Chicago, IL – June 21, 2023 – Today, Zacks Equity Research discusses W.W. Grainger, Inc. GWW, Ashtead Group ASHTY, MSC Industrial Direct Co., Inc. MSM and Hudson Technologies, Inc. HDSN.
Industry: Industrial Services
Link: https://www.zacks.com/commentary/2110646/4-industrial-services-stocks-to-watch-in-the-promising-industry
The Zacks Industrial Services industry is placed well to gain from increased e-commerce activities and diverse end-market demand. Despite the ongoing supply-chain snarls and flared-up input costs, industry players, such as W.W. Grainger, Inc., Ashtead Group, MSC Industrial Direct Co., Inc. and Hudson Technologies, Inc. have delivered improved results.
These companies are poised to deliver growth, backed by their initiatives to capitalize on the strong demand and efforts to gain market share. The companies have also been focusing on improving their productivity and efficiency to counter the impacts of inflationary costs on their margins.
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities, such as routine maintenance work, emergency maintenance and spare part inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve a wide array of customers, ranging from commercial, government and healthcare to manufacturing.
The industry's products (power tools, hand tools, cutting fluids, lubricants, personal protective equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. By offering inventory management, and process and procurement solutions, these companies reduce MRO supply-chain costs and improve customers' plant floor productivity.
E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers want to execute their business activities in the most efficient way possible, which often means online.
The pandemic led to a significant push in e-commerce activities. In 2021, global retail e-commerce sales amounted to $5.2 trillion and $5.7 trillion in 2022. Per Statista, revenues in the e-commerce market are projected to be $6.31 trillion in 2023. Revenues are expected to see a CAGR of 6.6% over the 2023-2027 period and reach $8.15 trillion in 2027. E-commerce sales are expected to be 25% of the total global retail sales by 2027. To capitalize on this trend, industrial services industry players are stepping up their investments in e-commerce and digital capabilities.
Supply-Chain Snarls Show Signs of Easing: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve, industrial production edged down 0.2% in May 2023 and manufacturing output inched up 0.1%.
Overall, industrial production has moved up 0.2% over the 12 months ended May 2023. The index for durable goods manufacturing was up 0.3% in May and 0.6% for the 12 months ended May 2023. In May, the Institute for Supply Management’s manufacturing index was 46.9%, contracting for the seventh month in a row. The average for the 12 months ended May 2023) is 49.4. Amid the ongoing uncertainty in the global economy and persisting inflationary trends, customers have been curbing their spending.
The manufacturing sector has also been bearing the brunt of supply-chain issues. On a positive note, some of the industry players recently noted that supply-chain issues are easing. The delivery of goods from suppliers to manufacturing organizations was reported to be faster for the eighth consecutive month in May. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.
Pricing Actions to Combat High Costs: The industry has been experiencing significant inflation levels, including higher prices for labor, freight and fuel. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. The industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and the diversification of the supplier base to mitigate some of these headwinds.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, a 19-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #109, which places it in the top 43% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors can add to their portfolio, it is worth taking a look at the industry’s stock-market performance and its valuation picture.
The Industrial Services industry has outperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has risen 29.7% compared with the sector’s growth of 23.5%. The Zacks S&P 500 composite has moved up 17%.
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 30.69X compared with the S&P 500’s 11.79X and the Industrial Products sector’s forward 12-month EV/EBITDA of 15.02X.
Over the last five years, the industry traded as high as 36.86X and as low as 6.04X, with the median being 10.39X.
Grainger: The company continues to deliver improved results, aided by margin improvement in the High-Touch Solutions North America (N.A.) and Endless Assortment segments, as well as a strong operating performance. GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies.
The High Touch Solutions North America (N.A.) segment will continue to benefit from pricing actions and continued volume growth. The Endless Assortment segment is gaining from customer acquisitions at its Zoro and MonotaRO businesses. Cost-control measures undertaken by GWW will sustain margins. The company is also focused on improving the end-to-end customer experience by investing in its e-commerce and digital capabilities, and executing improvement initiatives within its supply chain. Its shares have gained 7.5% in the past three months.
Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies, and other related products and services. The Zacks Consensus Estimate for 2023 earnings has moved up 7.6% in the past 90 days. The consensus mark indicates growth of 20.8% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 9.2%, on average. GWW has an estimated long-term earnings growth rate of 13% and a Zacks Rank #2 (Buy) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Hudson Technologies: Backed by its improved profitability and strong free cash flow, the company has lowered its total debt, thereby strengthening its balance sheet and improving financial flexibility. HDSN is expected to gain from the surge in demand for reclaimed refrigerants due to the phasedown of production and the consumption of Hydrofluorocarbons (HFCs) in the United States as mandated by the AIM Act. HFCs are potent greenhouse gases used in refrigerators, air conditioners and other applications.
A 10% stepdown instructed for 2022 and 2023, and a 40% baseline reduction in virgin production starting in 2024 has increased the industry’s reliance on reclaimed refrigerant to meet its HFC needs. Hudson Technologies has been the leader in refrigerant reclamation for nearly three decades and is well-poised to meet this demand. HDSN’s shares have gained 12.8% in the past three months.
The Zacks Consensus Estimate for Woodcliff Lake, NJ-based Hudson Technologies’ fiscal 2023 earnings per share has moved up 6.5% over the past 90 days. The company has a trailing four-quarter earnings surprise of 70.3%, on average. The HDSN stock currently carries a Zacks Rank #2 and has a long-term estimated earnings growth rate of 30%.
Ashtead Group: The company delivered rental revenue growth of 22% and a 27% improvement in adjusted earnings per share in its fiscal 2023 results (ended Apr 30, 2023). In fiscal 2023, it invested $3.8 billion in capital across existing locations and greenfields, and $1.1 billion on 50 bolt-on acquisitions. The company added 165 locations in North America. ASHTY is well-poised to deliver strong results, aided by its diverse end markets and products, lower debt levels, and efforts to strengthen its market position.
Initiatives to optimize the cash flow, and reduce capital expenditure and operating costs are likely to contribute to growth. It continues to invest in a digital transformation program that will enhance customer experience. The company has a strong pipeline of strategic acquisition opportunities to supplement its organic growth plan. A good quality fleet and a strong financial position bode well. Backed by these tailwinds, ASHTY shares have gained 11% in the past three months.
The Zacks Consensus Estimate for fiscal 2023 earnings for this London, U.K.-based company, which engages in construction, industrial and general equipment rental business, has been revised upward by 4.8% in the past 90 days. The consensus estimate indicates year-over-year growth of 14.5%. The company has a long-term estimated earnings growth rate of 15%. ASHTY currently carries a Zacks Rank #3 (Hold).
MSC Industrial: The second quarter of fiscal 2022 (ended Mar 4, 2023) marked the fourth consecutive quarter of double-digit average daily sales growth for the company. MSM expects this outperformance to continue, as it executes its five growth drivers, which are solidifying metalworking, leveraging its portfolio strength, expanding solutions, growing e-commerce, and diversifying customers and end markets with a particular focus on the public sector.
The company’s capital allocation priority remains investing in growth initiatives to drive profitability and pursuing margin-accretive deals through strategic mergers and acquisitions, while returning cash to shareholders. It recently acquired Ohio-based companies — Buckeye Industrial Supply Co. and Tru-Edge Grinding Inc. This will help fortify and expand its position as the leading metalworking supply distributor in North America. MSM also continues to invest in technology and expand its e-commerce channel, which generates around 60% of its revenues.
Melville, NY-based MSC Industrial distributes metalworking and maintenance, repair, and operations products and services in the United States, Canada, Mexico, and the U.K. The Zacks Consensus Estimate for MSM’s 2023 earnings has been revised upward by 3.8% in the past 90 days. The consensus mark indicates year-over-year growth of 2.4%. The company has a trailing four-quarter earnings surprise of 3.5%, on average. It currently carries a Zacks Rank #3. Its shares have risen 19.6% in the last three months.
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