Orders to U.S. factories for long-lasting manufactured goods surged in June reversing the sharp decline in the previous two months. 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 June. These two metrics provide a major relief to the market’s concern that investment contracted in the manufacturing sector primarily owing to the lingering trade dispute with China and fears of global economic slowdown.
Durable Goods Orders Rebound in June
On Jul 24, the Department of Commerce reported that new orders for manufactured durable goods increased $4.9 billion or 2% to $246 billion in June from May. The consensus estimate was of an increase of 0.7%. This marks the first monthly increase in three months and the highest monthly rise in durable goods orders since August 2018. Notably, durable goods orders in May and April declined 2.3% (revised) and 2.8%, respectively.
The significant increase in June’s orders is primarily due to a 75% jump in aircraft orders, which fell 50% in May and nearly 40% in April. In addition, orders for cars and auto parts witnessed a gain of 3.1%, marking the biggest monthly rise since July 2018. Furthermore, machines, computers, networking gear and primary metals witnessed strong orders.
Core Durable Goods Orders Jump in June
More important information from the report is that the core durable goods order (which excludes defense aircraft) jumped 1.9% in June compared with a rise of a mere 0.4% in May. This also reflects the highest monthly gain of core factory orders since February 2018.
However, year over year, core capital goods orders increased just 1% compared with a gain of 8% in June 2018. Shipments of core capital goods increased $3.5 billion or 1.4% to $258.2 billion.
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. Notably, the manufacturing sector constituted nearly 12% of U.S. GDP.
However, core durable goods data for June indicate that business spending is likely to continue although the pace may decline to some extent. Additionally, shipment of core capital goods is a leading metric to calculate equipment spending in the U.S. government’s GDP measurement. Both core durable goods orders and shipment of core durable goods increased for two consecutive months.
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 act as intermediary products for the 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 and June will act as a relief to the manufacturing sector.
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 durable goods orders. We narrowed down our search to five such stocks. Each of these stocks carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
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 stock sports a Zacks Rank #1. 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.
CIRCOR International Inc. CIR designs, manufactures, and markets engineered products and sub-systems worldwide. It operates through three segments: Energy, Aerospace and Defense, and Industrial. The stock sports a Zacks Rank #1. The company has expected earnings growth rate of 7.6% for the current year. The Zacks Consensus Estimate for the current year has improved 35% over the last 60 days.
Intevac Inc. IVAC provides vacuum deposition equipment for various thin-film applications, and digital night-vision technologies and products to the defense industry in the United States, Asia, Europe, and internationally. The stock carries a Zacks Rank #2. The company has an expected earnings growth rate of 115.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.5% over the last 60 days.
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 stock carries a Zacks Rank #2. 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.
Stratasys Ltd. SSYS provides 3D printing and additive manufacturing solutions for individuals, businesses, and enterprises. Its 3D printing systems utilize the company’s proprietary fused deposition modeling and inkjet-based PolyJet technologies. The stock carries a Zacks Rank #2. The company has an expected earnings growth rate of 19.2% for the current year. The Zacks Consensus Estimate for the current year has improved 1.6% over the last 60 days.
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