Wall Street’s obsession with anything AI-related this summer has obscured a trend that is quietly picking up steam. While the stocks benefiting from this trend are often considered “boring” by investors, they’re also the driving force behind a U.S. manufacturing boom that is one of the biggest seen in decades.
The stocks in question are industrial machinery stocks, and the strength of the sector has lately become apparent—especially when contrasted with the recent sell-off in AI-focused stocks like semiconductors. For instance, while the PHLX Semiconductor Index (SOX) has declined over 15% in the last two weeks, a number of major industrial machinery stocks have been making, or hovering near, new highs.
A major reason behind the strength of the industrial sector is the ongoing reshoring boom. In fact, manufacturers are building facilities in the U.S. at the fastest pace of the last few decades, a trend largely set in motion during the pandemic years. According to an MIT Sloan research report, a combination of supply chain bottlenecks, rising labor and transportation costs, U.S. tariffs on China and geopolitical tensions have forced companies to recognize the benefits of reshoring production.
Also contributing to the reshoring trend are recent laws aimed at increasing domestic manufacturing, including the Bipartisan Infrastructure Law, the CHIPS and Science Act and the Inflation Reduction Act. To that end, companies are constructing manufacturing facilities in the U.S. at a higher rate than any other property type, according to MIT Sloan, with spending on that front increasing a whopping 62% above the five-year average in 2022.
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Going forward, industrial machinery makers are likely to benefit from what economists view as a near-certain falling interest rate environment in the coming months. Indeed, lower rates make it easier for manufacturers to borrow money for new equipment and technology upgrades, in turn driving growth in the manufacturing space. What’s more, falling rates facilitate lower financing costs for manufacturers, while improving cash flow and making it easier to manage debt and raise capital for new projects.
With that said, let’s take a look at a couple of stocks that are key participants in, and providers for, the industrial machinery sector.
2 Industrial Machinery Stocks for a Resurgent Sector
Philadelphia-based Carpenter Technology (CRS) is a global provider of specialty metals like titanium, stainless steels, tool steels, powder metals, as well as additives and metal powders and parts. The company serves numerous end markets, including industrial, consumer, defense/aerospace and medical markets. Carpenter’s products are often used for components that require high strength and durability, which are critical attributes in the industrial machinery sector.
Business has been brisk for Carpenter in recent quarters as shown by the firm’s just-released record fiscal Q4 results, which featured the completion of its most profitable year ever. To that end, a major Wall Street bank recently initiated coverage in Carpenter with a “buy” rating based on the company’s potential for “significant growth” due to its unique position in the market, which combines exposure to early-cycle original equipment manufacturing (OEM) along with the pricing power of a commercial aftermarket supplier.
Additionally, the bank said Carpenter is likely to benefit from a “mismatch” between the recent increase in OEM production rates and capacity constraints for certain specialty metals, allowing the company to maintain its pricing power while passing on higher costs to customers. In the wake of the latest financial results, the top brass pulled forward by a year its goal of reaching $500 million in adjusted operating income by 2026, while Wall Street sees earnings booming this year and next.
Hyster-Yale (HY) is a leading manufacturer of a line of industrial lift trucks, attachments and aftermarket parts that are in high demand in the ongoing reshoring boom.
A strong global economy, combined with growing demand for lift trucks worldwide, plus a 17% year-over-year increase in lift truck prices, resulted in a 90% increase in lift truck operating profit for the first quarter of 2024.
Moreover, in its Q1 earnings report, Hyster-Yale reported revenues of more than $1 billion for the fourth consecutive quarter, including the highest reported operating profit and profit margins in the company’s history.
Looking ahead into Q2, management anticipates continued strong product margins from shipments of higher-margin backlog units to drive year-over-year profit growth, while profits are expected to increase “significantly” compared to a year ago. (The Q2 earnings report is due out August 6.)
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