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3 Industrial Services Stocks to Buy in the Flourishing Industry

The Zacks Industrial Services industry is poised well to gain from the rise in e-commerce activities and demand in its diverse end markets. Despite the ongoing supply-chain snarls and flared-up input costs, industry players like W.W. Grainger, Inc. GWW, Ashtead Group ASHTY and Velo3D VLD have witnessed solid order growth and delivered improved results. They are well-poised to deliver growth, backed by the solid demand in their end markets and their efforts to gain market share. They have also been focusing on improving their productivity and efficiency to counter the impacts of inflationary costs on their margins.

About the Industry

The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes activities such as routine maintenance work, emergency maintenance and spare parts inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve a wide array of customers, ranging from commercial, government, and healthcare to manufacturing. The industry's products (power tools, hand tools, cutting fluids, lubricants, Personal Protective Equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. By offering inventory management, and process and procurement solutions, these companies reduce MRO supply-chain costs and improve customers' plant floor productivity.

What's Shaping the Future of the Industrial Services Industry?

E-commerce A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customers’ demand for highly tailored solutions with real-time access to information and rapid delivery of products is rising. Customers want to execute their business activities in the most efficient way possible, which often means online. The pandemic led to a significant push in e-commerce activities. In 2020, more than two billion people purchased goods or services online, recording e-retail sales of $4.2 trillion. In 2021, global retail e-commerce sales amounted to $5.2 trillion. Per Statista, revenues in the e-commerce market are projected to reach $4.11 trillion in 2023. Revenues are expected to see a CAGR of 11.51% over the 2023-2027 period and reach $6.35 trillion in 2027. To capitalize on this trend, industrial services industry players are stepping up their investments in e-commerce and digital capabilities.

Supply-Chain Snarls Show Signs of Easing: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Trends in customers’ activity are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve, industrial production was flat in February 2023 and manufacturing output inched up 0.1%. Overall, industrial production has declined 0.2% over the 12 months ended February 2023. The index for durable goods manufacturing was up 0.1% in February and down 0.5% for the 12 months ended February 2023. In February, the Institute for Supply Management’s manufacturing index was 47.7%, contracting for the fourth month in a row. It has, however, picked up a tad from the reading of 47.4% in January. The average for the past 12 months (ended February 2023) is 51.8. Amid the ongoing uncertainty in the global economy and persisting inflationary trends, customers have been curbing their spending. The manufacturing sector has also been bearing the brunt of supply-chain issues. On a positive note, some of the industry players recently noted that supply-chain issues are easing. The delivery performance of suppliers to manufacturing organizations was reported to be faster for the fifth consecutive month in February. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.

Pricing Actions to Combat High Costs: The industry has been experiencing significant levels of inflation, including higher prices for labor, freight and fuel. The companies are currently witnessing labor shortages for some positions and incurring steep labor costs to meet demand. The industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and diversification of the supplier base to mitigate some of these headwinds.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Industrial Services Industry, a 21-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #32, which places it in the top 13% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
 
Before we present a few Industrial services stocks that investors can add to their portfolio, it is worth taking a look at the industry’s stock-market performance and its valuation picture.

Industry Versus S&P 500 & Sector

The Industrial Services industry has outperformed its sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has fallen 5.5% compared with the sector’s decline of 7.5% and the Zacks S&P 500 composite’s slump of 14.6%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 20.37X compared with the S&P 500’s 11.01X and the Industrial Products sector’s forward 12-month EV/EBITDA of 14.79X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry traded as high as 35.86X and as low as 6.04X, with the median being 9.50X.

3 Industrial Services Stocks to Bet on

Grainger: The company delivered improvement in the bottom and top lines in 2022, aided by margin improvement in the High-Touch Solutions North America (N.A.) and Endless Assortment segments, as well as strong operating performance. GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America (N.A.) segment will continue to benefit from pricing actions and strength in commercial, transportation and heavy manufacturing. The Endless Assortment segment is gaining on new customer acquisitions at its Zoro and MonotaRO businesses. GWW has been witnessing strong growth in non-pandemic product sales as the impacts of the pandemic abated. Grainger is, thus, investing in non-pandemic product inventory and partnering with suppliers to mitigate supply-related challenges, inbound lead-time challenges and any possible cost increases. Investments to enhance e-commerce sales and digital capabilities will aid growth. Cost-control measures undertaken by GWW will sustain margins. Its shares have gained 21.5% over the past three months.

Lake Forest, IL-based Grainger is a broad-line, business-to-business distributor of MRO supplies, and other related products and services. The Zacks Consensus Estimate for 2023 earnings has moved up 8% in the past 60 days. The consensus mark indicates growth of 12.2% from the prior-year reported number. GWW currently has a trailing four-quarter earnings surprise of 9.8%, on average. GWW has an estimated long-term earnings growth rate of 13% and it sports a Zacks Rank #1 (Strong Buy) at present.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price: GWW

Ashtead Group: The company delivered rental revenue growth of 25% and a 36% improvement in earnings in the nine months ended Jan 31, 2023. In the period, it invested $2.6 billion in capital across existing locations and greenfields, and $970 million on 38 bolt-on acquisitions. The company added 120 locations in North America. ASHTY is well-poised to deliver strong results, aided by its diverse end markets and products, lower debt levels, and efforts to strengthen its market position. Initiatives to optimize the cash flow, and reduce capital expenditure and operating costs are likely to contribute to growth. It continues to invest in a digital transformation program that will enhance customer experience. The company has a strong pipeline of strategic acquisition opportunities to supplement its organic growth plan. A good quality fleet and a strong financial position also bode well. Backed by these tailwinds, ASHTY shares have gained 5.5% in the past three months.

The Zacks Consensus Estimate for fiscal 2023 earnings for this London, U.K.-based company that engages in construction, industrial, and general equipment rental business has been revised upward by 2.4% in the past 90 days. The consensus estimate indicates year-over-year growth of 23%. The company has a long-term estimated earnings growth rate of 19%. ASHTY currently flaunts a Zacks Rank #1.

Price: ASHTY

Velo3D: The company recently reported a 194% year-over-year surge in revenues to $81 million in 2022. The improvement reflected higher annual system sales, specifically a significant increase in the sales of the company’s Sapphire XC system from the previous year. Growth in support service and recurring payment revenues, resulting from the 50% increase in the company’s installed base, also contributed to the upbeat results. The company expects revenue growth of more than 50% in fiscal 2023 to be aided strong demand. Backed by its strong liquidity and the recently established at-the-market equity offering program, VLD has the ability to fund its technology investments and growth plans. Backed by these tailwinds, the company’s shares have gained 21.3% in the past three months. Campbell, CA-based Velo3D produces metal additive three-dimensional printers in the United States and internationally.

The Zacks Consensus Estimate for VLD’s fiscal 2023 earnings is currently at a loss per share of 26 cents, which indicates an improvement from the loss of 41 cents reported in 2022. The consensus estimate has moved up to the loss of 26 cents from a loss of 38 cents expected 60 days ago. The VLD stock currently carries a Zacks Rank #2 (Buy).

Price: VLD

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

W.W. Grainger, Inc. (GWW) : Free Stock Analysis Report

Ashtead Group PLC (ASHTY) : Free Stock Analysis Report

Velo3D, Inc. (VLD) : Free Stock Analysis Report

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