We recently compiled the 7 Best Heavy Equipment and Industrial Machinery Stocks to Buy. In this article, we are going to take a look at Eaton Corporation plc (NYSE:ETN) against the other equipment and industrial machinery stocks.
Heavy equipment and industrial machinery stocks aren’t for those investors who are fans of sharp growth. These stocks belong to stable and sizeable firms that enjoy economies of scale because of their operations. Setting up manufacturing plants to make these machines is not an easy task, and firms that succeed in the endeavor can end up becoming industry leaders.
These stocks are differentiated by their products. Industrial equipment stocks can be of firms that sell farm equipment, construction machines, power generation equipment, and ships. While semiconductor fabrication machines are typically not thought to be industrial equipment, they are used at an industrial scale to churn out thousands of chips in a month to power our computers and phones. In fact, this sector is one of the few that actually has a stock that has a monopoly in its market. Its shares are up by 54% over the past twelve months and it is also Europe’s most valuable company. It ranked 10th on our list of 11 Best Semiconductor Stocks To Invest In for the AI Boom, so you can check it out by clicking on the link.
One way in which investors can decide which heavy equipment and industrial machinery stocks to invest in is by looking at their products. For instance, stocks that sell agricultural machinery are likely to fluctuate if investors believe that the broader agricultural industry is headed for a downturn. This has also been the case in 2024, as February marked a key data release from the Agriculture Department. According to this data, net farm income in the US is projected to fall to $156 billion in 2023 to mark a 16% drop from 2022’s record high of $185.5 billion. This trend will continue in 2024, to mark an additional, and stronger, 25.5% annual drop to $116 billion.
The report’s impact on agricultural stocks was immediate, with one of the biggest pure play farming equipment providers in the US with a market capitalization of $7 billion tanking by nearly 13% over the next two weeks. This stock is down by 22% year to date and 28% over the past twelve months, and its $1.6 billion in receivables and $3.4 billion in inventory could help it weather out the cyclical agricultural that’s widely believed to be in play for the rest of 2024. There’s an “economic stare-down” between farmers and buyers going on right now, as farmers are waiting for grain prices to recover from three year lows to sell their products.
This turmoil was also evident in the Creighton University Rural Mainstreet Index (RMI) reading for June 2024. High interest rates, weak prices, and low farming equipment sales made the index drop to 41.7 in June from 44.2 in May, for its tenth straight month of a reading that sits below the growth neutral figure of 50. Farm equipment loans are also up by 20% annually, as farmers rely on debt to fund their operations. The souring expectations are also present in the June reading of Purdue/CME Group Ag Economy Barometer. Its Farm Capital Investment Index component fell by three points to 32 in June – just a point shy of the all time low reading as farmers paused their plans for spending.
Shifting gears, the next major components of heavy equipment and industrial machinery stocks are those that make construction machinery. US construction spending fell by 0.1% in May to $2.1 trillion but marked a 6.4% annual growth. The drop was across the board, with private construction, residential construction, and single family construction dipping by 0.3%, 0.2%, and 0.7%, respectively. While the drop in residential spending could have come on the back of an 18.5% jump in housing inventory in May 2024 to 1.28 million at a time when the median home price was at a historic high of $419,300, commercial construction has been struggling due to high rates and rising work from home trends in America.
This slump is evident in regions such as Boston, where authorities have stressed on the need to sharply raise the tax rate ceiling for commercial properties or face a $400 million cut in spending. As of January 2024, US commercial property prices have tanked by 11% since March 2022 when the Fed started to hike interest rates. This goes against the observations made during previous hiking cycles, according to data from the International Monetary Fund. Any turmoil in this segment means that heavy industrial machinery stocks will also face headwinds since construction spending is unlikely to pick up unless builders are certain of a shift in the economic environment. Commercial real estate loans have smaller maturity timelines, and 30% of this debt is due for maturity from 2024 to 2026.
With the current interest rates, refinancing will be costly, and it could constrain capital spending in the sector. This sector has also faced consistent net operating income (NOI) drops since 2020, which further reduces incentives for investment and spending. However, the eCommerce boom which opens up demand for warehouses and growth in residential NOI should power the industry moving forward. Additionally, infrastructure spending through the Bipartisan Infrastructure Act and the Inflation Reduction Act has earmarked trillions of dollars to upgrade America’s existing infrastructure and focus on electrification, which will naturally stimulate the demand for the construction industry even though it is struggling right now.
Looking at these trends, it’s unsurprising that the construction and farm component of the S&P flagship index has trimmed down its year to date returns to 11% from a peak of 24% in April. The drop started in April when the consumer price index (CPI) jumped by 3.5% annually in March, to outpace analyst estimates of 3.4% and mark a six month high. The benchmark S&P index has returned 17.5% year to date to lead the construction and farm equipment stocks by more than seven percentage points.
Our Methodology
To compile our list of the best heavy equipment and industrial machinery stocks, we ranked the 40 most valuable farming, heavy, construction, and specialty industrial machinery stocks by the number of hedge funds that had held a stake in them as of Q1 2024 end.
Why are we interested in the stocks that hedge funds pile into? The reason is simple. Our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see the details here).
A technician standing in the middle of a power station, inspecting a power distribution system.
Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Investors In Q1 2024: 85
Eaton Corporation plc (NYSE:ETN) is an Ireland based company that sells valves, actuators, wiring, and other industrial products that can be used in data centers, EV supply chains, and other lucrative areas. This sets it up rather well to benefit from the global wave of electrification and the growth in data centers due to the AI boom. Additionally, the US government has earmarked trillions of dollars in infrastructure and EV spending through the Bipartisan Infrastructure Act and the Inflation Reduction Act – both of which will stimulate demand for Eaton Corporation plc (NYSE:ETN)’s products. It also benefits from a noticeable exposure to the stable aerospace industry. Eaton Corporation plc (NYSE:ETN)’s backlogs during the second quarter jumped by 27% for its Electrical business division and by 11% for the Aerospace division. The growth in Electrical orders came on the back of strong spending in the data center and hyperscaler market.
However, Eaton Corporation plc (NYSE:ETN) has struggled due to Europe’s economic slowdown, which has affected the otherwise strong performance of the Electrical business division. During its latest earnings call, here’s what management had to say on the matter:
We would intend and anticipate to narrow the gap between those two businesses and narrow the gap the right way, which is the Global business needs to do significantly better. We have no expectations at all that we’d see retrenchment in our Americas business. And so — but I will say, as you think about the restructuring program that we launched, $375 million of spending, $325 million of benefits. 2/3 of that, more or less, will be in the Electrical segment with a heavy concentration in Global. So we are clearly working hard to improve margins in the Electrical Global business. One of the reasons why this gap kind of widened and opened up is that as we’re all aware, in the U.S. market, the North America market is doing very well right now.
There’s a lot of activity. There’s a lot of growth. We have a very strong strategic position in the North America margin — market overall. And so there are just a lot of things today that are really positive in the Americas markets that are allowing us to continue to expand margins there. And as you know, a lot of the European markets have been much weaker than we anticipated. You see some of the macroeconomic data coming out of Europe, Germany specifically, and a lot of the market segments in Europe where we have a strong position are some of the weaker parts of the market. If you think about the MOEM segment, you see it in some of the automation data from some of the other electrical peer companies, the residential market. And so I think today, those margins will get better.
If we look forward, we’re obviously anticipating margins getting better, there’s easier comps in the second half of the year as well. But without a doubt, there’s plenty of opportunity to expand our margins in our Global segment.
Overall ETN ranks 1st on our list of the equipment and industrial machinery stocks to buy. You can visit 7 Best Heavy Equipment and Industrial Machinery Stocks to Buy to see the other equipment and machinery stocks that are on hedge funds’ radar. While we acknowledge the potential of ETN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ETN that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.