The U.S. manufacturing sector has been slowing and contracted for the first time in November in more than two and a half years. However, the contraction may be temporary as the latest data released this week shows that new orders for U.S.-made factory goods increased in October.
Rising prices have been hurting the manufacturing sector but higher demand has been driving orders. Given this situation, business services stocks like Hubbell Incorporated HUBB, EnerSys ENS, Applied Industrial Technologies, Inc. AIT and IDEX Corporation IEX are likely to benefit in the near term.
Factory Orders Rise in October
The Commerce Department said on Dec 5 that new orders for U.S.-made factory goods rose 1% in October, beating expectations of a rise of 0.7%. October’s jump follows a 0.3% in September. On a year-over-year basis, factory orders rose 12.8% in October.
Manufacturing makes up 11.3% of the total U.S. economy, and the solid jump in October once again proves that the industry is still performing well despite a slight contraction.
October orders for factory-made goods were driven by a 2.2% rise in transportation equipment bookings. This follows a 2.3% increase in bookings for transportation equipment in September. Also, orders for machinery rose 1.5%, alongside solid orders for computers, electronic goods, appliances and electrical equipment.
Orders for non-defense capital goods, which excludes aircraft, which is considered a gauge of business spending plans, rose 0.6% in October.
The report comes as the Commerce Department announced last week that orders for durable goods manufactured in U.S. factories increased in October by $2.8 billion, or 1%, to $277.4 billion.
Orders for transportation equipment climbed $2 billion, or 2.1%, to reach $97.8 billion in October. Orders for transportation equipment have now increased in six of the last seven months. Excluding transportation, new orders increased 0.5% for the month.
The manufacturing sector has been struggling, owing to cautious spending by consumers because of soaring prices. However, despite the challenges, the sector has been making efforts to hold its ground. Strong demand across the board is boosting orders, which ultimately is driving sales.
Shipments of manufactured durable goods increased by 0.4% in October, after growing by 0.3% in September. Shipments of machinery led the gains, increasing 1.3%. Capital goods shipments have now increased in 17 out of the past 18 months.
Thus, the recent contraction in manufacturing activity might be temporary, as orders are likely to further increase in 2023 as inflation is showing signs of easing and the Fed also has indicated slowing its pace of interest rate hikes, starting as early as in December.
Given this scenario, it will be prudent to invest in stocks with a favorable Zacks Rank that are poised to gain from solid durable goods orders. We narrowed down our search to four such stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Hubbell Incorporated is engaged in the design, manufacture and sale of electrical and electronic products to commercial, industrial, utility and telecommunications markets. HUBB’s products include plugs, receptacles, connectors, lighting fixtures, high-voltage test and measurement equipment, and voice and data signal processing components.
Hubbell Incorporated’s expected earnings growth for the current year is 29.3%. The Zacks Consensus Estimate for current-year earnings has improved 6.1% over the past 60 days. Presently, HUBB sports a Zacks Rank #1.
EnerSys engages in manufacturing, marketing and distribution of various industrial batteries. Additionally, ENS develops battery chargers and accessories, power equipment and outdoor cabinet enclosures. This apart, EnerSysprovides support services for clients.
EnerSys’ expected earnings growth for the current year is 7.2%. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 60 days. ENS, at present, has a Zacks Rank #2.
Applied Industrial Technologies, Inc. is a distributor of value-added industrial products — including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. AIT’s products are mainly sold to original equipment manufacturers and maintenance, repair, and operations customers in Australia, North America, Singapore and New Zealand.
Applied Industrial Technologies’ expected earnings growth for the current year is 14.3%. The Zacks Consensus Estimate for current-year earnings has improved 4.6% over the past 60 days. AIT currently has a Zacks Rank #2.
IDEX Corporation is an applied solutions company that specializes in a diverse range of applications such as fluid and metering technologies; health and science technologies; and fire, safety and other products built to customer specifications. IEX sells its products to original equipment manufacturers, as well as to direct end-use customers across the globe.
IDEX Corporation’s expected earnings growth for the current year is 28.3%. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the past 60 days. IEX currently has a Zacks Rank #2.
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