The Zacks Industrial Products sector kicked off the second quarter of 2023 earnings season last week. Most of the companies reported mixed results, surpassing earnings estimates but missing on revenues. Improving supply chains and reduction in raw material costs primarily drove the bottom line. However, a low-demand environment, thanks to volatile macroeconomic conditions, has weighed on revenues, compelling some industrial players to slash guidance.
Per the latest Earnings Trends report, second-quarter earnings for the S&P 500 companies within the industrials sector are expected to increase 5% year over year compared with a jump of 17% in the first quarter of 2023. Revenues are expected to rise 5.1% compared with a 9.8% increase recorded in the sequential reported quarter.
Below we have discussed industrial companies like Emerson Electric Co. EMR, Ingersoll Rand IR, Illinois Tool Works Inc. ITW and Johnson Controls International JCI that are set to trump earnings estimates this reporting cycle.
Factors at Play for Q2
Weakness in industrial demand, thanks to a slowdown in the manufacturing sector, is expected to have taken a toll on the top-line performance of industrial companies. Per the Institute for Supply Management’s latest report, the Manufacturing Purchasing Manager’s Index touched 46% in June, reflecting a contraction in manufacturing activities for the eight consecutive month. A figure below 50 indicates a contraction in manufacturing activity. The New Orders Index, which too has remained in the contraction territory for the past several months, registered 45.6% last month, a slower contraction compared to 42.6% recorded in May.
Companies with exposure to residential, electronics and consumer end markets are expected to have been affected by lower demand as the Federal Reserve continues to tighten monetary policy to curtail inflation, thus weighing on consumer spending.
On the other hand, companies with exposure to the Aerospace end market are expected to have benefited from strong commercial aftermarket demand, thanks to continued recovery in commercial flight hours. Resiliency in the printing, nonmetallic mineral products, primary metals and transportation equipment end markets is likely to have driven the industrial sector’s performance in the to-be-reported quarter.
Reduction in raw material costs, as inflation slows down and the Federal Reserve moves closer to its target of a 2% inflation rate, is expected to have boosted the bottom-line performance of industrial companies. Improving supply chains, pricing actions and cost-control initiatives are also expected to have buoyed performance.
How to Pick Winners?
Given the large number of players operating in the industrial sector, picking the right stocks is not an easy task. But our proven model makes it fairly simple. One can shortlist with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they report earnings with our Earnings ESP Filter.
Earnings ESP — the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate — is our proprietary methodology for determining the stocks with maximum chances of delivering positive earnings surprises in their next announcements. Our research shows that for stocks with this perfect combination, the chances of a beat are as high as 70%.
Below we list four industrial stocks that have the right mix of elements to pull off positive surprises this earnings season.
Emerson has an Earnings ESP of +2.35% and a Zacks Rank #2. The company is scheduled to release third-quarter fiscal 2023 (ended Jun 30, 2023) financial numbers on Aug 2.
Strong demand in the process and hybrid markets and improving supply chains are likely to have driven Emerson’s fiscal third-quarter performance. The acquisitions of AspenTech and Fluxa are expected to have boosted its top line in the to-be-reported quarter.
Ingersoll Rand has an Earnings ESP of +0.85% and a Zacks Rank #3. The company is slated to release second-quarter 2023 results on Aug 2.
Solid underlying demand and higher orders across the product portfolio of compressors and power tools and lifting are expected to have buoyed Ingersoll Rand’s performance. Contributions from the January 2023 acquisition of SPX FLOW’s Air Treatment business and the October 2022 acquisition of Dosatron International are expected to have boosted the top line.
Illinois Tool has an Earnings ESP of +0.54% and a Zacks Rank #3. The company is set to release second-quarter 2023 results on Aug 1.
Strength in institutional end market and capital equipment, as well as oil and gas businesses, are expected to have translated into higher revenues for Illinois Tool. Strong organic growth in North America and Europe is also likely to have aided performance.
Johnson Controls has an Earnings ESP of +0.24% and a Zacks Rank #3. The company is set to release third-quarter fiscal 2023 (ended Jun 30, 2023) financial numbers on Aug 2.
Johnson Controls’ fiscal third-quarter performance is expected to have benefited from a robust demand environment, pricing actions and cost-control initiatives. Continued improvement in HVAC & Controls and growth in the Install business are likely to have aided performance.
Illinois Tool Works Inc. (ITW): Free Stock Analysis Report
Emerson Electric Co. (EMR): Free Stock Analysis Report
Johnson Controls International plc (JCI): Free Stock Analysis Report
Ingersoll Rand Inc. (IR): Free Stock Analysis Report
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Zacks Investment Research
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