3 Industrial Services Stocks to Watch Amid Persistent Industry Challenges

Madhurima Das
9 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, its sustainability remains uncertain.

The rise in e-commerce activities is expected to support the industry. Companies like Siemens SIEGY, W.W. Grainger, Inc. GWW and Andritz ADRZY are positioned for growth, leveraging strategies to capitalize on this demand. The companies have also been focusing on increasing productivity and efficiency, and investing in automation and digitization, which will aid growth.


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 Raises Concerns: The manufacturing sector contributes around 70% to the industry's revenues. Customer activity trends are historically correlated to changes in the Industrial Production Index. Per the Federal Reserve’s last update, industrial production inched up 0.4% in March 2024. Despite this uptick, industrial production has been stagnant over the 12 months ended March 2024. The durable goods manufacturing index saw a slight increase of 0.3% in March, but it marked a slowdown from the 1.3% gain witnessed in February. The Institute for Supply Management’s manufacturing index was 50.3% for March, which marked an end to the prolonged contraction of 16 months, hinting at a potential recovery. However, this was short-lived, with the index slipping to the contraction territory with a 49.2% reading in April. The average for the 12 months ended April 2024 is 47.7%, reflecting lower customer spending amid inflationary trends. The New Orders Index also moved back into contraction in April, registering 49.1%, which was lower than the 51.4% witnessed in March. 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 marginally faster for the second consecutive month in April. 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.

E-commerce Acts as A Key Catalyst: MRO demand is significantly impacted by the evolution of e-commerce. Customer 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. According to Statista, global e-commerce sales were $5.8 trillion in 2023, and this figure is expected to reach $8 trillion by 2027, seeing a CAGR of 8.4%. The United States is expected to lead the retail e-commerce development, witnessing a CAGR of 11.82% over 2024-2028. The current valuation of the U.S. e-commerce market is $843 billion and it is anticipated to surpass the $1-trillion mark in 2026. India and Mexico are expected to follow suit, seeing a CAGR of 11.79% and 11.71%, respectively. To capitalize on this trend, industrial service companies are heavily investing in improving their digital capabilities and increasing their share in e-commerce.

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