Industrial Goods Sector

Everything ranging from capital goods to commercial and professional services to transportation

Author: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:November 28, 2023

What is the Industrial Goods Sector?

The Industrial Goods Sector is a broad and diverse category encompassing various types of businesses. It includes everything from the production of capital goods to the provision of commercial and professional services, as well as transportation services.

Within these broader categories are industrial subgroups. This sector also includes a variety of verticals that can be closely correlated with each other. 

Some key characteristics and traits of the industrial sector are that it contains some of the largest companies in the world and is usually more susceptible to economic cycles regarding its performance. 

Industrial goods are generally separated into three conventional categories, with sub-groups below the larger categories: capital goods, transportation, and commercial and professional services.

Capital Goods 

  • Aerospace & Defense (Boeing, Lockheed Martin, Airbus)
  • Construction & Engineering (Bechtel, Fluor, AECOM)
  • Industrial Conglomerates (Icahn Enterprises, NL Industries, 3M)
  • Machinery (Caterpillar, Deere, Parker Hannifin)
  • Electrical Equipment (Fuji Electric, Havells)
  • Trading (Dutch East India Company, Mitsubishi Corporation)


  • Air Freight and Logistics (DHL, UPS, FedEx)
  • Airlines (American Airlines, Delta Airlines, Southwest Airlines)
  • Marine (Mediterranean Shipping Company, Maersk)
  • Railroad (Amtrak, BNSF Railway)
  • Transportation Infrastructure (MetroMile, Einride)

Commercial and Professional Services

  • Commercial Services (Waste Management Inc, eBay)
  • Professional Services (Ecolab, Experian, Booz Allen Hamilton)

Key Takeaways

  • The Industrial Goods Sector, covering diverse businesses from capital goods to transportation, is characterized by its susceptibility to economic cycles and includes some of the world's largest companies.
  • Leading investment banks, often with large capital, dominate the industrial sector, with work focusing on specialized valuation, accounting methodologies, and diverse exit opportunities.
  • Economic conditions significantly influence the industrial sector, necessitating analysis of factors such as supply chain efficiency, costs, expenses, and distribution methods.

Key characteristics and traits of industrials

The fundamental characteristics and traits of the industrials are:

1. Cyclical inclination

The industrial goods sector is usually susceptible to changes in economic conditions. These companies can largely be classified as cyclical stocks, stocks that outperform the market when the economy is doing well and vice-versa.

The reasoning behind industry cyclicality is the huge expenses involved in manufacturing and service provision. A lack of market confidence can lead to delay and default on payments, which causes a shrink in the business.

Due to their low variable costs, as the economy expands and demand rises, the incremental cost of production for the industries is very low, resulting in margin expansion and high profitability.

The higher profitability also generates a lot of cash flow which can be used for additional Capex and reinvestments.

2. Supply dependence 

Just like its cyclical nature, the supply chain of materials is also critical in the performance of the industrial sector. Supply dependence can lead to huge benefits or consequences depending on the availability of raw materials.

The availability of supply also largely depends on macroeconomic trends, such as inflation, trade, and more. Examples include rising commodity prices and sanctioned trade, which could have huge impacts on industrial companies that require them. 

3. Industrial sector clients

Unlike many other sectors that cater directly to consumers, such as consumer staples, discretionary, technology, and more, companies in industries typically have other corporations or the government as their customers. 

Many industrial companies are involved in corporate agreements and government contracts, which may also involve bidding rather than selling their product via a consumer channel. 

Investment banking in industrials

Investment banks with large capitals tend to lead the league tables in the industrial sector, as many deals require debt/leverage. As of 2022, Bank of America leads the league tables in industrial investment banking.

Boutiques and middle-market firms have high-performing industrial groups as well. Examples include Lazard’s Aerospace & Defense Group and Perella Weinberg Partners’ Industrials group in Los Angeles. 

In terms of investment banking work in the industrial goods sector, it is fairly standard and straightforward, as industrial companies typically require specialized valuation or accounting methodologies. However, certain metrics may apply to sub-groups.

For example, aerospace companies such as Boeing and Airbus are concerned with the growth of air travel, airline profitability, and the potential upgrades and purchases of new planes and aerospace gear. They must be accurate to avoid potential R&D losses.

On the investor and firm side, key factors such as order backlog, passenger traffic, route profitability, and airline competition must be carefully considered and analyzed. These metrics above pertain uniquely to aerospace companies. 

Generally, when it comes to daily work, common valuation techniques and DCF modeling skills are highly useful in the industrial sector. Lease accounting may be a beneficial skill due to the sector's constant leverage deals.

Many investment bankers in the industrial group do well on exit opportunities, with typical routes to corporate development and advisory, private equity, and hedge funds

Job description in industrials investment banking

Depending on the business model, size, valuation, and more, firms may have different procedures when approaching deals in the industry group. Still, the general outline of tasks is similar from bank to bank.

Investment bankers in industries will often work in tangent with multiple subgroups and offices due to the large size and coverage of the group itself. 

Research and client communication are integral parts of industrial deals, as the team works to pitch and execute the deal. While working on the pitch book, attention must be dedicated to comparative analysis and historical + forecast performance.

The analysis and forecast will come in handy for the client, as they should be updated on recent industry and M&A trends to determine the right approach to the deal.

Economic trends must also be factored into account by investment bankers, as they may need to advise clients accordingly, such as whether to implement risk-loving vs. risk-averse strategies given the economy's circumstances. 

At the live deal stage, some key requirements and documents include CIM, teaser, and sales team memos. Debt deals tend to be more common than equity deals in industrials since industrials have more consolidated than growth companies. 

Understanding trends in industrials

There are some very significant dynamics between industrials and economic development. Economic conditions largely influence industrials and vice versa. A healthy manufacturing industry, for instance, facilitates economic growth.

Many scale companies in the industrial sector can provide productive advantages, such as economies of scale. Research from Industrial Analytics suggests that mass production decreases the per-unit cost and increases the value of outputs per input.

Other productive advantages include increasing demand for labor, material, and skills(market signaling) and feeding resources and momentum into other sectors like technology and energy.

The sheer size and function of the industrial sector allow it to pour into other sectors, which does not necessarily reciprocate. Generally, it is usual to see many sectors’ performance aligned with the industrial sector. 

Trends and drivers in the industrial sector are not only important to understand when working in financial services, but it also correlates with everyday consumers and businesses.

There are a couple of factors to always consider when analyzing industrial companies.

  1. Economic conditions: Examine the economic cycle and the current investing sentiments. Determine if it is an adequate time for investing.

  2. Supply chain: Examine the company's efficiency, which involves due diligence, and comprehend the company’s suppliers and the big picture material provision. 

  3. Costs and expenses: Examine the company’s underlying costs of production, hiring, etc. Use data as a point of comparison with competitors. Consider potential barriers to entry for the company’s specialization. 

  4. Distribution: Examine the company’s method of getting its products to its clients. Take into account the diversification of the distribution channel, as well as its targeted market. 

Future trends of industrial companies

A recent study by McKinsey has found that recent top performers in the industrial sector follow three important steps: leverage technology for profitable growth, institute better corporate oversight and build a platform through M&A to expand.

With rapid technological advancements, companies in the industrial sector inevitably account for it in production and product/service offerings. McKinsey suggested critical metrics in this area: profit-revenue spread and operating-leverage multiple.

Due to the large nature of industrial companies, corporate oversight is important to ensure that the company is running toward its promises and that every level of the company hierarchy is performing appropriately.

Some factors to account for include the interest alignment of the board incentives and the management, CEO tenure in role and a diverse board with relevant experiences, and the average percentage of shares traded daily (lower is better).

M&A plays an integral role in a company's continued consolidation and financial health. In McKinsey’s analysis, the top companies on its performing list averaged 9.2 deals from 2010-2019, while lower-tier companies averaged 6.5 deals. 

Deals usually have great promises in the industrial sector, as it is a means to expand market share and advance new product and service offerings. 

High-performing companies constantly look for synergies in smaller-scale businesses and acquire them to advance to new markets to secure scale in existing markets, which applies particularly to a large sector like industrial goods. 

How can I utilize this information in investing?

Using the metrics above as a guide, investors can perform due diligence accordingly, use a comparable universe, and narrow down based on ratio criteria. Doing so requires a brokerage account with a publicly available investing platform. 

Investors may also choose to invest in ETFs and index funds that cover the industrial sector. Some examples of funds include the S&P Capital Goods index fundVanguard’s Industrials ETF, and Fidelity MSCI Industrials ETF

Like investing in any sector, it is crucial to rely on one’s judgment and analysis when making investment decisions. Simply listening to other people’s advice may sometimes be misleading and could cause unpredictable outcomes. 

Case study 

The industrials sector sees many deals, and here we will look in-depth into a recent deal: Angeles Equity Partners & Clearlake’s sale of ACS(American Construction Source) in 2021. The deal was advised by Moelis and Jefferies.

In 2018, Angeles and Clearlake invested and formed ACS following the acquisitions of three leading regional building materials companies. 

Since the investment, ACS acquired and integrated nine businesses with a materials distribution network in 70 different US locations.

As spoken by one of the partners at Clearlake, the rationale behind the initial investment was the firm’s discovery that the LBM (lumber and building materials) market was a highly fragmented market ripe for disciplined consolidation with a focus on higher-value niches. 

The private equity firms, in this case, were able to use ACS as a differentiated platform that benefitted from a commercial strategy to appeal directly to custom home builders, with an emphasis on growth markets and residential renovation markets.

Selling ACS to US LBM poses a perfect exit for the firms, as US LBM has direct specialization in home-building production and services. 

The values of both companies align, and they share many industry synergies. The deal’s financial details were not publicly disclosed. 

Summary of the industrial Goods sector 

The industrial goods sector includes large-cap companies in many different industries and sub-groups, which tend to be cyclical. They are considered the opposites to defensive stocks, which tend to perform with more stability during market downturns. 

Industrials are largely impacted by economic conditions and vice-versa. A healthy and stable industrial sector can provide many benefits and momentum to the overall performance of the financial markets and propel other sectors as well. 

Working in the industrial sector in finance is fairly similar to working in any other sector.

At analyst and associate levels, employees will usually be tasked with doing research and due diligence, analyzing market conditions and comparables, and preparing pitches.

Although a mature and consolidated sector, future changes in technology and corporate oversight will have a huge impact on industrial companies as well. These are factors that investors should keep in mind when approaching a company’s valuation.

Researched and authored by Kevin Wang | LinkedIn

Reviewed and edited by Aditya Salunke | LinkedIn

Free Resources 

To continue learning and advancing your career, check out these additional helpful WSO resources: