Industrial Services Industry's Near-Term Prospects Bright

The Zacks Industrial Services industry primarily includes providers of industrial equipment products and MRO (maintenance, repair and operations) services. These items (repair components, cutting fluids, lubricants, safety supplies and other consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services.

Let us take a look at the industry’s three major themes:

• Inflation has hit the industry hard, particularly with respect to metal-based products. The U.S.-China-induced trade tariffs left the industry bearing the brunt of higher costs of raw material and lower business spending. Distributors continue to pass along higher prices to customers. However, it may not always be possible or adequate to cover rising product inflation in an intensely competitive environment, consequently limiting margins. However, with the possibility of an amicable solution to the trade war , the industry is likely to receive some relief.
  
• The industry serves a wide array of customers comprising commercial, government, healthcare and manufacturing. Improved outlook and increased spending by these customers bode well for the Industrial Services industry given that MRO inventory accounts for as much as 40% of their annual budget. Notably, MRO demand has been significantly impacted by evolution of e-commerce. In the United States, business investment and exports are two major indicators of MRO spending. Business investment is likely to grow on the back of favorable financial conditions, expanding global markets, lower capital costs and improving regulatory climate.
  
• Improvement in end markets like recovery in manufacturing activity, residential and non-residential construction; ongoing revival in the oil and gas industry; and economic growth will continue to fuel the industry. The recent tax reform is likely to lead to higher capital spending and attract incremental foreign capital to the United States, in turn bolstering exports.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Industrial Services industry, which is a 15-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #96, which places it at the top 38% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised upward by 4%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector, Lags S&P 500

The Industrial Services industry has outperformed its own sector over the past year. Over this period, the industry has gained 4.3% while the sector dipped 3.3%. Meanwhile, the S&P gained 6.8%.

One-Year Price Performance

Industrial Services Industry’s Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 10.8x compared with the S&P 500’s 11.1x and the Industrial Products sector’s trailing 12-month EV/EBITDA of 14.3x. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio

Over the last five years, the industry has traded as high as 37.9x and as low as 9.4x, with the median being at 12.3x.

Bottom Line

Improving overall economy and leading economic indicators instill optimism regarding the Industrial Services industry’s growth. Further, booming e-commerce sector, increased business spending will drive the industry. Efforts to reduce cost base will also deliver returns.

We are presenting two stocks with Zacks Rank #1 (Strong Buy), one with a Zacks Rank #2 (Buy) and two stocks with Zacks Rank #3 (Hold) that investors may take a look at.

You can see the complete list of today’s Zacks #1 Rank stocks here.

DMC Global Inc. (BOOM): The Zacks Consensus Estimate for 2019 earnings per share for this Boulder, CO-based company has advanced 49% over the past 90 days. The consensus estimate reflects year-over-year growth of 77%. This stock carries a Zacks Rank #1. The company estimates long-term earnings growth of 20%. The company has an average positive earnings surprise history of 48.24% over the trailing four quarters.

Horiba Ltd. (HRIBF): This Kyoto, Japan-based company has a Zacks Rank #1. The company estimates long-term earnings growth of 10%. The Zacks Consensus Estimate for fiscal 2019 earnings has moved up 25% over the past 90 days.

Ashtead Group (LON:AHT) Plc (ASHTY): This London, the U.K.-based company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 earnings has moved up by 3% over the past 90 days. The consensus estimate reflects year-over-year growth of 35.81%. The company estimates long-term earnings growth of 22%. The company has an average positive earnings surprise history of 10.09% over the trailing four quarters.

HD Supply Holdings, Inc. (HDS): The Zacks Consensus Estimate for this Atlanta, GA-based company has moved 4% upward for fiscal 2020 earnings over the past 90 days. The stock carries a Zacks Rank #3. The company has an average positive earnings surprise history of 5.19% over the trailing four quarters. The consensus estimate reflects year-over-year growth of 8.53%. The company estimates long-term earnings growth of 15%.

W.W. Grainger, Inc. (GWW): This Lake Forest, IL-based company carries a Zacks Rank #3. The Zacks Consensus Estimate has moved north by 1% for current-year earnings over the past 90 days. The consensus estimate reflects year-over-year growth of 7.72%. The company has an average positive earnings surprise history of 13.50% over the trailing four quarters. The company estimates long-term earnings growth of 12%.

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