6 Industrial Stocks Likely To Beat Estimates In Q4

The upcoming fourth-quarter earnings season for the industrial sector holds promise backed by the upbeat manufacturing data, strong housing and commercial construction markets and an improving U.S economy. Industrial production, which is considered one of the leading economic indicators for industrial stocks, jumped 8.2% at an annual rate in the fourth quarter. It is a measure of the level of output of manufacturing, mining and utilities sectors in a country. The upbeat performance was supported by a 7% jump in manufacturing and 12.7% in mining output in the quarter. The index is currently pegged at 107.5% of its 2012 average. Further, it has gained 3.6% in a year, logging its biggest calendar-year gain since 2010.

Manufacturing Activity, New Orders Close 2017 on a High

Manufacturing activity also closed on a high in 2017 as evident from the December PMI (Purchasing Managers' Index) reading of 59.7, per the Institute for Supply Management (“ISM”). The reading was a tad lower than the peak of 60.8 in September but marked the fastest pace of expansion since 2011. The PMI is an indicator of the economic health of the manufacturing sector with a reading above 50 signaling increased factory activity.

The score can be attributed to strong expansion in new orders and production. Further, 16 of 18 industries reported growth in December. With this reading, manufacturing has delivered positive growth for 16 consecutive months.  Notably, in 2017, the ISM manufacturing index averaged the highest readings for a calendar year since the last 13 years.

The manufacturing sector accounts for about 12% of the U.S. economy. The December PMI indicates growth for the 103rd consecutive month in the overall economy. The index has averaged 57.6% for 2017, which translates to a 4.5% increase in real gross domestic product (GDP) on an annualized basis.

New orders and production both rose to very healthy levels to close 2017 and have delivered positive growth trend for 16 straight months. In December, New Orders Index registered 69.4%, the highest reading since January 2004. In fact, the index has been at levels above 60% for seven months at a stretch – the highest expansion level in 14 years. The Production Index registered 65.8% in December, the highest reading since May 2010.

Steady Growth Ahead

Healthy order and production levels suggest that the strength exhibited by the manufacturing sector throughout 2017 should carry over into 2018. With the passage of the Tax Cuts and Jobs Act, the pace of growth could pick up even further. We believe that implementation of the Trump government’s growth policies, especially the proposed $1 trillion spending on infrastructure improvement, will be a boon for industrial stocks.

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