4 Industrial Stocks with Surprise Potential this Season - Earnings ESP

It is the first week of bulk reporting for third-quarter 2014 earnings season. The market has been choppy since the beginning of the week, with major U.S. indexes including the DOW, NASDAQ and S&P 500 having shed 2.6%, 1.4% and 2.3% respectively.

Finance companies grabbed everyone's attention as the big ones reporting this week failed to create the much-anticipated magic. The sector's earnings declined 6.1% year over year on revenue growth of 4.6%. As of Oct 16, nearly 12.9% of all the S&P 500 companies have released their third-quarter results. Earnings growth was flat at 2.1% on revenue growth of 5.3%.     

The outlook isn't very impressive for this earnings season. Investor sentiments are shaky as the Fed is all set to discontinue its bond purchases, while the strengthening U.S. dollar and damper global growth are likely to hurt the country's export businesses.

Currently, earnings of S&P 500 companies are expected to grow by a meagre 3% in the third quarter versus 8.1% recorded in the preceding quarter, reflecting the prevalent nervousness in the market. Revenue is predicted to grow 2.7%.

For Industrial Products sector, the picture is not very bright either. Industrial activities, measured in terms of industrial production in the U.S., increased just 3.2% year over year as compared with 5.5% in the preceding quarter. Also, the job market provided little reason to rejoice as dismal performance in August dragged down new job additions in third-quarter by 15.5% over the preceding quarter.

Let us take a look at the performance of Industrial Products sector so far in third-quarter 2014. Just 12% of the total Industrial Products companies in the S&P 500 group reported their results as of Oct 16. Earnings declined 0.9% year over year with a beat ratio of 100%, while revenues edged down 0.3%.

Considering the results so far, earnings for the Industrial Products sector is anticipated to decline by 2.2% in the third quarter, while revenues are predicted to slip 1.1%. Amid such a gloomy environment, can we expect any Industrial Products company to surprise us with their results?

Well, choosing the right stocks with a potential to beat earnings estimates from a plethora of industry players can be a daunting task. However, we are providing below simple guidelines to pick such stocks.

The Industrial Products sector includes machinery, pollution control, industrial products-services, construction building services, and containers and glass industries. In this diversified sector, selecting stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks

can help.

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chances of positive earnings surprise are as high as 70%.

Here are four Industrial Products stocks currently equipped with the right combination of elements to post an earnings beat:

(

): The company is one of the leading manufacturers of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Well positioned to capitalize on the recovery in the U.S. construction market, the company's cost-reducing efforts will provide a strong support to its margins. Also, its share buyback activities will boost the earnings, going forward.   

With a market capitalization of $58.5 billion, Caterpillar currently carries a Zacks Rank #3. Earnings ESP for the third quarter is +2.26%, with the Zacks Consensus Estimate pegged at $1.33 and the Most Accurate Estimate at $1.36.

Caterpillar is currently valued at a forward Price-to-Earnings (P/E) multiple of 14.94 versus 14.99 for the industry. It offers a return of 20.2% on equity and 8.7% on investments. Earnings over the next 5 years are anticipated to grow 10.2%.    

Caterpillar Inc

is scheduled to release its third-quarter financial results on Oct 23 before the market opens.

(

): The company manufactures complex metal components and products. Its product portfolio includes high-quality investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. The aerospace and industrial gas turbine markets are two promising end-markets for the company. It currently has a $32 billion market capitalization.

Precision Castparts presently carries a Zacks Rank #3. Earnings ESP for second-quarter of fiscal 2015 (ended Jun 2014) is +1.22%, with the Zacks Consensus Estimate pegged at $3.29 and the Most Accurate Estimate at $3.33.

The stock is currently valued at a forward P/E multiple of 16.00 versus 16.08 for the industry. Despite being highly levered, the company's return on equity is 15.9% and return on investments is 12%, higher compared with 11.6% and 2.6% for the industry, respectively. Earnings are expected to grow 12.8% over the next 5 years.

Precision Castparts is scheduled to release its second-quarter fiscal 2015 financial results on Oct 23 before the market opens.

(

): The company is one of the leading suppliers of maintenance, repair and operations (MRO) products to small and mid-sized industrial customers in the U.S. The company has performed better than the industrial services industry over the past five years. In the next 5 years, earnings are predicted to grow 13.4%. It currently has a $5.1 billion market capitalization.

MSC Industrial Direct presently holds a Zacks Rank #3. Earnings ESP for fourth-quarter fiscal 2014 (ended Aug 2014) is +0.99%, with the Zacks Consensus Estimate pegged at $1.01 and the Most Accurate Estimate at $1.02.

The company's return profile is quite impressive, with return on equity being 17.7% and on investments 15%, higher than the industry returns of 8.5% and 0.8%, respectively. It is currently valued at a forward P/E multiple of 18.34.

MSC Industrial Direct is scheduled to release its fourth-quarter fiscal 2014 results on Oct 28 before the market opens.

(

): The company is a leading metals service center firm engaged in value-added materials management and metals processing services. The company's diversified product-line and acquisitive nature position it well to expand its business and capitalize on improved demand environment in the quarter. It currently has a $4.9 billion market capitalization.

Reliance Steel & Aluminum presently holds a Zacks Rank #3. Earnings ESP for third quarter 2014 is +2.94%, with the Zacks Consensus Estimate pegged at $1.36 and the Most Accurate Estimate at $1.40.

The stock is currently valued at a forward P/E multiple of 12.28 versus 16.08 for the industry. The company is highly levered, while offering returns of 9.2% and 6% on equity and investments. Earnings are estimated to grow 9.5% in the next five years.

Reliance Steel & Aluminum is scheduled to release third-quarter 2014 results on Oct 23 before the market opens.

With persistent economic uncertainties in many parts of the world, presence of headwinds cannot be ruled out. Sincere efforts are being made to overcome these hurdles, with greater emphasis on growing trade relations and implementation of better policies. Stabilization will be conducive to industrial activities, acting as growth boosters for the industrial products sector.

As we await a more favourable environment, choosing some possible winners on the basis of a solid Zacks Rank and a positive Zacks Earnings ESP this earnings season might work wonders for some interested investors.

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