U.S. Industrial Production Hits 4-Month High: 5 Top Picks

U.S. industrial production gained momentum in July after a marginal increase in June. July's gain was the highest since March. Indexes for all major market groups like consumer goods, business equipment, business supplies, materials and construction activities expanded.

Industrial Production Surges in July

The Federal Reserve reported that industrial production gained 0.9% in July compared with a downwardly revised 0.2% in June. The consensus estimate was for an increase of 0.5%. Although the metric gained 6.6% year over year, it's still 0.2% below the pre-pandemic level of February 2020.

Meanwhile, in May, out of the three broad sectors, the manufacturing sector advanced 1.4% buoyed by the strong performance of motor vehicles and parts. Production at auto plants climbed 11.2% in July. This was primarily due to the production rescheduling by the auto companies.

The Fed reported that “a number of vehicle manufacturers trimmed or canceled their typical July shutdowns,” in a process called retooling of plants. The massive shortage of semiconductors has forced auto manufacturers to minimize their days of scheduled shut down.

Moreover, excluding the auto sector, manufacturing moved up 0.7% in July. In addition to the auto industries, durable goods manufacturers rose 2.4%. Industries like machinery; electrical equipment, appliances, and components; aerospace and miscellaneous transportation equipment; and miscellaneous manufacturing. Overall, the manufacturing sector grew 0.8% above the pre-pandemic level.

Aside from the manufacturing sector, mining activities were up 1.2% while the output of utilities decreased 2.1%. The major driver for the mining sector was higher drilling activity buoyed by a sharp increase in crude oil prices. The utilities sector declined due to below normal temperature.

Capacity utilization for overall industrial production in July increased to 76.1% from 75.4% in June. The consensus estimate was 75.7%. However, this metric is 3.5% below its historical average level.

Future Catalysts

U.S. manufacturers across sizes are expanding their scale of operations and hiring more despite soaring wages and salaries to cater to robust demand. The personal savings of Americans are around an astonishing $2 trillion.

The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and in turn compelling businesses to expand their scale of operations. The manufacturing sector constitutes nearly 12% of the U.S. GDP.

On Aug 10, the U.S. Senate passed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years. The bill is now headed to the House of Representatives for discussions and vote.

The proposed bill will provide federal money into physical infrastructure projects such as roads, bridges, passenger rails, airports, drinking water and waste-water systems, high-speed Internet, and climate-related infrastructure.

Our Top Picks

At this stage, we have narrowed down our search to five industrial product stocks that have strong growth potential for the rest of 2021 and witnessed strong earnings estimates revisions in the last 30 days. Year to date, these stocks gained more than the market's benchmark S&P 500 Index. Moreover, each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Image Source: Zacks Investment Research

Terex Corp. TEX manufactures and sells aerial work platforms and materials processing machinery worldwide. It operates in two segments, Aerial Work Platforms and Materials Processing. Terex is focused on aligning production and cost structure across segments in response to the customer demand environment while also aggressively managing cost and working capital.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.2% over the last 30 days. The stock price has jumped 43.8% year to date.

Kadant Inc. KAI is a leading supplier of a range of products and systems for the global papermaking and paper-recycling industries, including de-inking systems, stock-preparation equipment, water-management systems, and papermaking accessories. It operates through three segments: Flow Control, Industrial Processing, and Material Handling.

The company has an expected earnings growth rate of 46.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 20.8% over the last 30 days. The stock price has climbed 42.2% year to date.

Encore Wire Corp. WIRE is a low-cost manufacturer of copper electrical building wire and cable. It is a leading supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings..

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved more than 100% over the last 30 days. The stock price has rallied 41.1% year to date.

Belden Inc. BDC operates as a signal transmission solutions company in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. It operates in two segments, Enterprise Solutions and Industrial Solutions.

The company has an expected earnings growth rate of 50.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 11% over the last 30 days. The stock price has surged 28.3% year to date.

Mueller Industries Inc. MLI is a leading manufacturer of copper tube and fittings, brass and copper alloy rod, bar and shapes, aluminum and brass forgings, aluminum and copper impact extrusions, plastic fittings and valves, refrigeration valves and fittings, and fabricated tubular products. It has operations in the United States, the United Kingdom, Canada, South Korea, the Middle East, China, and Mexico.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 50% over the last 30 days. The stock price has advanced 27.3% year to date.

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