Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include Cooper Industries (NYSE: CBE), Eaton (NYSE: ETN), Honeywell (NYSE: HON), Illinois Toolworks (NYSE: ITW) and Textron (NYSE: TXT). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
The industrial sector has been a bit of a mixed bag over the past few months. Residential construction equipment has been weak, as would be expected. Sales of truck-related equipment has also been lackluster, a reflection of the impact of new environmental regulations that went into effect at the beginning of the year. On the other hand, electrical equipment has sold well thanks to ongoing demand from utilities. Hydraulics and fluid control systems also remain in demand, particularly for use in aerospace and energy. Internationally, especially in economies that are growing faster than the U.S., demand for many industrial products is strong.
Although not ideal, this backdrop has provided enough strength to help several Machinery-General Industrial companies exceed second-quarter expectations, including Cooper Industries (NYSE: CBE) and Eaton (NYSE: ETN).
CBE earned 78 cents per share from continuing operations in the second quarter, a penny ahead of estimates and 22% above year ago levels. Revenues rose 14% and reached $1.46 billion. Sales of electrical products increased 15%, reflecting higher demand from both utility and industrial customers and well as the positive impact of acquisitions. Tool segment revenues were materially helped by the weak dollar, though aerospace helped to offset weakness in the motor vehicle market. Approximately two-thirds of the covering brokerage analysts raised their full-year forecasts following the report, sending the consensus estimate up by three cents to $3.11 per share.
ETN surpassed expectations by 24 cents with operating earnings of $1.70 per share; profits were up 1% from a year prior. Revenues rose 4% to $3.25 billion. Sales were boosted by electrical and fluid power products, acquisitions and the weak dollar; offsetting these positives was a 23% decline in the truck segment. CEO Alexander Cutler believes demand for electrical products will strengthen somewhat in the second half of the year. Based on this expectation, and the impact of continued cost-cutting initiatives, Cutler raised his full-year profit guidance by 30 cents to between $6.75 and $6.95 per share. Nearly all of the covering brokerage analysts adjusted their forecasts in response, sending the consensus estimate up to $6.78 per share.
CBE is a Zacks #2 Rank (“buy”) stock and ETN is a Zacks #1 Rank (“strong buy”) stock. Three other Zacks #2 Rank stocks within Machinery-General Industrial also recently exceeded earnings, including Illinois Toolworks (NYSE: ITW).
Ongoing strength within the aerospace sector also helped Honeywell (NYSE: HON) and Textron (NYSE: TXT).
HON earned 78 cents in the second-quarter, two cents above expectations and 24% above year prior levels. Revenues rose 8% to $8.5 billion. Aerospace sales were 13% higher, boosted by strong demand from the commercial sector. Margins for this segment were higher as well. The conglomerate also realized a double-digit increase in its automation and control solutions business unit. Looking forward, HON expects to earn between $3.10 and $3.16 per share this year; previously, the company had forecast profits of $3.00 to $3.10 per share. The majority of the covering brokerage analysts raised their full-year projections in response, pushing the consensus estimate up five cents to $3.14 per share.
TXT reported adjusted second-quarter profits of $1.94 per share versus $1.34 a year prior; the consensus estimate had called for earnings of $1.45 per share. Revenues rose 15% to $3.2 billion. Growth was primarily driven by Cessna, which enjoyed both higher volume and improved pricing. Commercial helicopter sales and profits were also higher. The company believes the strong momentum in the commercial sector will continue and raised its forecast as a result. TXT now expects full-year continuing operation earnings to come in a range of $6.35 to $6.55 per share; previously, the company had forecast profits between $6.10 and $6.30 per share. All eight of the covering brokerage analysts revised their projections in response, causing the consensus estimate to jump by 27 cents to $6.56 per share.
HON is a Zacks #2 Rank stock and TXT is a Zacks #1 Rank stock. Both stocks are classified in Diversified Operations.
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +32.2%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 129% annually (+5.3% vs. +12.1%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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Charles Rotblut, CFA
312-265-9352
Email: pr@zacks.com
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