Overview

The US industrial sector is valued at over $2.92 trillion-dollar. The industry is heavily dominated by multibillion dollar conglomerates with numerous barriers to entry for new entrants. The sector is comprised of companies that are involved in producing goods used in construction and manufacturing. Industrial companies have a common characteristic of being highly cyclical with strong correlation with economic performance, closely following the S&P 500.

Corporations within the sector involve companies involved in Aerospace & Defense, Air Freight & Logistics, Airlines, Building Products, Commercial Services & Supplies, Construction & Engineering, Electrical Equipment, Industrial Conglomerates, Machinery, Professional Services, Road & Rail, Trading Companies & Distributors and Transportation Infrastructure.

The industrial sector is comprised of thousands of multibillion dollar corporations. Some of the largest names in the sector include: General Electric (GE), 3M (MMM), Raven Industries (RAVN), Icahn Enterprises (IEP), SNC-Lavalin (SNC), Precision Castparts (PCP) and Flowserve (FLS)

Our Senior Analyst, Jeffery Lee, our two Junior Analysts Anujan Raveenthiran and James Jung, and our research analyst JT Paliwal are providing coverage for the Industrials Sector.

Sector Themes

US residential/commercial construction has been gradually rising year over year, experiencing its 8th straight year of growth since the global recession experienced since 2007/2008. This growth and recovery can be seen through various economic indicators including US housing starts, new residential construction and new/existing US existing home sales.

Manufacturing within the US has seen a fall in growth with the most recent report released in February of 2016 claiming the sector performing at 4 year lows, comparable to a reading seen in October of 2012. The manufacturing PMI came in at 51.3, a fall from a high of 57.9 in early 2014.

The quantity of global M&A deals valued at over $50 million within the industrial sector declined by over 34% between 2014 and 2015. There were 795 less M&A deals in 2015 when compared to 2014. The value of global M&A deals fell as well, with a decline in the US share of global M&A activity. There was however greater M&A activity within Asia.

Companies are accumulating larger cash balances. This capital flexibility, combined with the current strength of the US dollar, means a strategic M&A play could create the growth companies are looking for.

The European economy is currently underperforming with numerous issues regarding large levels of debt as well as a potential exit of one of their largest key economic contributors, Britain. China is attempting to transition from a manufacturing based to a service based economy, one of the factors leading to a gradual cooling in demand for oil. The demand for industrial goods are slowing within the Asian and European market however, companies with exposure to US markets stand to benefit the most.

 

Outlook

The industrial sector is highly cyclical and also strongly correlated with the global economy. US consumer spending has been on the rise, increasing by approximately 50 basis points quarter over quarter for the last three months of 2015. A large portion of the consumer expenditure growth was led by higher automotive sales which can be attributed to the recent events including the tensions within the Middle East leading to very low prices of oil, the major variable cost for automotive vehicles. As 65% of the US GDP is dependent on consumer spending, this growth is leading to very similar growths for companies classified under the industrial sector with GDP expected to continue its growth.

The US labour market is almost at full unemployment, hovering around 4.9% unemployment. Real wage growth has remained very flat however. Unemployment continues to decrease resulting in real wages begin to rise. This trend is expected to continue for the next foreseeable future.

The industrial sector is comprised of numerous organizations producing transportation vehicles often for military and defence purposes. As tension as well as conflict continues to rise especially within the Middle East as a result of the threat on terror, primarily ISIS, sales and support within the industry benefit. The political race will have future impact within the industry as the two leading candidates, Hilary Clinton and Donald Trump, both plan on creating a larger military force however Trump is in favour of a decrease in military spending, contrary to Clinton’s plan.

The housing market has been greatly recovering since the 2008 recession with housing starts at 7 year highs. The trend does not seem to be ending anytime soon, which signals great opportunity for companies involved in both US residential and commercial construction.