In this piece, we will take a look at the 7 best heavy equipment and industrial machinery stocks to invest in.
Heavy equipment and industrial machinery stocks aren’t for those investors who are fans of sharp growth. These stocks belong to stable and sizeable firms that enjoy economies of scale because of their operations. Setting up manufacturing plants to make these machines is not an easy task, and firms that succeed in the endeavor can end up becoming industry leaders.
These stocks are differentiated by their products. Industrial equipment stocks can be of firms that sell farm equipment, construction machines, power generation equipment, and ships. While semiconductor fabrication machines are typically not thought to be industrial equipment, they are used at an industrial scale to churn out thousands of chips in a month to power our computers and phones. In fact, this sector is one of the few that actually has a stock that has a monopoly in its market. Its shares are up by 54% over the past twelve months and it is also Europe’s most valuable company. It ranked 10th on our list of 11 Best Semiconductor Stocks To Invest In for the AI Boom, so you can check it out by clicking on the link.
One way in which investors can decide which heavy equipment and industrial machinery stocks to invest in is by looking at their products. For instance, stocks that sell agricultural machinery are likely to fluctuate if investors believe that the broader agricultural industry is headed for a downturn. This has also been the case in 2024, as February marked a key data release from the Agriculture Department. According to this data, net farm income in the US is projected to fall to $156 billion in 2023 to mark a 16% drop from 2022’s record high of $185.5 billion. This trend will continue in 2024, to mark an additional, and stronger, 25.5% annual drop to $116 billion.
The report’s impact on agricultural stocks was immediate, with one of the biggest pure play farming equipment providers in the US with a market capitalization of $7 billion tanking by nearly 13% over the next two weeks. This stock is down by 22% year to date and 28% over the past twelve months, and its $1.6 billion in receivables and $3.4 billion in inventory could help it weather out the cyclical agricultural that’s widely believed to be in play for the rest of 2024. There’s an “economic stare-down” between farmers and buyers going on right now, as farmers are waiting for grain prices to recover from three year lows to sell their products.
This turmoil was also evident in the Creighton University Rural Mainstreet Index (RMI) reading for June 2024. High interest rates, weak prices, and low farming equipment sales made the index drop to 41.7 in June from 44.2 in May, for its tenth straight month of a reading that sits below the growth neutral figure of 50. Farm equipment loans are also up by 20% annually, as farmers rely on debt to fund their operations. The souring expectations are also present in the June reading of Purdue/CME Group Ag Economy Barometer. Its Farm Capital Investment Index component fell by three points to 32 in June – just a point shy of the all time low reading as farmers paused their plans for spending.
Shifting gears, the next major components of heavy equipment and industrial machinery stocks are those that make construction machinery. US construction spending fell by 0.1% in May to $2.1 trillion but marked a 6.4% annual growth. The drop was across the board, with private construction, residential construction, and single family construction dipping by 0.3%, 0.2%, and 0.7%, respectively. While the drop in residential spending could have come on the back of an 18.5% jump in housing inventory in May 2024 to 1.28 million at a time when the median home price was at a historic high of $419,300, commercial construction has been struggling due to high rates and rising work from home trends in America.
This slump is evident in regions such as Boston, where authorities have stressed on the need to sharply raise the tax rate ceiling for commercial properties or face a $400 million cut in spending. As of January 2024, US commercial property prices have tanked by 11% since March 2022 when the Fed started to hike interest rates. This goes against the observations made during previous hiking cycles, according to data from the International Monetary Fund. Any turmoil in this segment means that heavy industrial machinery stocks will also face headwinds since construction spending is unlikely to pick up unless builders are certain of a shift in the economic environment. Commercial real estate loans have smaller maturity timelines, and 30% of this debt is due for maturity from 2024 to 2026. With the current interest rates, refinancing will be costly, and it could constrain capital spending in the sector. This sector has also faced consistent net operating income (NOI) drops since 2020, which further reduces incentives for investment and spending. However, the eCommerce boom which opens up demand for warehouses and growth in residential NOI should power the industry moving forward. Additionally, infrastructure spending through the Bipartisan Infrastructure Act and the Inflation Reduction Act has earmarked trillions of dollars to upgrade America’s existing infrastructure and focus on electrification, which will naturally stimulate the demand for the construction industry even though it is struggling right now.
Looking at these trends, it’s unsurprising that the construction and farm component of the S&P flagship index has trimmed down its year to date returns to 11% from a peak of 24% in April. The drop started in April when the consumer price index (CPI) jumped by 3.5% annually in March, to outpace analyst estimates of 3.4% and mark a six month high. The benchmark S&P index has returned 17.5% year to date to lead the construction and farm equipment stocks by more than seven percentage points.
So, with these details in mind, let’s take a look at some top heavy equipment and industrial machinery stocks.
A farmer working in a field with the latest farm machinery and tools.
Our Methodology
To compile our list of the best heavy equipment and industrial machinery stocks, we ranked the 40 most valuable farming, heavy, construction, and specialty industrial machinery stocks by the number of hedge funds that had held a stake in them as of Q1 2024 end.
Why are we interested in the stocks that hedge funds pile into? The reason is simple. Our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see the details here).
7. Xylem Inc. (NYSE:XYL)
Number of Hedge Fund Investors In Q1 2024: 45
Xylem Inc. (NYSE:XYL) is an industrial engineering products firm that sells fluid control and management equipment. It is one of the biggest companies in the world in the water pump market. Xylem Inc. (NYSE:XYL)’s customers range from utilities to other industrial water users, lending it a rather stable market. Despite a capital intensive business, the firm has laid out optimistic cost efficiency plans for its future. Xylem Inc. (NYSE:XYL)’s current non GAAP operating margin sits at 17.4%, and between 2024 and 2027, the firm aims to increase its non GAAP operating margin by 100 basis points annually. Its stable business model and market position were reflected during Xylem Inc. (NYSE:XYL)’s first quarter earnings report. Citing its revenue and cost control efficiencies, the quarter saw the firm raise its annual revenue guidance to $8.5 billion for 16% annual growth from the previous estimate that had promised a 15% growth. Additionally, for the full year, its adjusted operating margin is guided at 20%, for a one basis point jump from the previous high end estimate. Year to date, the stock is up 17.9%; however, a high P/E ratio of 46 might mean that room for further growth is limited.
Artisan Partners mentioned Xylem Inc. (NYSE:XYL) in its Q1 2024 investor letter. Here is what the fund said:
Xylem’s pumps business (sold primarily to utilities) is sticky and profitable, providing capital to invest in innovative solutions, such as smart meters. In mid-2023, Xylem completed the acquisition of Evoqua, giving it a leading position in the US water treatment business. We believe the company is at the start of a compelling profit cycle. Smart meter sales are recovering from supply chain issues, cost and revenue synergies from its acquisition are in the early innings, and a newly hired and well-respected CFO should help catalyze long-awaited margin expansion. Meanwhile, rising demand for solutions to water sustainability challenges should be a trend for years to come. Financial results were thesis affirming, including revenue, margins and earnings that exceeded expectations. We decided to bring the position into the CropSM of the portfolio.
6. Illinois Tool Works Inc. (NYSE:ITW)
Number of Hedge Fund Investors In Q1 2024: 45
Illinois Tool Works Inc. (NYSE:ITW) is a diversified industrial machinery and products firm that makes and sells equipment such as welding equipment, fasteners, and packaging equipment. Even though it has a diversified business model that targets the automotive, food, construction, electronics, welding, and other industries, most of these industries thrive in a growth economy. As a result, Illinois Tool Works Inc. (NYSE:ITW) does well when rates are low and businesses start to spend on mega growth projects. As a result, its shares are down 10% year to date and have gained a mere 5.4% since the market bottom in October 2023 which was spurred because of high interest rate fears. However, a key standout for Illinois Tool Works Inc. (NYSE:ITW) is its electric vehicle business division. The firm’s operational scale, backed by $2.2 billion of fixed assets, allows it to achieve significant economies of scale for items such as polymers and fluids and those used in battery installation in EVs.
In fact, Illinois Tool Works Inc. (NYSE:ITW)’s automotive business was one of its strongest performers during its first quarter earnings. During the earnings call, management outlined:
But big picture, I’d say, Automotive really solid progress here on a year-over-year basis. We expect full year margins in 19%, almost 20% range, an improvement of 240 basis points on a year-over-year basis and lots of room to go as we work through our margin enhancement plan.
5. Chart Industries, Inc. (NYSE:GTLS)
Number of Hedge Fund Investors In Q1 2024: 48
Chart Industries, Inc. (NYSE:GTLS) is a Georgia based industrial products company that sells equipment used to store, transport, and manage gasses. Its products can allow Chart Industries, Inc. (NYSE:GTLS) to take a sizeable role in the green energy industry as they help industries manage hydrogen, natural gas, and carbon dioxide. Chart Industries, Inc. (NYSE:GTLS) also benefits from a massive order backlog due to its global operations base and the high barriers to entry in its industry. As of the first quarter, the firm’s backlog sat at $4.3 billion, which set a new record. Chart Industries, Inc. (NYSE:GTLS) also reduced its financing costs by removing $14 million in annual interest expenses by repricing a $1.6 billion term facility. However, its shares are quite vulnerable, particularly in today’s restrictive environment for industrial stocks. This was evidenced by a massive 25% share price drop in October 2023 when it reported a 10% revenue drop to $898 million and missed analyst estimates of $1.03 billion. At the same time, Chart Industries, Inc. (NYSE:GTLS) reduced its annual guidance to $3.45 billion to $3.5 billion from an earlier $3.66 billion to $3.8 billion. The actual revenue for the year sat at $3.35 billion.
Baron Funds mentioned Chart Industries, Inc. (NYSE:GTLS) in its Q4 2023 investor letter. Here is what the fund said:
Chart Industries, Inc. is a global leader in design, engineering, and manufacturing of process and storage technologies and equipment for gas and liquid handling. Shares fell after the company missed analyst earnings forecasts on project revenue recognition timing. Chart also held an Investor Day in which it provided mid-term financial targets instead of further detail on its 2024 outlook, falling short of some analyst expectations. We remain bullish on the company’s prospects. Business fundamentals are strong, with management seeing solid demand across the portfolio and cost synergies from the Howden acquisition are ahead of company targets. Chart also has a much larger than normal backlog supporting growth in 2024, providing good visibility. We believe the integration of Howden is proceeding well, with the combined company on track to become a globally diversified, high- quality, high-growth industrial business with proprietary technology and solutions serving the growing hydrogen, carbon capture, liquid natural gas, and other end markets. Chart’s valuation remains attractive relative to its growth and margin profile, in our view.
4. Deere & Company (NYSE:DE)
Number of Hedge Fund Investors In Q1 2024: 48
Deere & Company (NYSE:DE) is the well known American industrial machinery company that sells excavators, harvesters, and other similar equipment. Its machines target both the farming and construction industries, so if you’ve read the introduction to our piece, you’ll understand how the environment is muted for Deere & Company (NYSE:DE). Consequently, it’s unsurprising that the shares are down 13% year to date. The slowdown in the farm industry has hit Deere & Company (NYSE:DE) hard, as it announced in July that it will lay off nearly 600 employees as part of a bid to shift its production to Mexico and cut costs. The decision came after a disappointing second quarter earnings report which saw the company report a 15% annual revenue drop. This was Deere & Company (NYSE:DE)’s third consecutive quarter of a revenue drop, and while its adjusted revenue of $13.6 billion beat analyst estimates of $13.26 billion, Deere & Company (NYSE:DE) also cut its full year guidance to $7 billion from an earlier midpoint of $7.62 billion. However, Deere & Company (NYSE:DE) has a market capitalization of $96 billion after its share drops and cash reserves of $8.4 billion. Its receivables of $58.7 billion also provide it with a lot of room to weather the current storm and start to grow once the agriculture cycle normalizes.
Oakmark Funds mentioned Deere & Company (NYSE:DE) in its Q1 2024 investor letter. Here is what the fund said:
Deere & Company is a leading manufacturer of agricultural equipment with dominant market share in North America and Brazil. Despite its brand strength, technological capabilities and distribution advantages, the company’s stock price has recently fallen due to fears about a downturn in the agriculture business cycle. Longer term, world population and food demand are expected to increase annually yet land and labor devoted to agriculture are expected to decline. Deere seems well-positioned to benet from this dynamic as farms will have to become more productive. We were pleased to purchase shares in Deere at a low double-digit multiple of our estimate of normal earnings power.
3. Emerson Electric Co. (NYSE:EMR)
Number of Hedge Fund Investors In Q1 2024: 53
Emerson Electric Co. (NYSE:EMR) makes and sells a wide variety of industrial products such as valves, regulators, sensors, and switches, lending it a diverse business. Additionally, Emerson Electric Co. (NYSE:EMR) is a global company with a presence in China, Europe, North America, and other regions. This allows it to hedge its business performance against an economic downturn in one region, such as the Chinese industrial slowdown that has persisted since the coronavirus pandemic. At the same time, since its exposure to the struggling construction and farming stocks is limited, Emerson Electric Co. (NYSE:EMR) has benefited from a shift towards automation and upward revision of utility spending in the US. At the same time, its acquisition of process optimization firm AspenTech has allowed Emerson Electric Co. (NYSE:EMR) to grow its revenue even though industrial spending has been muted. Management expects to deliver an additional $100 million in revenue in 2024 through synergies. Additionally, its diversified business has enabled it to hedge the downturn in industrial and automation spending by focusing on the growth in energy spending, life sciences growth in Africa, and a broader uptick in metals and mining.
Emerson Electric Co. (NYSE:EMR)’s management shared details of order visibility in the third quarter and the important process optimization business during the second quarter earnings call. Here is what they said:
Look we’re off to a good start in Q3. April over April of last year is up double digit 10% on orders. Certainly – and the three months has turned positive as well. So we flipped that to the low single digits on a three-month basis trailing three-month basis. So feel good about the start, feel good about the funnel and the conversion and the markets. And it’s again, driven by the process and hybrid environment across most of the world areas. Discrete we’re watching very carefully. As we said, we expect that to turn now a quarter later than originally expected. But we’re seeing green shoots that started developing in March and into April, particularly in Western Europe, in Germany around machine makers and some of the discrete industries.
So optimistic start for the quarter again gave us the confidence as we tested our businesses and worked out process that exiting the year in that mid-single digit low single-digit type of range on orders is very, very feasible.
2. Parker-Hannifin Corporation (NYSE:PH)
Number of Hedge Fund Investors In Q1 2024: 63
Parker-Hannifin Corporation (NYSE:PH) is one of the largest industrial equipment companies in the world. It has a hedged and diversified business model which caters to industrial demand and the aerospace industry. While the latter is strained in the current economic environment, the latter is a stable sector due to sizeable government contracts. Defense companies continue to spend even in a tough economy as national security concerns and project delivery timelines force them to keep up the pace. Consequently, Parker-Hannifin Corporation (NYSE:PH)’s shares are up by 11% year to date, leading the S&P industrial sector’s 7.48% in gains. These trends were also visible in the firm’s latest financial results. These saw Parker-Hannifin Corporation (NYSE:PH) deliver a 20% annual growth year to date operating cash flows to $2.1 billion. At the same time, its North American industrial segment sales dropped by 5% annually lagging international industrial sales drop by one percentage point. However, the Aerospace segment marked a whopping 18% annual growth. The quarterly results also marked five consecutive quarters of order drops in the North American industrial segment.
Parker-Hannifin Corporation (NYSE:PH)’s management also shared key details for the future of its North American industrial orders during its Q3 2024 earnings call where it outlined:
Obviously, we know aerospace is very strong, and we’ve raised our guidance because of that. If you take a look at energy, oil and gas, that remains positive. Implant industrial equipment, low single-digit negative, more negative in Europe, less in North America. Transportation, mid mid-single-digit negative, Automotive is down globally. And I would again say that Europe is more negative there. Off-highway, high single-digit negative, primarily construction and Ag and both of them are equally negative, Andrew. Again, Europe a little more negative. When we take a look at HVAC refrigeration, it is still double-digit negative, but it’s some pretty tough comps to prior it was quite positive this time last year, mainly driven by the residential business.
It is improving. There’s an improvement in commercial and as you were just mentioning, destocking, distribution is slightly negative, and we saw that destocking lingering through the quarter. So when we take a look at where we’re at today, Industrial North America orders have been negative for five quarters now. And we’re still very proud of it, still guiding to 1.5% organic growth for the company. And historically, you would see that orders go negative for an average of six core years. And both portfolio, total Parker went negative same quarter as industrial North America. So a big difference here. What I would also say is the backlog remains strong. Backlog dollars are at near record levels. And as we spoke about in quarters past, consistent coverage really holding in there, as we’ve talked about before, pretty much double what they’ve been historically.
And while we have Q3 order conditions reflected in the guide, I would have to say that April orders are off to a better start, and we might be seeing the end of destocking here.
1. Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Investors In Q1 2024: 85
Eaton Corporation plc (NYSE:ETN) is an Ireland based company that sells valves, actuators, wiring, and other industrial products that can be used in data centers, EV supply chains, and other lucrative areas. This sets it up rather well to benefit from the global wave of electrification and the growth in data centers due to the AI boom. Additionally, the US government has earmarked trillions of dollars in infrastructure and EV spending through the Bipartisan Infrastructure Act and the Inflation Reduction Act – both of which will stimulate demand for Eaton Corporation plc (NYSE:ETN)’s products. It also benefits from a noticeable exposure to the stable aerospace industry. Eaton Corporation plc (NYSE:ETN)’s backlogs during the second quarter jumped by 27% for its Electrical business division and by 11% for the Aerospace division. The growth in Electrical orders came on the back of strong spending in the data center and hyperscaler market.
However, Eaton Corporation plc (NYSE:ETN) has struggled due to Europe’s economic slowdown, which has affected the otherwise strong performance of the Electrical business division. During its latest earnings call, here’s what management had to say on the matter:
We would intend and anticipate to narrow the gap between those two businesses and narrow the gap the right way, which is the Global business needs to do significantly better. We have no expectations at all that we’d see retrenchment in our Americas business. And so — but I will say, as you think about the restructuring program that we launched, $375 million of spending, $325 million of benefits. 2/3 of that, more or less, will be in the Electrical segment with a heavy concentration in Global. So we are clearly working hard to improve margins in the Electrical Global business. One of the reasons why this gap kind of widened and opened up is that as we’re all aware, in the U.S. market, the North America market is doing very well right now.
There’s a lot of activity. There’s a lot of growth. We have a very strong strategic position in the North America margin — market overall. And so there are just a lot of things today that are really positive in the Americas markets that are allowing us to continue to expand margins there. And as you know, a lot of the European markets have been much weaker than we anticipated. You see some of the macroeconomic data coming out of Europe, Germany specifically, and a lot of the market segments in Europe where we have a strong position are some of the weaker parts of the market. If you think about the MOEM segment, you see it in some of the automation data from some of the other electrical peer companies, the residential market. And so I think today, those margins will get better.
If we look forward, we’re obviously anticipating margins getting better, there’s easier comps in the second half of the year as well. But without a doubt, there’s plenty of opportunity to expand our margins in our Global segment.
Even though ETN is a top hedge fund heavy equipment and industrial machinery stock due to its smart business model, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.
