While consumers are hailing the fall in oil prices, companies that supply these oil companies with industrial infrastructure equipment are beginning to feel the pain. The overall rig count in the U.S. has been declining over the past few months due to OPEC continuing to produce about 31.5 million barrels a day. This has put pressure on the smaller U.S. oil companies, which are holding off on drilling new wells because it is not currently profitable with oil prices so low. Further, this low oil price environment is expected to continue for at least the first half of 2016. Therefore, industrial infrastructure equipment designer, supplier, and manufacturer Powell Industries (POWL - Snapshot Report) is the Zacks Bear of the Day.  

This Zacks Rank #5 (Strong Sell) sells, designs, develops, manufactures, packages and services systems and equipment for the distribution, control and management of electrical energy and other dynamic processes. The principal products are switchgear and related equipment, bus duct and process control systems. These products and systems are utilized primarily by refineries, petrochemical plants, utilities, paper mills, offshore platforms, commuter railways, vehicular transportation and numerous other industrial, commercial and governmental facilities.

In their most recent earnings announcement, the company missed the Zacks Consensus Earnings Estimate, and slightly beat the Zacks Consensus Revenue Estimate. The two major areas where the company saw pullbacks was the decline in their backlog, which fell 13% YoY, and overall orders which declined 50% YoY.  

Further, this was not just a Powell issue, the entire industrial infrastructure equipment suppliers segment has seen most of their products witness declines in orders especially oil & gas focused products. Moreover, this trend is not expected to improve as oil prices continue to decline. There would need to be a large upward swing in oil prices to reverse the yearlong trend, but this is not expected to happen anytime during FY 2016.  

According to Michael Lucas, President and CEO, “bookings reflect the lagging effect of reduced capital spending levels in the energy markets. Capital spending remains depressed and uncertain. We expect little change in the oil and gas industry outlook in fiscal 2016.”

As you can see from the graph below, estimates have been declining for the past year for Powell.

Declining estimates

Due to the declining orders, earnings estimates for Q1 16, Q2 16, FY 16, and FY 17 have all declined; Q1 16 fell from $0.56 to $0.40, Q2 15 dropped from $0.48 to $0.23, FY 16 plummeted from $1.75 to $0.85, and FY 17 dropped from $1.85 to $0.90.

Bottom Line

With the decline in oil prices, orders for industrial infrastructure equipment has dropped off significantly which has in turn hurt Powell Industries.Further, this trend is not expected to reverse course in 2016. Therefore it would be best to stay away from this company until oil prices show a steady rebound.

If you are inclined to invest in the Machine Electrical equipment sector, you would be best served by looking into CUI Global (CUI - Snapshot Report), which holds a Zacks Rank #1 (Strong Buy), or Franklin Electric (FELE - Snapshot Report), which carries a Zacks Rank #2 (Buy).