Despite economic challenges, the industrial machinery sector is thriving, powered by industrialization, automation, and smart manufacturing. Notably, increased government investments in local manufacturing and infrastructure are significantly driving the demand for industrial machinery.
Amid these favorable tailwinds, it could be wise to invest in fundamentally strong industrial machinery stocks: The Japan Steel Works, Ltd. (JPSWY), Enerpac Tool Group Corp. (EPAC), and Smiths Group plc (SMGZY).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the industrial machinery industry is well-positioned to grow.
Industrial manufacturers are increasingly using automation to enhance efficiency and productivity. This integration minimizes errors, optimizes production schedules, increases output, and reduces downtime and operational costs, leading to higher demand for industrial machinery.
Global demand for industrial machinery stays strong, driven by governments worldwide prioritizing infrastructure development. For instance, the Infrastructure Investment and Jobs Act (IIJA), signed into law by President Biden in late 2021, allocates $1.2 trillion for rebuilding infrastructure and supporting domestic manufacturing. This is anticipated to further elevate the demand for industrial machinery.
Technological advancements in industrial machinery production drive innovation, boosting productivity, lowering costs, and increasing profits. The industrial machinery market is projected to grow at a CAGR of 6%, reaching $1.23 trillion by 2032.
On top of it, technological advances, including AI, cloud computing, and 3D printing, drive innovation in industrial machinery. Embracing these technologies enhances efficiency and productivity, resulting in improved profits and a competitive edge for manufacturers.
The use of AI boosts product development capabilities by improving efficiency and incorporating modern production technologies. AI in the industrial machinery market is expected to grow at a 25% CAGR until 2032, fueled by rising demand for automation and efficiency in the industrial sector.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Industrial - Machinery picks, beginning with the third choice.
Stock #3: The Japan Steel Works, Ltd. (JPSWY)
Headquartered in Shinagawa, Japan, JPSWY engages in the provision of industrial machinery products and material and engineering business in Japan and internationally. It operates through the Industrial Machinery Products Business and Material and Engineering Business segments.
In terms of the trailing-12-month net income margin, JPSWY’s 6.11% is 1% higher than the 6.05% industry average.
JPSWY’s total net sales for the six months that ended September 30, 2023, increased 6.3% year-over-year to ¥110.18 billion ($12.18 billion). Its operating profit increased 86% year-over-year to ¥5.78 billion ($12.18 billion).
In addition, the company’s profit attributable to JPSWY and EPS came in at ¥4.76 billion ($12.18 billion) and ¥64.73, representing increases of 170.6% and 170.5%, respectively, from the prior-year quarter.
Street expects JPSWY’s revenue for the quarter ending December 31, 2023, to increase 1% year-over-year to $446.93 million. Over the past six months, the stock has declined 7.1% to close the last trading session at $8.18.
JPSWY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Value and a B for Momentum and Stability. Within the A-rated Industrial - Machinery industry, it is ranked #23 out of 79 stocks. To see JPSWY’s Growth, Sentiment, and Quality ratings, click here.
Stock #2: Enerpac Tool Group Corp. (EPAC)
EPAC manufactures and sells a range of industrial products and solutions in the United States, the United Kingdom, Germany, Australia, Canada, China, Saudi Arabia, Brazil, France, and internationally. It operates through Industrial Tools & Services and Other segments.
On July 11, 2023, EPAC announced the completion of the sale of its Cortland Industrial, LLC business to Tufropes, a global leader in synthetic fiber ropes. The net proceeds will be used to pay down debt and support strategic investments. EPAC will continue to focus on retaining and growing the Cortland Biomedical business, emphasizing its commitment to this sector.
Paul Sternlieb, President and CEO at EPAC, stated, “With this transaction, we are continuing to sharpen Enerpac Tool Group’s pure-play focus. At the same time, we are pleased to have completed a competitive process for Cortland Industrial that culminated in this value-maximizing transaction and provides a strong new home in Tufropes for our Cortland Industrial team members.”
In terms of the trailing-12-month levered FCF margin, EPAC’s 16.51% is 161.7% higher than the 6.31% industry average. Likewise, its 19.95% trailing-12-month EBIT margin is 103.4% higher than the 9.81% industry average. Additionally, its 7.78% trailing-12-month net income margin is 28.7% higher than the 6.05% industry average.
For the fiscal fourth quarter ended August 31, 2023, EPAC’s net sales increased 5.8% year-over-year to $160.61 million. Its operating profit increased 145.3% from the year-ago value to $32.20 million.
For the same quarter, the company’s adjusted net earnings from continuing operations and adjusted EPS from continuing operations came in at $22.43 million and $0.42, representing an increase of 16.4% and 20% from the prior-year period, respectively.
Analysts expect EPAC’s EPS and revenue for the fiscal year ending August 31, 2025, to increase 14% and 7.1% year-over-year to $1.95 and $645.70 million, respectively. Over the past six months, the stock has gained 20.9% to close the last trading session at $29.14.
It’s no surprise that EPAC has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Growth and Momentum. Within the same industry, it is ranked #8. Beyond what we stated above, we also have given EPAC grades for Value, Stability, and Sentiment. Get all EPAC ratings here.
Stock #1: Smiths Group plc (SMGZY)
Headquartered in London, the United Kingdom, SMGZY operates as a technology company in the Americas, Europe, the Asia Pacific, and internationally. It operates through four divisions: John Crane, Smiths Detection, Flex-Tek, and Smiths Interconnect.
On November 7, 2023, SMGZY partnered with John Crane, a global leader in rotating equipment solutions and energy transition technologies, to supply energy transition technology to one of the world's largest offshore Carbon Capture, Utilisation, and Storage (CCUS) facilities in Malaysia.
Notably, the project, set to begin operation in the fourth quarter of 2025, involves providing 24 dry gas seals and 12 filters for CO2 compressors, supporting the removal and storage of 3.3 metric tonnes of CO2 annually.
On October 25, 2023, SMGZY announced the supply of 60 HI-SCAN 6040 CTiX carry-on baggage scanners to Munich Airport. The new scanners at Munich Airport speed up security, letting 30 million passengers pass through in a third of the usual time. They also skip the need to remove electronics and liquids, making the process more efficient and improving the passenger experience.
Markus Rossmeisl, Director of Sales Germany at Smiths Detection, SMGZY, expressed delight in partnering with Munich Airport to supply the HI-SCAN 6040 CTiX checkpoint scanner. He mentioned that the scanner enhances security while providing passengers with more time to relax before their flights, creating a better, faster, and safer experience for everyone.
In terms of the trailing-12-month gross profit margin, SMGZY’s 36.81% is 21.3% higher than the 30.35% industry average. Likewise, its 14.49% trailing-12-month EBIT margin is 47.7% higher than the 9.81% industry average. Additionally, its 17.58% trailing-12-month EBITDA margin is 28% higher than the 13.74% industry average.
SMGZY’s revenue for the fiscal year ended July 31, 2023, rose 18.4% year-over-year to £3.04 billion ($3.76 billion). The company’s headline operating profit increased 20.1% year-over-year to £501 million ($619.57 million). Moreover, its headline EPS came in at 97.5p, up 39.6% over the prior-year quarter.
For the fiscal year 2024, SMGZY’s EPS and revenue are expected to increase 17.2% and 4.5% year-over-year to $1.39 and $3.86 billion, respectively. Over the past year, the stock has gained 10.7% to close the last trading session at $20.53.
SMGZY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Momentum, Stability, and Quality. It is ranked #5 in the Industrial - Machinery industry. To see SMGZY’s Value and Sentiment ratings, click here.
What To Do Next?
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SMGZY shares were unchanged in premarket trading Wednesday. Year-to-date, SMGZY has gained 9.19%, versus a 18.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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