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Industry Rank Analysis 01-11-12

Spending by businesses on Equipment and Software has been one of the strongest forces driving the recovery so far.  The U.S. seems to be experiencing a bit of a manufacturing Renaissance, but still has a very long way to go before manufacturing is anywhere near as big a part of output and employment as it was 30 years ago.  

Most of the improvement is probably just cyclical, but the pick up in this cycle has been much stronger for manufacturing than it had been in the previous two recoveries.  The domestic economy is gaining steam, with just 0.4% growth in the first quarter, 1.3% in the second, and 1.8% in the third.  The consensus is that growth accelerated to over 2.5% in the fourth quarter.  The Machinery Industry is a natural beneficiary of this.    

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 258 different industries tracked.  It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.  

It is interesting when you see a cluster of similar industries at the top of the list.  The same holds true for the bottom of the list.  The definition of size that matters here is not the total sales or market capitalization but the number of companies in the “industry.”  

Where Machinery Is Working

There are five separate Machinery “industries” that make the top 40.  The best performing of them is the smallest by number of companies: The Industrial Automation/Robotics Industry, in 13th place -- representing an improvement of 8 spots since last week.  Its average Zacks Rank is 2.25, down (a good thing) from 2.50 last week.  

The next best is the Machine Tools Industry, with seven members and in 20th place -- slipping six spots from last week as its average rank rose to 2.43 from 2.29.  The Far Machinery Industry also has seven members in it, and come in 30th place, a four spot improvement.  Its average rank was unchanged at 2.57.  

The largest of the five groups by far is the General Industrial Machinery group with 38 firms in it.  It is in 38th place, an 18-spot deterioration as the average rank increased to 2.61 from 2.45.  Filling out the group is Construction and Mining Machinery, an eight member group in 40th place, a huge improvement of 128 spots as the average rank plunged to 2.63 from 3.13.

If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of these “industries” would earn the coveted Zacks #1 Rank (Strong Buy).  Instead, 11 of the 64 (17.3%) have earned that distinction.  If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 10, or 15.6%, hold it.

Some of the names on the lists below are large will know household names, such as Caterpillar (CAT) and Deere (DE), but there are also some very small firms as well.

The valuations are for the most part reasonable, and while I don’t show the FY2 over FY1 growth on the tables, you can get a good idea of it by looking at how much lower the P/E for next year is relative to the P/E for this year.  Most are expecting solid, but not spectacular growth, and you are paying a reasonable price for those earnings.  Not rock bottom for the most part, but very reasonable.  

Most are seeing big increases in their estimates for both this year and next.  However, just as a word of warning, the smaller firms tend to be thinly covered, so an individual analyst raising his or her numbers for the firm has a much bigger impact on the mean estimate than is the case with the big well-covered companies.  Many of the firms pay at least some dividend, but most of the yields are relatively low.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Current FY Est	P/E Using Next FY Est	%Ch Curr FY Est - 4 wks	%Ch Next FY Est - 4 wks	"Current Price"	Div Yield
Caterpillar Inc	CAT	$58,661	12.86	9.76	1.69%	3.36%	$90.99	2.02%
Eaton Corp	ETN	$14,450	10.51	8.88	2.60%	2.62%	$42.35	3.21%
Gardner Denver	GDI	$3,820	13.66	11.69	9.27%	10.29%	$73.07	0.27%
Agco Corp	AGCO	$3,768	9.67	8.56	5.71%	2.31%	$39.74	0.00%
Lincoln Electrc	LECO	$2,639	12.95	10.94	12.37%	9.97%	$31.28	1.98%
Barnes Grp	B	$1,191	15.37	12.61	5.29%	3.58%	$21.87	1.46%
Colfax Corp	CFX	$1,079	19.55	15.85	5.23%	7.56%	$24.80	0.00%
Kaman Corp A	KAMN	$856	16.52	13.56	-0.44%	0.00%	$32.60	1.72%
Dxp Enterprises	DXPE	$322	11.66	9.81	4.45%	4.10%	$22.81	0.00%
Hollysys Automt	HOLI	$315	6.17	5.54	2.28%	-3.70%	$5.76	0.00%
Flow Intl Corp	FLOW	$146	19.87	11.41	0.00%	0.00%	$3.08	0.00%

Number 2 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	"%Ch Curr Fiscal Yr Est - 4 wks"	"%Ch Next Fiscal Yr Est - 4 wks"	"Current Price"	Div Yield
Deere & Co	DE	$30,496	11.34	9.68	0.33%	0.01%	$72.66	2.26%
Kubota Corp Adr	KUB	$10,827	15.37	14.14	0.00%	0.00%	$42.57	1.74%
Robbins & Myers	RBN	$1,987	18.6	14.36	0.00%	0.00%	$43.48	0.41%
Actuant Corp	ATU	$1,377	12.24	10.26	0.00%	0.00%	$20.06	0.20%
Irobot Corp	IRBT	$734	25.08	20.42	7.96%	3.83%	$27.67	0.00%
Stratasys Inc	SSYS	$530	29.29	22.53	-7.36%	-8.06%	$25.07	0.00%
H&E Equip Svcs	HEES	$355	N/A	12.32	-226.32%	0.00%	$10.14	0.00%
Kadant Inc	KAI	$264	9.75	8.24	0.30%	0.65%	$21.42	0.00%
Graham Corp	GHM	$178	17.07	13.16	4.64%	1.99%	$17.98	0.44%
Tri-Tech Holdng	TRIT	$46	3.71	3.4	0.00%	0.00%	$5.67	0.00%

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
AGCO CORP (AGCO): Free Stock Analysis Report
 
CATERPILLAR INC (CAT): Free Stock Analysis Report
 
DEERE & CO (DE): Free Stock Analysis Report
 
EATON CORP (ETN): Free Stock Analysis Report
 
GARDNER DENVER (GDI): Free Stock Analysis Report
 
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