The industrial sector finds itself in an advantageous position given the need to improve infrastructure and the increased use of automation and smart manufacturing. Notably, increased government investments in boosting domestic manufacturing and improving infrastructure are boosting the prospects of the industrial sector.
Given the industry tailwinds, it could be wise to invest in fundamentally strong industrial machinery stocks Daikin Industries, Ltd. (DKILY), Tennant Company (TNC), and Interface, Inc. (TILE).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industrial sector’s prospects.
The increased demand for manufactured goods, including building materials and textiles, coupled with the emphasis on domestic manufacturing, is driving an upsurge in the need for industrial goods and services.
The industrial sector is benefiting from increased digitization initiatives that are helping improve manufacturing processes. Moreover, industrial companies are also benefiting from increased local sourcing, which has helped reduce reliance on unreliable supply chains, which often slow down manufacturing processes.
In the era of Industry 4.0, the industrial sector thrives through technological investments and sustainability. Industry 4.0 is driving advanced automation, enhanced connectivity, and remote monitoring, thereby boosting manufacturing. It has also helped optimize efficiency and production schedules and reduce operational costs.
The global Industry 4.0 market is anticipated to reach approximately $482 billion by 2032, growing at a CAGR of 20.7%. The industrial machinery sector sees robust demand as the economy expands and the demand for manufactured items increases.
Moreover, advanced technologies, including AI, IoT, and robotics, are being integrated into industrial machinery to drive innovation, boost productivity, lower costs, and improve profits. The industrial machinery market is projected to grow at a CAGR of 5.3%, reaching $1.04 trillion by 2032.
The growth of the global textile market is tied to increased demand for fast fashion and the rising trend of shopping online. The global textile market revenue is expected to grow at a CAGR of 7.6% from 2023 to 2030.
Given this backdrop, let’s assess the fundamentals of the featured industrial stocks.
Daikin Industries, Ltd. (DKILY)
Headquartered in Osaka, Japan, DKILY manufactures, distributes, and sells air conditioning and refrigeration equipment, as well as chemical products internationally. The company provides a range of air conditioning and refrigeration equipment products.
On December 26, 2023, DKILY established Daikin Airconditioning (Cambodia) Co., Ltd. in Phnom Penh, Kingdom of Cambodia, to tap into the growing HVAC market in the region, with operations set to begin in January 2024.
DKILY plans to bolster its position in Cambodia's expanding commercial air conditioning market by enhancing its sales network, offering after-sales services, and establishing a training facility for service engineers to meet the growing demand in the country's economy.
On October 15, 2023, DKILY, Tokyo Gas Engineering Solutions Corporation, and RIKEN National Research and Development Agency unveiled the world's first laser-based technology for remotely detecting leaks of HFC-32 (R32) refrigerant.
The collaboration aims to improve refrigerant leak detection during on-site inspections of air conditioners, contributing to the reduction of greenhouse gas emissions, with plans for commercialization in 2025.
In terms of the trailing-12-month gross profit margin, DKILY’s 34.29% is 13.3% higher than the 30.28% industry average. Likewise, its 5.75% trailing-12-month Capex/Sales is 93.6% higher than the 2.97% industry average. Additionally, its 0.93x trailing-12-month asset turnover ratio is 15.6% higher than the 0.80x industry average.
DKILY’s net sales for the first half of the fiscal year 2023 increased 10.2% year-over-year to ¥2.23 trillion ($15.39 billion). Its operating profit rose 6.3% year-over-year to ¥235.70 billion ($35.95 billion). In addition, its profit attributable to owners of parent grew 2.2% from the same period the prior year to ¥221.70 billion ($1.53 billion).
Street expects DKILY’s revenue for the fiscal year ending March 31, 2024, to increase 419.3% year-over-year to $29.34 billion. Its EPS for the fiscal year ending March 31, 2025, is expected to increase 564.7% year-over-year to $4.03. Over the past month, the stock has gained 14.4% to close the last trading session at $17.03.
DKILY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Stability. Within the A-rated Industrial - Building Materials industry, it is ranked #21 out of 46 stocks. To see DKILY’s Growth, Value, Momentum, Sentiment, and Quality ratings, click here.
Tennant Company (TNC)
TNC designs, manufactures, and markets floor cleaning equipment in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. The company provides a suite of products, including floor maintenance and cleaning equipment, along with other sustainable cleaning technologies.
In terms of the trailing-12-month levered FCF margin, TNC's 10.61% is 76.5% higher than the 6.01% industry average. Likewise, its 11.99% trailing-12-month EBIT margin is 21.9% higher than the 9.84% industry average. Additionally, its 8.36% trailing-12-month net income margin is 36.7% higher than the 6.12% industry average.
For the fiscal third quarter ending September 30, 2023, TNC's net sales increased 15.9% year-over-year to $304.70 million. The gross profit rose 31.1% over the same quarter last year, reaching $132 million.
For the same quarter, its adjusted net income and adjusted earnings per share were $25.40 million and $1.34, reflecting increases of 36.6% and 36.7% over the prior-year quarter, respectively. Additionally, the company's adjusted EBITDA increased by 35.8% year-over-year to $45.90 million.
Analysts expect TNC's revenue for the quarter that ended December 31, 2023, to increase 6.5% year-over-year to $309.95 million. Its EPS for fiscal 2023 is expected to increase 44.1% year-over-year to $5.91. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 34.5% to close the last trading session at $90.39.
It’s no surprise that TNC has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth and Quality. Within the A-rated Industrial - Machinery industry, it is ranked first out of 79 stocks. Beyond what we stated above, we also have given TNC grades for Momentum, Stability, and Sentiment. Get all TNC ratings here.
Interface, Inc. (TILE)
TILE designs, produces, and sells modular carpet products primarily in the United States and internationally. The company operates in two segments: Americas (AMS) and Europe, Africa, Asia, and Australia (EAAA).
In terms of the trailing-12-month gross profit margin, TILE’s 33.46% is 10.5% higher than the 30.28% industry average. Likewise, its 8.49% trailing-12-month levered FCF margin is 41.3% higher than the 6.01% industry average. Additionally, its 1.04x trailing-12-month asset turnover ratio is 29.7% higher than the 0.80x industry average.
For the third quarter that ended on October 1, 2023, TILE’s net sales stood at $311 million. The company’s adjusted gross profit increased 1% over the prior year’s quarter to $111.60 million. Moreover, its adjusted EBITDA came in at $43.7 million, up 1.9% year-over-year.
For the quarter ending March 31, 2024, TILE’s EPS is expected to increase 28.6% year-over-year to $0.09. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 57.6% to close the last trading session at $12.04.
TILE’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Value and Quality. It is ranked first out of 5 stocks in the Industrial - Textiles industry. To see TILE’s Growth, Momentum, Stability, and Sentiment ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
DKILY shares were trading at $16.46 per share on Tuesday morning, down $0.57 (-3.32%). Year-to-date, DKILY has gained 1.79%, versus a 0.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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