Despite several macroeconomic challenges, the machinery industry is expected to grow significantly due to the strong demand for machinery and industrial goods, the integration of cutting-edge technologies, and increasing government funding. Thus, it could be wise to invest in fundamentally sound machinery stocks ABB Ltd (ABB) and Tennant Company (TNC).
However, the fundamentally weak machinery stock Kornit Digital Ltd. (KRNT) could be best avoided now.
Before discussing the fundamentals of these stocks, let's delve deeper into the forces driving the industry.
Despite supply disruptions, labor shortages, high material inflation, and an uncertain economic environment, the manufacturing industry is positioned to demonstrate continued strength this year, thanks to the increased adoption of new, emerging technologies and favorable federal funding to boost domestic manufacturing.
Manufacturing industry players’ increased focus on innovation and technology is helping them to combat lingering macroeconomic challenges. With the integration of advanced technologies such as IoT, machine learning, 5G, AI, and augmented and virtual reality, manufacturers aim at improved operational efficiency, lower operating costs, and higher margins.
Additionally, the Bipartisan Infrastructure Law’s $185 billion funding for over 6,900 projects is expected to boost the demand for machinery equipment and goods, leading to increased production and sales. This, in turn, could drive revenue growth for industrial manufacturers and suppliers.
According to a report by The Business Research Company, the industrial machinery market is projected to reach $708.30 billion by 2027, growing at a CAGR of 6.7%. Investors’ interest in machinery stocks is evident from the S&P 1500 Composite Industrial Machinery Index’s 18.8% returns over the past six months.
Against this backdrop, quality machinery stocks ABB and TNC could be ideal buys to capitalize on the industry’s bright prospects. However, struggling machinery stock KRNT might be best avoided now.
Let’s discuss these stocks:
Stocks to Buy:
ABB Ltd (ABB)
Headquartered in Zurich, Switzerland, ABB is a global provider of electrification, automation, robotics, and motion products. It operates through four divisions, Electrification Products; Robotics and Motion; Industrial Automation; and Power Grids. The company caters to customers in the utilities, industry, transport, and infrastructure sectors.
On March 16, 2023, ABB declared the initiation of its expansion project for their present North American robotics base and production plant situated in Auburn Hills, MichiganTop of Form
. The plan, valued at $20 million, is a significant milestone in advancing ABB Robotics’ worldwide dominance in designing and fabricating revolutionary robotic systems.
On March 8, ABB announced its partnership with Direct Energy Partners (DEP), a digital technology start-up that expedites the adoption of Direct Current (DC) microgrids. The alliance is set to strategically benefit the company by reinforcing its position as a frontrunner in cutting-edge technologies.
ABB’s trailing-12-month gross profit margin of 33.06% is 12.9% higher than the industry average of 29.29%. Likewise, its trailing-12-month EBITDA margin and net income margin of 15.20% and 8.41% are 13.3% and 28.8% higher than the industry averages of 13.42% and 6.53%, respectively.
During the fourth quarter that ended December 31, 2022, ABB’s total revenues increased 3.4% year-over-year to $7.82 billion, while its gross profit grew 10.9% year-over-year to $2.66 billion. Its operational EBITDA was $1.15 billion, up 16% from the prior year’s period. Also, as of December 31, 2022, the company’s total current assets stood at $19.57 billion, compared to $18.70 billion as of December 31, 2021.
The consensus revenue estimate of $30.91 billion for the fiscal year ending December 2023 reflects a 5% year-over-year improvement. Likewise, the consensus EPS estimate of $1.63 for the current year indicates a 25.6% rise year-over-year. The stock has gained 35.7% over the past six months to close the last trading session at $32.75.
ABB’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
ABB has an A grade for Sentiment and a B for Stability, Growth, and Quality. It has topped the A-rated 79-stock Industrial - Machinery industry.
In addition to the POWR Ratings I’ve just highlighted, you can see ABB’s ratings for Value and Momentum here.
Tennant Company (TNC)
TNC manufactures, designs, and markets floor cleaning equipment. It offers aftermarket parts and consumables, equipment maintenance, repair services, and other floor maintenance and cleaning equipment. The company provides financing, rental, leasing programs, and machine-to-machine asset management solutions.
On March 20, TNC announced the expansion of its ride-on scrubber portfolio, presenting its customers with new floor cleaning equipment alternatives, T681 and T981 scrubbers. This move should strengthen TNC's market position, improving the overall customer experience by providing more varied options.
TNC’s trailing-12-month gross profit margin of 38.56% is 31.7% higher than the 29.29% industry average. Additionally, its trailing-12-month ROCE, ROTC, and ROTA of 14.66%, 7.07%, and 6.11% are higher than the industry averages of 13.83%, 7.01%, and 5.20%, respectively.
For the fourth quarter that ended December 31, 2022, TNC’s net sales increased 5.3% year-over-year to $291 million, and its gross profit grew 14.5% from the year-ago value to $115.20 million. Also, the company’s adjusted net income and adjusted EPS rose 101.5% and 105.6% year-over-year to $27.20 million and $1.46, respectively.
Analysts expect TNC’s EPS to increase 4.2% year-over-year to $4.27 for the fiscal year ending December 2023. The company’s revenue for the ongoing year is expected to grow 4.5% year-over-year to $1.14 billion. Shares of TNC have gained 11.2% over the past six months to close the last trading session at $64.66.
TNC’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
TNC has a B grade for Quality, Value, Momentum, and Growth. It is ranked #2 out of 79 stocks in the Industrial - Machinery industry.
Click here to see the other ratings of TNC for Sentiment and Stability.
Stock to Sell:
Kornit Digital Ltd. (KRNT)
Headquartered in Rosh HaAyin, Israel, KRNT designs and markets digital printing solutions. Its offerings include digital printing systems, consumables, software, and value-added services. Furthermore, the company’s direct-to-garment printing platform caters to a wide range of industrial operators, from small-scale to mass producers.
The stock’s trailing-12-month EBITDA margin of negative 19.93% compares to the 13.42% industry average. And its trailing-12-month net income margin of negative 29.12% compares to the 6.53% industry average. In addition, the stock’s trailing-12-month asset turnover ratio of 0.27x is 66% lower than the industry average of 0.80x.
KRNT’s total revenue decreased 27.7% year-over-year to $63.30 million in the fourth quarter that ended December 31, 2022. Its non-GAAP gross profit declined 47% from the year-ago value to $23.03 million. Moreover, the company’s non-GAAP net loss and non-GAAP loss per share stood at $6.56 million and $0.13, compared to a net income and EPS of $6.37 million and $0.13 in the previous year’s quarter.
Analysts expect KRNT to report a loss per share of $0.51 for the fiscal year ending December 2023. The company’s revenue for the current year is expected to decrease 8.3% year-over-year to $249.10 million. Furthermore, KRNT missed the consensus EPS and revenue estimates in three of four trailing quarters, which is disappointing.
The stock has plummeted 24.5% over the past six months and 76.3% over the past year, closing the last trading session at $19.15.
KRNT’s POWR Ratings reflect its weak fundamentals. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system.
It has an F grade for Growth and a D for Stability, Quality, and Value. KRNT is ranked last among 79 stocks in the same industry.
Beyond the POWR Ratings stated above, we have also given KRNT grades for Momentum and Sentiment. Get all KRNT ratings here.
What To Do Next?
Get your hands on this special report:
What gives these stocks the right stuff to become big winners, even in this brutal stock market?
First, because they are all low-priced companies with the most upside potential in today’s volatile markets.
But even more important is that they are all top Buy rated stocks according to our coveted POWR Ratings system, and they excel in key areas of growth, sentiment and momentum.
Click below now to see these 3 exciting stocks that could double or more in the year ahead.
ABB shares were trading at $32.19 per share on Monday afternoon, down $0.56 (-1.71%). Year-to-date, ABB has gained 5.68%, versus a 4.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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