With the recent rally in tech stocks, why would you choose industrial services stocks to buy? Well, the U.S. economy and the global economy alike have witnessed a unique challenge over the past few months. They’re all trying to recover as quickly as possible from the latest economic recession due to the coronavirus crisis.
Back in March 2020, the U.S. government called for a $2 trillion infrastructure package as part of coronavirus response to boost the economy. A CNBC article about this massive infrastructure package stated that “Trump has long pushed for a proposal to revamp American roads, bridges and airports, and Democratic congressional leaders saw the issue as a key area where they could cooperate with the Republican president when he first took office. But efforts to put together a sprawling infrastructure plan have fallen apart.”
If this infrastructure package gets approved, even partially, then the industrial services sector may benefit for the rest of 2020 and beyond. The Industrials sector (as measured by the Vanguard Industrials Index Fund ETF Shares (NYSEARCA:VIS)) has generally underperformed the broader market, with a year-to-date return of -5%, compared to the return of 4.8% for the S&P 500 Index.
Below are five industrials services stocks to buy for the rest of 2020.
These stocks are selected on investment criteria such as value, growth and strong fundamentals. The stocks selected are:
- GrafTech International (NYSE:EAF)
- Powell Industries (NASDAQ:POWL)
- The Timken Co. (NYSE:TKR)
- Advanced Emissions Solutions (NASDAQ:ADES)
- Comfort Systems USA (NYSE:FIX)
Let’s go into a little more detail on each of these picks.
5 Industrial Services Stocks to Buy: GrafTech International (EAF)
GrafTech International manufactures graphite electrode products which are essential to the production of electric arc furnaces for steel and other ferrous and non-ferrous metals.
The firm also produces petroleum needle coke products via its subsidiary Seadrift Coke. Petroleum needle coke is a raw material for producing graphite electrodes. The company has customers in America, Europe, the Middle East.
The most recent second-quarter 2020 earnings report was strong with earnings and revenues beating estimates. “GrafTech International (EAF) came out with quarterly earnings of $0.35 per share, beating the Zacks Consensus Estimate of $0.21 per share. … GrafTech, which belongs to the Zacks Metal Products – Procurement and Fabrication industry, posted revenues of $280.72 million for the quarter ended June 2020, surpassing the Zacks Consensus Estimate by 29.07%.”
Strong earnings and revenue are both supportive of the stock price. I like the high net margin of 41.58% and a trailing price-earnings ratio (without extraordinary items) of just 3.5.
Powell Industries (POWL)
Powell Industries engages in the development, design, manufacture, and provision of services of custom-engineered products and systems, largely for “engineering-construction firms and end-users in the oil and gas, electric utility, transportation and other heavy industries.”
Unfortunately, the stock is down over 41% in 2020 so far.
Still, it has an attractive dividend yield of over 3.5%, a relatively low P/E ratio of 19.8, and a strong positive free cash flow increase in 2019 of $64.5 million — compared to the -$33.05 million in 2018. The company has a strong balance sheet, and although the third quarter 2020 earnings report were not impressive, I like the business approach by Brett A. Cope, the president and chief executive officer, who said, “Powell remains committed to our plans and investment in research and development to create innovative products and services to capitalize on opportunities and maximize profitability in an uncertain market environment.”
There was a severe disruption in its business activities and the key suppliers of the company in the past few months due to the Covid-19 crisis, which was reflected in the earnings report. And to the extent that a return to normal business operations is made, its next earnings report should be stronger.
Timken (TKR)
The Timken Company engages in the engineering, manufacturing, and marketing of bearings and power transmission products. Another company with second-quarter 2020 earnings and revenues surpassing estimates.
According to the Yahoo! article, “The Timken Company TKR reported second-quarter 2020 adjusted earnings per share of $1.02, which beat the Zacks Consensus Estimate of 33 cents by a wide margin. Total revenues in the quarter were $804 million, down 20% from the year-ago quarter on account of lower demand due to the COVIS-19 (SIC) situation and unfavorable currency impact, partially offset by the favorable impact of acquisitions. The top line, however, surpassed the Zacks Consensus Estimate of $705 million.”
In addition to this, Timken declared a quarterly dividend of 28 cents per share. That payout will mark 393straight quarters of paying dividends. As the article points out, this makes it “one of the longest-running dividend records among NYSE-listed companies.”
The current dividend yield is around 2%, with a low trailing P/E ratio of 13.2, and the stock is down around 4% in 2020. However it has made an impressive rally of about 48% in the past three months, and it could have the momentum to rise further.
Advanced Emissions Solutions (ADES)
Advanced Emissions Solutions is a holding company which engages in the provision of environmental and emission control equipment to the power generation industry. This stock has a very low market capitalization of $82 million. In general, small-capitalization stocks are riskier compared to larger companies, but recently we have witnessed that the Russell 2000 Index has made a comeback. This trend could continue, as the valuation of stocks may be a dominant theme in the stock market until the Presidential election.
The stock is down almost 65% in 2020.
The pandemic took its toll on second-quarter 2020 results. “Our second quarter results were expectedly challenged by the continued pressure in coal-fired power generation which was intensified by the economic disruption resulting from the ongoing pandemic, which were significant factors in the impairment charge recorded in the second quarter,” said Greg Marken, interim CEO of ADES.
It is hard to ignore the trailing P/E ratio of 4.5, the net margin of 50.64%, and the positive and increasing free cash flows for the past three consecutive years.
Comfort Systems (FIX)
Comfort Systems USA engages in the provision of mechanical and electrical contracting services. It operates through Mechanical Services, Electrical Services and Corporate segments. It has a year-to-date performance of around 10% and a three-month performance of around 80%.
The most recent quarterly results beat the earnings and revenue estimates. From the Yahoo! article, “Comfort Systems USA, Inc. (NYSE:FIX) just released its latest quarterly results and things are looking bullish. The company beat both earnings and revenue forecasts, with revenue of US$743m, some 7.3% above estimates, and statutory earnings per share (EPS) coming in at US$1.08, 137% ahead of expectations.”
The company has experienced both earnings growth and cash flow growth, and this trend may continue being supportive for the stock, as the recent strong earnings reported.
“While the historical EPS growth rate for Comfort Systems is 26.4%, investors should focus on the projected growth. The company’s EPS is expected to grow 16.5% this year, crushing the industry average, which calls for EPS growth of -3.5%. The company’s annualized cash flow growth rate has been 31.4% over the past 3-5 years versus the industry average of 12.3%.”
These five industrial services stocks are worth a closer look for the rest of 2020.
As of this writing, Stavros Georgiadis, CFA did not hold a position in any of the aforementioned securities.
