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Industrial Production Increases on Higher Demand: 5 Winners

The U.S. manufacturing sector, severely hit by sky-high prices and the Federal Reserve’s interest rate hike campaign to curb inflation, is trying to make a slow but steady comeback. Factory output is increasing on rebounding demand, driving manufacturing activity at U.S. factories.

The sector is likely to get a further boost as the Fed gears up to end its monetary tightening, with inflation declining over the past year.  Given this scenario, industrial stocks like A. O. Smith Corp. AOS, Applied Industrial Technologies, Inc. AIT, Xerox Holdings Corp. XRX, Caterpillar Inc. CAT and Deere & Co. DE are expected to benefit in the near term.

Industrial Production, Capacity Utilization Increase

The Commerce Department said on Oct 17 that production at U.S. factories increased in September. The department reported that industrial production grew 0.3% month over month in September, beating expectations of an increase of 0.1%.


Production is still down 0.8% year over year, but signs of recovery are evident. Durable goods production increased 2.3% year over year. The output of motor vehicles and parts rose 0.3% in September after falling by 4.1% a month earlier.

Interestingly, the jump comes despite a strike by the United Auto Workers union at various factories of General Motors Co. GM and Ford Motor Co. F last month that massively hampered production.

Factory production and production in mining increased 0.4% each. Also, capacity utilization increased 0.2% to 79.7% in September, matching its long-run (1972-2022) average.

The manufacturing sector is still facing challenges, with manufacturing activity contracting for the 11th consecutive month in September. Institute for Supply Management (ISM) Manufacturing PMI came up with a reading of 49% in September, up 1.4% from August’s reading of 47.6%.

While a reading below 50 typically indicates a contraction in manufacturing activity, recent trends show signs of recovery. Several major subindexes have been expanding, suggesting a positive trajectory for manufacturing. Notably, the September reading is the highest since November 2022, providing further evidence that manufacturing activity is indeed expanding.

The Federal Reserve left interest rates unchanged to the current range of 5.25-5.5% in its September FOMC meeting before increasing it by 525 basis points since March 2022.

However, inflation has sharply declined over the past year after the Fed started raising interest rates. Also, the Fed has said that it will go for another 25-basis point interest rate hike this year before going for rate cuts in 2024.

This definitely bodes well for the manufacturing sectors, as lower borrowing costs will boost production.

Our Choices

Given this scenario, it would be ideal to invest in the five stocks we have picked below. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and assure good returns. You can see the complete list of today’s Zacks #1 Rank stocks here.

A. O. Smith Corp. is one of the leading manufacturers of commercial and residential water heating equipment, and water treatment products of the world. AOS specializes in offering innovative and energy-efficient solutions and products, which are developed and sold on a global platform.

A. O. Smith’s expected earnings growth for the current year is 14.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 60 days. AOS presently carries a Zacks Rank #2.

Applied Industrial Technologies 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 4.3%. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the past 60 days. AIT currently sports a Zacks Rank #1.

Xerox Holdings is a leader in the contractual print and document services market. XRX has developed one of the industry’s strongest portfolios of managed print service solutions and services. Xerox’s strategy is to use data-centric technologies to better help customers in their digital transformation journey, taking advantage of the changing market conditions.

Xerox’s expected earnings growth for the current year is 52.7%. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the past 60 days. XRX presently has a Zacks Rank #2.

Caterpillar 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 43.6%. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the past 60 days. CAT currently carries a Zacks Rank #2.

Deere & Co. is the world’s largest producer of agricultural equipment, manufacturing agricultural machinery since 1837 under the iconic John Deere brand with its signature green and yellow color scheme. DE has an advantage in most farm machinery categories as its machines come with advanced features and are better constructed than its competitors.

Deere & Company’s expected earnings growth for the current year is 45.6%. The Zacks Consensus Estimate for current-year earnings has improved 6.3% over the past 60 days. DE currently carries a Zacks Rank #2.

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Caterpillar Inc. (CAT) : Free Stock Analysis Report

Xerox Holdings Corporation (XRX) : Free Stock Analysis Report

Deere & Company (DE) : Free Stock Analysis Report

A. O. Smith Corporation (AOS) : Free Stock Analysis Report

Applied Industrial Technologies, Inc. (AIT) : Free Stock Analysis Report

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