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U.S. Business Investment Rebounds in May: 5 Top Picks

Nalak Das

On Jun 26, the Department of Commerce released U.S. factory orders for long-lasting durable goods in May. Although the orders contracted, the rate of decline was much less than the previous month.

Moreover, core durable goods order –- a key metric to track business investment plan –- jumped significantly. The shipment of core durable goods also increased to a large extent in May. These two metrics provide a major relief to the market’s concern that investment softened in the manufacturing sector primarily owing to the lingering trade dispute with China.

Durable Goods Orders Weak But Not Disappointing

The Department of Commerce reported that new orders for manufactured durable goods declined $3.3 billion or 1.3% to $243.4 billion in May from April. The consensus estimate was of a decline of 0.8%. However, durable goods orders in April declined 2.8% (revised data). This indicates that the rate of decline in capital goods orders actually halted in May.

Moreover, the decline in May’s durable goods order was primarily attributed to a 28.2% drop in non-defense aircraft orders. This tepid result was mainly due to lack of orders for the troubled 737 MAX aircraft of The Boeing Co. BA.

Motor vehicles and parts orders rebounded 0.6%, while Orders for transportation equipment plummeted 4.6%. Overall durable goods shipments rose 0.4% and inventories increased 0.5% in May.

Core Durable Goods Orders Jump in May

More important information from the report is that the core durable goods order (which exclude defense aircraft) jumped 0.4% in January after witnessing a sharp fall in the previous three months. This also reflects the highest monthly gain of core factory orders since January. Notably, this metric declined 1% in April.

Last month, leading performers for core durable goods were heavy machinery, primary metals, computers and networking gear. Meanwhile, in May, core capital goods orders rose 2.3% year over year. Shipments of core capital goods increased 0.7% in May compared with 0.4% (revised data) in April.

Implication of Strong Core Durable Goods Data

Industry researchers are highly concerned about future capital spending by the U.S. manufacturing sector due to the prolonged tariff battle between the United States and China and an impending global economic slowdown. However, core capital goods data for May indicate that business spending is likely to continue although the pace may decline to some extent.

Shipment of core capital goods is a leading metric to calculate equipment spending in the U.S. government’s GDP measurement. Notably, the manufacturing sector constituted nearly 12% of U.S. GDP.

Lingering trade conflict between the United States and China took a toll on the manufacturing sector. A large section of U.S. manufacturing companies is dependent on low-cost inputs from China which acts as intermediary product for heavy industrial sector. However, imposing of tariff on several of these intermediary products by the Trump administration raised input cost for those U.S. companies.

Consequently, business confidence dented and investors postponed investment plans. Notably, the first quarter of 2019 witnessed contraction of business spending on equipment for the first time in three months. Therefore, stabilization of business investment in May will act as a major boon to the manufacturing industry. Notably, business investment in the 12 months ended in May rose 1.4% from 1.2% in April.

Our Top Picks   

Against this backdrop, it will be prudent to invest in stocks with a favorable Zacks Rank that are poised to gain from the solid core factory orders data. We narrowed down our search to five such stocks. Each of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performanc of our five picke in the past three months.

Cisco Systems Inc. CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry worldwide. The company has an expected earnings growth rate of 18.5% for the current year. The Zacks Consensus Estimate for the current year has improved 0.7% over the last 60 days.

AZZ Inc. AZZ provides galvanizing and metal coating services, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. The company has expected earnings growth rate of 32.1% for the current year. The Zacks Consensus Estimate for the current year has improved 2.8% over the last 60 days.

Flowserve Corp. FLS designs, develops, manufactures, distributes, and services industrial flow management equipment in the United States, Europe, the Middle East, Africa, Asia, and internationally. The company has expected earnings growth rate of 25.1% for the current year. The Zacks Consensus Estimate for the current year has improved 2.3% over the last 60 days.

The Timken Co. TKR engineers, manufactures, and markets engineered bearings and power transmission products worldwide. It operates in two segments, Mobile Industries and Process Industries. The company has expected earnings growth rate of 26.6% for the current year. The Zacks Consensus Estimate for the current year has improved 10% over the last 60 days.

Broadwind Energy Inc. BWEN provides products to energy, mining, and infrastructure sector customers primarily in the United States. It operates through three segments: Towers and Heavy Fabrications, Gearing, and Process Systems. The company has expected earnings growth rate of90.6% for the current year. The Zacks Consensus Estimate for the current year has improved 63.6% over the last 60 days.

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Cisco Systems, Inc. (CSCO) : Free Stock Analysis Report
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