries. The selected industry is currently in the top 15% of more than 265 Zacks industries. We believe that industries in the top half have higher chances of beating the bottom half.

We have selected four suitable investment options from companies dealing in general industrial machineries.

Altra Industrial Motion Corp. AIMC: The company primarily engages in manufacturing and distributing mechanical power transmission products like couplings, clutches and brakes, gearings and others.

The stock currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Positive revisions in earnings estimates reflect positive sentiments about the company’s growth prospects. The Zacks Consensus Estimate for earnings is pegged at $2.54 for 2018 and $3.06 for 2019, reflecting growth of 2% and 1.3% from the respective tallies 60 days ago. Also, the bottom-line estimates represent year-over-year growth of 23.9% for 2018 and 20.5% for 2019.

Further, the company’s Earnings ESP of +4.07% for the third quarter of 2018 and a favorable VGM Score of B give it an edge over other stocks. Its revenues are projected to grow 6.6% year over year in 2018.

Colfax Corporation CFX: The company specializes in making products and providing services related to fabrication technology as well as air and gas handling. It currently sports a Zacks Rank #1.

The company’s earnings estimates have been positively revised in the past 60 days. The Zacks Consensus Estimate is pegged at $2.25 for 2018 and $2.50 for 2019, reflecting growth of 5.6% and 7.3% from their respective tallies 60 days ago. Also, the bottom-line estimates represent year-over-year growth of 29.3% for 2018 and 11.3% for 2019.

In addition, the company’s Earnings ESP of +2.49% for the third quarter of 2018, +0.49% for 2018 and +0.82% for 2019 adds to its investment appeal. Regarding the top line, we expect 3.9% and 4.1% year-over-year growth for 2018 and 2019, respectively.

Luxfer Holdings PLC LXFR: The company primarily manufactures and distributes gas cylinders as well as high-performance materials. The stock currently sports a Zacks Rank #1. Its investment appeal is further accentuated by a favorable VGM Score of B.

In the past 60 days, the company’s earnings estimates for 2018 have increased 10.1% to $1.42 while that for 2019 jumped 7.8% to $1.65. These estimates reflect year-over-year growth of 39.2% for 2018 and 16.2% for 2019. The company’s revenues are projected to grow 9.9% in 2018 and 1% in 2019.

Twin Disc, Incorporated TWIN: The company primarily manufactures and distributes power transmission equipments for off-highway applications. The stock currently sports a Zacks Rank #1 and has a VGM Score of B.

In the past 60 days, the company’s earnings estimates for 2018 have increased 17.3% to $1.76. On a year-over-year basis, the estimates reflect growth of 27.5%. Also, the company’s revenues are projected to grow 43.5% in 2018.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Colfax Corporation (CFX) : Free Stock Analysis Report
 
Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report
 
Altra Industrial Motion Corp. (AIMC) : Free Stock Analysis Report
 
Luxfer Holdings PLC (LXFR) : Free Stock Analysis Report
 
Twin Disc, Incorporated (TWIN) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.