The manufacturing sector is bearing the brunt of soaring prices and higher interest rates, as orders have slowed on declining demand. However, despite mounting concerns about the economy slipping into a recession in the coming months, the sector looks to be putting up a brave fight.
According to the latest report from the Commerce Department, factory orders increased in April for the second straight month, indicating that the sector is leaving no stone unturned to rebound. Sings of easing inflation have raised hope that the Fed might finally pause its interest rate hikes, thereby giving a boost to manufacturing.
Factory Orders Jump
The Commerce Department said on Jun 5 that orders for U.S.-made factory goods rose for the second straight month by 0.4% in April. The rise followed a 0.6% increase in March. On a year-over-year basis, factory orders increased 1.4% in April.
The sector, which accounts for 11.3% of the economy, has been suffering due to the Fed’s steep rate hike policy, which has pushed up borrowing costs at an alarming rate. Banks have also cut down on lending following the failure of some major regional banks.
Last week, the Institute of Supply Management’s (ISM) manufacturing PMI reading showed a contraction in manufacturing activity for the seventh straight month.
Amid all these pressures, the sector is trying to rebound as higher demand is driving orders. April’s orders were largely driven by higher spending on defense equipment.
Also, new orders for transportation equipment rose 3.7% after jumping 9.8% in March. Orders for motor vehicles increased 0.5%. New orders for machinery rose 1%.
The Commerce Department also said that orders for non-defense capital goods, excluding aircraft, which are viewed as a gauge of business equipment spending plans, increased 1.3% in April. Shipment of "core capital goods," which is used to compute business equipment spending in the GDP report, increased 0.5%.
People’s cautious spending has been impacting orders. However, demand is still high. The rise in factory orders comes as the Fed reported that industrial production rose 0.5% in April, after rising 0.4% in March and beating estimates of 0.1%.
Manufacturing output increased 1% in April. April’s jump was driven by the robust output of motor vehicles and parts. Factory output, excluding motor vehicles and parts, climbed 0.4% in April.
Motor vehicle production grew an impressive 9.3% in April, while the index for mining rose 0.6%.
Given this scenario, it will be prudent to invest in stocks with a favorable Zacks Rank that are poised to gain from the rise in orders for factory goods. 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.
Caterpillar Inc. CAT is the largest global construction and mining equipment manufacturer. Given that it serves a gamut of sectors — infrastructure, construction, mining, oil & gas, and transportation — CAT is considered a bellwether of the global economy. Caterpillar has more than 4 million products with an extensive dealer network of 165 dealers spanning 191 countries.
Caterpillar’s expected earnings growth for the current year is 27.5%. The Zacks Consensus Estimate for current-year earnings has improved 12.6% over the past 60 days. CAT presently sports a Zacks Rank #1.
Terex Corporation TEX is a global manufacturer of aerial work platforms, materials processing machinery and cranes. TEX designs, builds and supports products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. Terex Corporation’s manufacturing facilities are located in the United States, Canada, Europe, Australia, Asia and South America.
Terex Corporation’s expected earnings growth for the current year is 38%. The Zacks Consensus Estimate for current-year earnings has improved 21.9% over the past 60 days. TEX currently sports a Zacks Rank #1.
Ingersoll Rand Inc. IR is a global industrial company with expertise in industrial and mission-critical flow creation technologies. IR came into existence when Gardner Denver Holdings, Inc. acquired the Industrial segment of Ingersoll-Rand plc in February 2020.
Ingersoll Rand’s expected earnings growth for the current year is 14.8%. The Zacks Consensus Estimate for current-year earnings has improved 7.5% over the past 60 days. IR currently carries a Zacks Rank #1.
Graco Inc. GGG engages in designing, manufacturing and marketing equipment and systems used to measure, move, control, spray and dispense fluid as well as powder materials. The products offered by GGG are produced in the United States, Italy, the U.K., Belgium, Switzerland, China and Romania.
Graco’s expected earnings growth for the current year is 16.4%. The Zacks Consensus Estimate for current-year earnings has improved 10.9% over the past 60 days. GGG currently has a Zacks Rank #1.
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