Chicago, IL – January 23, 2025 – Today, Zacks Equity Research Equity are W.W. Grainger, Inc. GWW, Eos Energy Enterprises EOSE, ScanSource SCSC and ClearSign Technologies CLIR.
Link: https://www.zacks.com/commentary/2401215/4-industrial-services-stocks-to-watch-despite-industry-headwinds
The Zacks Industrial Services industry has been bearing the brunt of the prolonged contraction in the manufacturing sector as customers remain cautious about spending. Flared-up input costs have added to the woes.
Despite the current setback, the rise in e-commerce activities will be a key catalyst for the industry. Companies like W.W. Grainger, Inc., Eos Energy Enterprises, ScanSource and ClearSign Technologies are positioned for growth by leveraging strategies to capitalize on this demand. The companies have also been focusing on lowering costs, increasing productivity and efficiency, and investing in automation and digitization, which will aid growth.
The Zacks Industrial Services industry comprises companies that provide industrial equipment products and MRO (maintenance, repair and operations) services. It includes routine maintenance, emergency maintenance and spare part inventory control, which keep a facility and its equipment in good operating condition. Industry participants serve a wide array of customers, ranging from commercial, government and healthcare to manufacturing.
The industry's products (power tools, hand tools, cutting fluids, lubricants, personal protective equipment and consumables) are utilized in production and plant maintenance but are not directly related to customers’ core products or services. These companies reduce MRO supply-chain costs and improve customers' plant floor productivity by offering inventory management, and process and procurement solutions.
The durable goods manufacturing index was up 0.1% during the period. The Institute for Supply Management’s manufacturing index had languished in contraction territory for a consecutive 16 months until February 2024. March saw a slight uptick to 50.3%. However, the index slipped to the contraction territory again, with a 49.2% reading in April. It has remained below 50% since and was 49.3% in December. The average for 2024 was 48.3%.
The New Orders Index had shown expansion in November and December, following seven consecutive months of contraction. However, it remains to be seen whether this will be sustained as the index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.
Pricing Actions to Combat High Costs: The industry has been experiencing significant inflation levels, including higher prices for labor, freight and fuel. The companies are witnessing labor shortages for some positions and incurring steep labor costs to meet demand. Industry players are focusing on pricing actions, cost-cutting measures, efforts to improve productivity and efficiency and the diversification of the supplier base to mitigate some of these headwinds.
E-commerce to be a Growth Driver: MRO demand is significantly impacted by the evolution of e-commerce. Customer demand for highly tailored solutions, with real-time access to information and rapid delivery of products, is rising. Customers want to execute their business activities in the most efficient way possible, which often means online.
According to Statista, global e-commerce revenues are expected to reach $4,791 billion in 2025 and see a compound annual growth rate (CAGR) of 7.83% between 2025 and 2029. The U.S. retail e-commerce market is expected to reach the $1.38 trillion mark in 2025 and witness a CAGR of 8.01% between 2025 and 2029. To capitalize on this trend, industrial service companies are heavily investing in improving their digital capabilities and increasing their e-commerce share.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bearish prospects in the near term. The Zacks Industrial Services Industry, a 19-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #218, which places it in the bottom 13% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few Industrial services stocks that investors can add to their portfolio, it is worth taking a look at the industry’s stock-market performance and its valuation picture.
The Industrial Services industry has underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has grown 9.6% compared with the sector’s growth of 14.9%. The Zacks S&P 500 composite has moved up 24.3%.
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Industrial Services companies, we see that the industry is currently trading at 28.52X compared with the S&P 500’s 13.96X and the Industrial Products sector’s forward 12-month EV/EBITDA of 19.84X.
Over the last five years, the industry traded as high as 35.44X and as low as 6.04X, the median being 19.43X.
Eos Energy Enterprises: The company recently announced that it is set to deliver on its revised 2024 revenue guidance of $15 million supported by increased customer deliveries during the fourth quarter. For 2025, it projects revenues to be between $150 million and $190 million, almost 10 times the projected 2024 level.
The growth is expected to be driven by increased production from its first state-of-the-art manufacturing line along with the continued strengthening of its overall supply chain. Over the past six months, Eos Energy has been ramping up its manufacturing line while laying a solid foundation for future growth by securing financing and adding to its customer orders backlog. EOS’ annualized capacity for line one is around 1.25 GWh currently. The company expects to take it up to the two GWh level by the fourth quarter of 2025.
The Zacks Consensus Estimate for the Edison, NJ-based company’s fiscal 2025 earnings indicates year-over-year growth of 82.3%. EOSE currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ClearSign Technologies: The company, in December 2024, announced that it had received the follow-on purchase order to retrofit four process heaters with 26 ClearSign Core burners. This marks a milestone for CLIR, as it is the largest order in terms of the number of burners and total order value. The company recently expanded its partnership with Zeeco, Inc. to launch a co-branded process burner line.
This collaborative effort by ClearSign Technologies and Zeeco is expected to significantly reduce industrial emissions. The company had reported record revenues in the third quarter of 2024. The growing pipeline of projects to be shipped, installed and in engineering phases and its expanding sales channels through a network of partners, OEM and engineering firms poised the company well for solid growth.
The Zacks Consensus Estimate for Tulsa, OK-based ClearSign Technologies’ earnings for fiscal 2025 has been unchanged over the past 30 days. The estimate currently indicates year-over-year growth of 107.7%. CLIR has a trailing four-quarter earnings surprise of 20.83%, on average. The company currently carries a Zacks Rank #3 (Hold).
Grainger: The company continues to deliver robust results, aided by margin improvements in its segments and strong operating performance. GWW is well-poised to gain from efforts to increase its customer base through incremental marketing investments and effective marketing strategies. The High Touch Solutions North America segment will continue to benefit from pricing actions and volume growth.
The Endless Assortment segment is gaining from customer acquisitions at its Zoro and MonotaRO businesses. Cost-control measures undertaken by GWW will sustain margins. The company is also focused on improving the end-to-end customer experience by investing in its e-commerce and digital capabilities and executing improvement initiatives within its supply chain.
The Zacks Consensus Estimate for fiscal 2025 earnings for the Lake Forest, IL-based company indicates year-over-year growth of 7.6%. The estimate has remained unchanged over the past 30 days. GWW currently has a trailing four-quarter earnings surprise of 1.24%, on average. It has an estimated long-term earnings growth rate of 9.3% and a Zacks Rank of 3 at present.
ScanSource: Despite cautious technology spending hurting its revenues, the company’s shifting business mix, operational execution and cost-saving efforts are driving stronger earnings and cash flow. Efforts to lower debt while returning capital to shareholders and acquisitions are also commendable. ScanSource recently acquired Resourcive, which delivers strategic IT sourcing solutions to the mid-market and enterprise, advising clients on value creation strategies that are enabled by technology.
With this acquisition, ScanSource is creating the advisory channel model of the future. SCSC has also acquired Advantix, which enables mobility value-added resellers to sell hardware combined with the recurring revenue stream from data connectivity. With this acquisition, the company created the Integrated Solutions Group (“ISG”). It is focused on developing solutions and services that enable channel partners to wrap additional value around their hardware offerings.
The Zacks Consensus Estimate for Greenville, SC-based ScanSource’s fiscal 2025 earnings has remained unchanged in the past 30 days. The consensus mark indicates year-over-year growth of 14%. SCSC has a long-term estimated earnings growth rate of 10% and currently carries a Zacks Rank of 3.
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