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Industry Description
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes routine maintenance, 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. These companies reduce MRO supply-chain costs and improve customers' plant floor productivity by offering inventory management and process and procurement solutions.
Trends Shaping the Future of the Industrial Services Industry
E-Commerce to be a Growth Driver: MRO demand is significantly impacted by the evolution of e-commerce. Customer 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. According to a Grand View Research report, global e-commerce revenues are expected to see a compound annual growth rate (CAGR) of 18.9% between 2024 and 2030. Over 2024- 2030, the U.S e-commerce market is expected to witness a CAGR of 16.4%. To capitalize on this trend, industrial service companies are heavily investing in improving their digital capabilities and increasing their e-commerce share.
Production Index Enters Expansion Territory: The manufacturing sector contributes around 70% to the industry's revenues. The Institute for Supply Management’s manufacturing index has been in contraction for the past five months and registered 49% in June. It, however, marked a slight increase from the 48.5% in May. The Production Index entered expansion territory for the first time in four months in June, registering 50.3%. It was 4.9 percentage points higher than the May reading of 45.4%. The recent uptick in both indices in June looks promising for the industry.
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 imposition of tariffs and retaliatory tariffs will also heighten costs for the industry. 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.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 #60, which places it in the top 24% of 246 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.
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.
Industry Vs S&P 500 & Sector
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 grown 16.5% compared with the sector’s rise of 14.8%. The Zacks S&P 500 composite has moved up 11.2%.
Industry's Current Valuation
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 30.7X compared with the S&P 500’s 13.89X and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.94X. This is shown in the charts below.
Over the last five years, the industry traded as high as 37.03X and as low as 22.65X, the median being 30.27X.
3 Industrial Services Stocks to Buy
Siemens: The company witnessed a 10% increase in orders in the second quarter, with revenues up 7%. Revenue growth was noted in most industrial businesses, led by significant increases at Mobility and Smart Infrastructure. Earlier this year, the company completed the acquisition of Altair Engineering Inc., a leading provider of software in the industrial simulation and analysis market. With this acquisition, Siemens extended its leadership in simulation and industrial Artificial Intelligence (AI) by adding new capabilities in mechanical and electromagnetic simulation, high-performance computing, data science and AI. The company recently completed the acquisition of Dotmatics, a leading provider of Life Sciences R&D software. SIEGY will combine Dotmatics’ scientific intelligence with its industrial AI technologies. This transaction expands Siemens’ total addressable market for industrial software by $11 billion and aligns with ‘ONE Tech Company’, its strategic growth program, aimed at accelerating innovation and creating value across industries.
The Zacks Consensus Estimate for the Munich, Germany-based company’s fiscal 2025 earnings has been revised 2% upward in the past 30 days. The consensus mark indicates year-over-year growth of 10.2%. SIEGY has a trailing four-quarter earnings surprise of 14.9%, on average. The company has a long-term estimated earnings growth rate of 8.4% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Eos Energy Enterprises: The company recently announced that it has received its second loan advance from the Department of Energy's Loan Programs Office for $22.7 million. With this advance, the company has fully drawn the maximum allowable amount under the first tranche of $90.9 million in connection with the completion of its first state-of-the-art manufacturing line. The loan advance covers 80% of eligible costs, incurred as part of its production expansion plans related to Project AMAZE. These funds support EOSE’s ongoing efforts to expand its operational capacity to meet growing customer demand and further its strategic growth objectives. The company also noted that production volumes at the first state-of-the-art manufacturing line are ramping up as it progresses toward realizing the full 2 GWh capacity on Line 1. For 2025, EOSE expects revenue between $150 million and $190 million compared with $15.7 million in 2024. This growth is expected to be driven by increased production volume on the company’s first state-of-the-art manufacturing line as staged sub-assembly automation comes online.
The Zacks Consensus Estimate for the Edison, NJ-based company’s fiscal 2025 earnings is currently pegged at a loss of 52 cents per share. The estimate has remained unchanged in the past 30 days. EOSE currently carries a Zacks Rank #2 (Buy).
MSC Industrial: In the recently reported fiscal third quarter, the company noted encouraging data points, such as core customer sequential improvement, continued momentum in high-touch solutions and a building productivity pipeline. The company remains focused on delivering on its long-term objectives of growing to 400 basis points or more above the IP Index and expanding operating margins to the mid-teens. It recently acquired ApTex, Inc. and Premier Tool Grinding, Inc. ApTex will strengthen the company’s position to gain share in the Wisconsin area by combining ApTex’s technical expertise with MSC Industrial’s best-in-class metalworking offering. Premier Tool Grinding will augment MSM’s specialty tooling and regrinding service offering that was recently enhanced through its acquisition of Tru-Edge and will also expand its reach to the western parts of the United States.
The Zacks Consensus Estimate for Melville, NY-based MSM’s 2025 earnings has remained stable in the past 30 days. The company has a trailing four-quarter earnings surprise of 6% on average. It currently carries a Zacks Rank of 2.
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This article originally published on Zacks Investment Research (zacks.com).
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