3 Industrial Services Stocks Set to Withstand Industry Turmoil

Madhurima Das
8 min read

In This Article:

The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector and cost inflation. Even though there has been a slight pickup in orders recently, it remains to be seen whether this will be sustained. The rise in e-commerce will likely support the industry. Companies like Siemens SIEGY, W.W. Grainger, Inc. GWW and Andritz ADRZY are poised to deliver growth, backed by their initiatives to capitalize on this demand. The companies have also been focusing on increasing 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 part 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.

Trends Shaping the Future of the Industrial Services Industry

Contraction in Manufacturing Activity Creates Concern: Around 70% of the industry’s revenues are derived from sales in the manufacturing sector. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s latest update, industrial production dipped 0.1% year over year in January 2024, with manufacturing output falling 0.5% mainly due to winter weather. Overall, industrial production has remained flat over the 12 months ended January 2024. The durable goods manufacturing index, however, saw a modest increase of 0.1% in January, showing a 0.3% improvement over the 12 months ending in January 2024. The Institute for Supply Management’s manufacturing index was 49.1% in January. Despite remaining below 50 (which indicates contraction) for the 15th month in a row, the reading was an improvement from the seasonally adjusted 47.1% recorded in December 2023.  The average for the 12 months ended January 2024 is 47.2%, reflecting lower customer spending amid the inflationary trends. However, the New Orders Index expanded to 52.5% in January, improving from 47% in December and the best performance since May 2022. Notably, some industry players have reported that supply-chain issues have been gradually easing. The delivery of goods from suppliers to manufacturing organizations was reported to be faster for the sixteenth consecutive month in January. 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 inflation levels, including higher prices for labor, freight and fuel. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. Industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency, and the diversification of the supplier base to mitigate some of these headwinds.

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