Industrial Equipment: Investing Essentials

The industrial equipment sector, some of its companies. and the industry trends they face.

Aug 21, 2014 at 3:44PM

If you have wondered how to play the anticipated resurgence in manufacturing in the U.S., the industrial equipment industry could be the place to look for stocks to buy. The logic behind this view is simple: If the economy is flourishing, manufacturing companies will look to expand capacity and spending on capital machinery will increase. At this stage general industrial equipment companies such as Siemens, ABB (NYSE:ABB), Parker-Hannifin (NYSE:PH), Honeywell International (NYSE:HON), and Emerson Electric (NYSE:EMR) start to look attractive. Investors should also consider more niche market players such as vision machine company Cognex (NASDAQ:CGNX) or Roper Industries (NYSE:ROP). It's time to look closer at the industry.


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What is the industrial equipment industry?

In essence, the industry represents any item of capital machinery that is sold to an industrial company in order to enable its manufacturing or processing activity. While this traditionally means hardware, investors should recognize that software and information technology are becoming an increasing part of the industry. For example, Cognex is heavily exposed to growth in factory automation and increasingly in logistics, while Parker-Hannifin and Ametek (NYSE:AME) are leading players in the motion control market.

How big is the industrial equipment industry?

A definitive estimate is difficult due to the broad nature of the sector, but investors can use industrial equipment spending figures from the Federal Reserve as a rough guide. At the end of 2013, industrial equipment spending in the U.S. was more than $200 billion, up by $46.5 billion from the end of 2010. Other useful U.S. industry metrics -- used by companies such as Rockwell Automation (NYSE:ROK) -- are the Fed's Industrial Production Index and the Purchasing Managers' Index from the Institute for Supply Management.

How does the industrial equipment industry work?

Industrial equipment manufacturers tend to sell using a mix of direct sales and distributors, based on where their traditional end markets are located. As manufacturing and industrial activity increasingly shifts toward emerging markets, the challenge is for companies to develop sales operations or distributor relationships in those countries.

They will also need to establish manufacturing operations within emerging markets to be closer to their future customers, and to take advantage of low-cost production in these markets. This is a particular challenge because manufacturers generally prefer being serviced by companies with operations within their own country. That means U.S. companies need to be prepared to face strong local competition in emerging markets in the coming years.

What are the drivers of the industrial equipment industry?

The obvious driver of the industry is economic growth, more specifically within the industrial economy. This often comes relatively late in the business cycle. In plain English, this means that as the economy expands, manufacturers see a pickup in demand and increase production rates. At some point they will need to upgrade or expand production capacity. This usually involves purchasing new production equipment (whether it be plastic bottling systems, power transmission technology, automated equipment, packaging machinery, process controls, etc.) -- good news for industrial equipment companies.

However, this sort of spending tends to be relatively high ticket, and it's somewhat reliant on business sentiment being positive on future growth. In other words, it will only pick up strongly after a recovery is in place. As noted above, the shift to emerging market production is also an ongoing trend, and investors should look out for management commentary on how their companies intend to expand sales in these regions.

Another thing to watch for is the ongoing development of shale oil and gas plays in North America, Increased upstream activity (oil and gas extraction) should lead to more spending on downstream (processing and refining) activity,which is good news for companies such as Emerson Electric and Rockwell Automation. In addition, cheaper energy sources, such as gas, should lead to an increase in manufacturing activity in the U.S. -- another long-term trend that should offer support to U.S. companies servicing areas of growth in the domestic economy.

However, the winners in the sector are likely to be those that adjust to the shift in manufacturing toward the BRIC countries (Brazil, Russia, India, and China). This is something to follow closely in the coming decade.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Cognex and Emerson Electric. The Motley Fool owns shares of Cognex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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