As the first-quarter 2015 earnings season gradually picks up the steam, the U.S. equity market continues to remain shaky with volatility in the currency exchange rates and a sluggish global growth rate. Lower oil prices have further added to the woes of the industries that directly or indirectly source businesses from the energy sector.
Despite the short-term gloom, market sentiments are likely to improve as the economy continues to recover. And the one sector that is bound to profit in that scenario is the U.S. Industrials sector. This is mostly due to the sector’s high positive correlation with the economy. Between Sep19, 2008, and Mar 6, 2009, when the economy was plagued by the recession, the U.S. Industrial sector reportedly fell by about 55% compared with 45% for the S&P 500 benchmark index. However, since the market bottomed on Mar 6, 2009, the S&P 500 is up 149% compared with 230% for the S&P 500 Industrials Index.
GE: Reshaping for the Future?
Perhaps the high-growth potential of the Industrial sector and the credit risks associated with the financial businesses had been the most decisive factors behind the massive restructuring program initiated at the Fairfield, CT-based General Electric Company GE.
In accordance with Chairman and CEO Jeff Immelt’s vision to transform the diversified conglomerate to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital over the next 24 months. The only financial operations that would be retained by the company will include financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.
Immelt’s current restructuring plan also involves the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate. The CEO felt that this was perhaps the most opportune time to sell these assets when the market was relatively high.
The decision might also have been triggered by the Federal Reserve’s decision to raise interest rates later this year, thereby pushing up the financing costs. The assets were sold to a consortium led by private equity firm Blackstone and Wells Fargo & Company WFC for approximately $26.5 billion.
The transactions will realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With the restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.
Too Little Too Late?
Investors had long been expecting such radical moves by General Electric to pull up the sagging share prices. This Zacks Rank #4 (Sell) stock failed to spring any surprises either with its latest earnings release announcement and mirrored its previous performances, when its operating earnings exceeded the Zacks Consensus Estimate by a penny.
Total revenue for the reported quarter (excluding GE Capital exits) decreased 3% year over year to $33,104 million and fell short of the Zacks Consensus Estimate of $34,424 million. While the overall Industrial segment revenue fell 1% year over year to $23.8 billion, GE Capital revenue dropped 7% to $9.7 billion.
Over the last one-year period, General Electric has performed relatively weaker in comparison to the overall S&P 500 with an average return of 1.8% compared to 12.4% for the benchmark index. Whether the latest move is ‘a step in the right direction’ or ‘too little too late’ can only be judged in the due course of time.
3 Top Industrial Stocks
As the strategic restructuring actions of General Electric are likely to bear fruit in the longer term, investors should better be well off if they concentrate on other relatively better stocks in the industrial space to profit in the short term. Let’s take a closer look at a handful of Industrial stocks with attractive Zacks Style Score system and a favorable Zacks Rank that appear to be well positioned to benefit from the solid sector dynamics as well.
The Zacks Style Score, created to complement the Zacks Rank, takes into account all relevant metrics to give us an actionable metric that helps identify stocks with brilliant growth prospects, attractive valuations and great momentum. Back-tested results show that stocks with Style Scores of ‘A’ or ‘B,’ when combined with Zacks Rank #1 (Strong Buy) or #2 (Buy) handily beat other stocks.
The Zacks Style Score (comprising of the Value, Growth and Momentum scores) collectively considers nearly 20 different measures correlated to future stock returns. Thus, it is one of the most comprehensive indicators available to investors, especially when combined with the Zacks Rank.
Compass Diversified Holdings CODI: Based in Westport, CT, Compass Diversified acquires and manages a group of middle market businesses that are headquartered in North America. The company diligently follows a disciplined approach to methodically purchase attractive businesses at values that are accretive to its shareholders.
The current Zacks Consensus Estimate for this Zacks Rank #2 (Buy) stock is pegged at 37 cents, which represents a stellar year-over-year improvement of 365.63%.
Growth Style Score: D
Value Style Score: A
Momentum Style Score: B
3M Company MMM: Together with its subsidiaries, 3M operates as a diversified technology company with manufacturing operations spread over 70 countries worldwide. The company intends to continue investing in capital expenditures and research and development to support organic growth as it aims at a prudent capital structure strategy and increased capital deployment. 3M's global footprint, diversified product portfolio and the ability to penetrate in different markets is likely to augment its revenues in the long term.
The current Zacks Consensus Estimate for this Zacks Rank #3 (Hold) stock is pegged at $1.92, representing a decent year-over-year increase of 7.4%.
Growth Style Score: A
Value Style Score: D
Momentum Style Score: A
Icahn Enterprises, L.P. IEP: Headquartered in New York, Icahn operates in diverse businesses including automotive, energy, metals, railcar, gaming, food packaging, real estate, and home fashion.
This Zacks Rank #2 stock had reported an outstanding earnings surprise of +118.2% in the last reported quarter.
Growth Style Score: C
Value Style Score: A
Momentum Style Score: B
Moving Forward
Until the macroeconomic turbulence settles down, investors could mitigate operating risks by investing in these industrial stocks that promise a healthy ROI. With a healthy U.S. GDP growth forecast of 3% by the IMF, Industrial stocks are poised to benefit quite significantly and could well turn out to be the next big story with exponential return prospects.
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