The Soul of a New Machine - Zacks Industry Rank Analysis

Industry Rank Analysis 09-10-10

The Machinery industry appears to be getting into high gear. Several of the industries related to big equipment are showing up well, based on the Zacks Rank.
 
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well -- a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting, however, when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.  

In this case, there are several medium sized but related industries that are clustered near the top of the industry rankings. Best of the bunch is Engines, which are a big component in the big machines, but that “industry” has only two players in it. It is in fifth place among the 256 industries tracked with an average rank of 2.00, unchanged from last week, although the ranking slipped from third place last week.

Next best are Farm Machinery and Construction/Mining Machinery, which are in a tie for 21st place with average scores of 2.33. That is a minor deterioration on the Farm and no change in the Mine in terms of average score. There are six firms in the Farm Machinery segment and nine in the Construction and Mining segment. Machine Tools also show up favorably in 28th place with an average score of 2.43, unchanged from last week. That segment has seven firms in it.

The two biggest segments in terms of the number of firms do not fare quite as well, but still look pretty good. Given their larger number of firms that is not particularly unusual. The Electrical Machinery segment has 13 firms in it and is in 31st place, an improvement of two spots from last week, although its average score is unchanged at 2.46. Finally, General Industrial Machines, which with 41 firms is bigger than the rest of them combined, is 45th place with an average score of 2.51, also an improvement of three spots but an unchanged average Zacks Rank from last week.

The Machinery industry is an obvious beneficiary of the proposal to allow firms to expense, rather than depreciate and amortize over the economic live, investments in equipment made during 2011. For starters, the industry itself tends to be capital intensive and buys a lot of equipment. In addition, they make the equipment that every other firm would be able to write off immediately.

That proposal is not what is driving these relatively good scores -- it is the strong results they posted in the second quarter and the related positive earnings revisions made after the positive surprises. Logic would dictate that the proposal would have wide bi-partisan support, since tax cuts for business are the sort of thing that the GOP is always demanding. However, we are in the political silly season: now, if Obama is supporting them, they must be an awful idea, at least to the GOP members of Congress.

But hey, why should this proposal be any different than any of the other proposals he has made? Actual enactment of the idea is still very much of an open question, so it should be seen as a potential, but only potential, extra kicker for these firms.

The first table below shows the Machinery stocks that hold the vaunted Zacks #1 Rank (Strong Buy). The second table shows those with Zacks #2 Ranks (Buy). Both lists contain firms worthy of further investigation. There is a wide range of market capitalizations to choose from on both lists, ranging from large cap to micro cap.

However, many of the larger cap names are ADR’s and might be more thinly traded that their market capitalizations might suggest. The names on the Zacks #1 Rank list are not particularly cheap on a P/E basis based on this years earnings, but start to look much more reasonable on 2011 earnings.

Number 1 Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Komatsu Ltd Adr	KMTUY	$20,974	15.33	12.21	0.00%	0.00%	$21.00
Cummins Inc	CMI	$16,531	16.68	12.94	3.20%	2.21%	$83.16
Stanley B&D Inc	SWK	$9,635	16.14	12.63	-0.86%	0.00%	$58.16
Cnh Global Nv	CNH	$7,880	26.13	15.12	9.02%	4.84%	$33.15
Metso Corp -Adr	MXCYY	$5,818	15.52	10.93	0.00%	0.00%	$38.80
Nordson Corp	NDSN	$2,365	15.76	14.52	7.36%	8.61%	$69.32
Smith (Ao) Corp	AOS	$1,653	13.48	12.52	-0.32%	-0.22%	$54.16
Appld Indl Tech	AIT	$1,241	15.92	13.09	8.15%	0.57%	$29.27
Franklin Elec	FELE	$767	17.8	15.1	0.00%	0.00%	$33.00
Tennant Co	TNC	$645	27.37	19.99	0.00%	0.00%	$33.94
Gorman Rupp Co	GRC	$469	22.11	18.47	0.79%	4.83%	$28.08
Ballantyne Strg	BTN	$116	20.85	16.05	50.00%	33.33%	$8.13
Manitex Int Inc	MNTX	$27	13.06	7.7	56.52%	19.61%	$2.35

Number 2 Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Caterpillar Inc	CAT	$44,183	18.8	13.73	0.34%	0.48%	$70.08
Deere & Co	DE	$29,157	15.31	13.39	7.68%	5.14%	$68.63
Sandvik Ab	SDVKY	$15,291	15.16	11.11	0.00%	0.00%	$12.89
Kubota Corp Adr	KUB	$10,884	17.18	14.26	6.41%	6.76%	$42.79
Joy Global Inc	JOYG	$6,498	15.15	13.13	3.82%	3.25%	$62.98
Bucyrus Intl A	BUCY	$5,215	15.19	12.43	-0.35%	0.00%	$64.37
Sensata Technol	ST	$3,151	10.61	9.38	0.45%	0.40%	$18.42
Lincoln Electrc	LECO	$2,309	18.92	15.61	0.00%	0.00%	$54.41
Baldor Electric	BEZ	$1,796	22.19	15.4	0.11%	0.00%	$38.23
H&E Equip Svcs	HEES	$277	N/A	55.19	4.23%	4.88%	$7.91
Smartheat Inc	HEAT	$212	9.85	7.41	0.77%	0.00%	$6.45
China Electric	CELM	$101	5.69	4.35	1.78%	1.35%	$4.89

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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