With strong fundamentals but uneven growth and declining productivity in a turbulent business environment, industrials need resilience more than ever, and this will require significant transformations at most companies. This year’s Resilience and Performance Transformation report looks back on the recent performance of industrial companies to identify the small number of aces who fly above the averages. Then it looks forward to learning from the aces how other companies can soar to new heights.

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Industrials Are off the Ground but Flying Low

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Industrials in 2024 posted strong fundamentals but uneven growth and declining productivity. EV/sales at 2.5 show that the sector's performance is not fully reflected in valuations.

Industrial strengths: Manufacturing output was up 8% since 2010, nearing pre-pandemic levels; Industrials ranked in the top five value-creating sectors, with a 13% total shareholder return for the last five years, up three spots from last year’s assessment (Exhibit 1). Strong fundamentals include revenue growth outpacing GDP, EBITDA margins up more than 90 basis points, and de-levered balance sheets.

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Exhibit 1

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While output increased, productivity has declined 5% since 2010, with 2023 levels below those of the COVID-19 era. Value creation is concentrated in automotive, construction, and rental and leasing services; without them, five-year TSR falls to 9.3%, causing industrials to sink to the bottom five sectors. Revenue growth is uneven, with 10% of industrial companies driving 75% of revenue; an EV/sales ratio of 2.5 times is bottom of the pack across sectors (Exhibit 2).

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Exhibit 2

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The Averages Hide Some Highfliers

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Valuations seem low, but select S5C companies trade at premium multiples. Industrial multiples were weighed down by companies with less than $5 billion in revenue. The 450 sub–$5 billion companies (S5C), which make up 70% of the sector, have an EV-to-sales ratio of 2.3 times, well below technology (5.9 times), financials (6.6 times), and health care (4.0 times). Analyst coverage of these firms is below that for the overall US S5C, with minimal gains over five years. However, high-value small companies exist: 113 S5Cs show an EV/sales ratio of 4.8 times, which is nearly double the average for the S5C segment and overall industrials (Exhibit 3).

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Exhibit 3

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How the Top Companies Have Excelled

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Looking back to these top-valued S5Cs gives us a recipe for higher valuations. They combine above-average performance with resilience, a strong investor base, a high level of investor engagement, and a stream of recurring revenue.

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Performance

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Top-valued companies set holistic targets and launched rapid transformations to meet the targets. On average, they achieved revenue growth of 7.3% for the period from 2019 to 2024, gross margins 240 basis points above their peers, operating expenses five cents lower per dollar of revenue, and operating cash flow 122 basis points above that of their peers (Exhibit 4). They did all this at speed: 50% of firms hit 70% of targets in two to three years. In addition, they also focused on holistic portfolio management—three times more M&A, 1.2 times more divestitures versus low-valued peers—to focus on core segments.

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Exhibit 4

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Resilience

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Top-valued companies develop resilience with adaptive cost structures and robust balance sheets. The cost structure of top-valued companies allows for costs that are fixed during periods of growth and variable during decline. During periods of revenue growth, their costs rose 0.9% per 1% growth in revenues, and during periods of revenue decline, their costs fell 1.7% per 1% in revenue decline). Balance sheets strengthened, with debt to equity down 0.2 times, and cash coverage of liabilities improved.  

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Recurring Revenue

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Companies receive a valuation premium when their recurring revenue exceeds 15% of sales. Recurring revenue mainly comes from two sources: software-driven subscriptions and service contracts.

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Investor Base

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Top-valued companies attract blue-chip investors, obtaining a 300-point or higher stake from blue-chip institutions, compared with overall industrials and tech. However, analyst coverage is a stronger driver of blue-chip ownership than performance. These investors are far likelier to engage when coverage exceeds five analysts.

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Investor Engagement

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Top-valued companies excel at investor engagement. The market favors a cohesive story on market leadership, secular growth exposure, margins trajectory, and innovation. In today’s disruptive era, about 80% of highly valued companies highlight digital or a customer-centric focus.

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The Industrial Sector’s Tailwinds and Headwinds

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Policy-driven reshoring, AI, and investment-friendly regulations offer strong tailwinds, but trade barriers, labor shortages, and economic uncertainty pose significant risks.  

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Reshoring has gained momentum in the United States from recent laws: the Infrastructure Investment and Jobs Act (IIJA), Inflation Recovery Act (IRA), CHIPS and Science Act (CHIPS), and Defense Production Act (DPA). Among those making major investments in the first quarter of 2025 are Corning, GlobalFoundries, Siemens, and TSMC. Renewal of tax cuts also is expected to spur capital investment, mirroring the 17% surge following passage of the Tax Cuts and Jobs Act (TCJA). AI adoption is accelerating, with 50% of S&P 500 companies prioritizing it and about 60% of top industrials embedding digital at their core. Easing energy and sustainability regulation could expedite capital project approvals.

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The most talked-about headwinds are tariffs, beginning with 20% to 25% levies on imports from Canada, Mexico, and China. Based on past tariffs, those imposed are likely to be sticky. Labor shortages have been worsening, as hiring challenges now impact 55% of manufacturers. Material cost inflation continues, driven by tariffs, geopolitical tensions, and energy disruptions. Forecasts of a recession are trending, with the S&P 500 with a turbulent start to the year, consumer confidence at a 15-month low, and layoffs at a 4.5-year high.

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Plotting a Flight Path for Turbulent Times

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By drawing insights from top-valued companies, companies in the industrial sector can navigate headwinds, seize tailwinds, and drive higher valuations. Five measures are promising (Exhibit 5):

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Exhibit 5

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1. Navigating Externalities

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To address tariffs and inflation, companies should pursue a strategic long-term approach, rather than short-term fixes. Techniques to consider include lean (Six Sigma), end-to-end cost transformation, localized supply chains, and pricing optimization.

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2. Digital Innovation

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B2C companies paved the way in customer experience, and their lessons can be applied in B2B online channels. Companies can adopt a tech-forward mindset (for example, by getting curious to gain a head start). More than 20 AI use cases can already be addressed in industrials.

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3. Customer Centricity

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Already industrial companies are embracing customer centricity with tech-driven engagement, seamless omnichannel experience, and integration of customer insights.

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4. Holistic Portfolio Management

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Industrial leaders achieved roughly 20% revenue growth by making five or more accretive acquisitions in a decade. Companies should further divest noncore assets as needed to prevent so-called conglomerate discounts imposed by the market (Exhibit 6).

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Exhibit 6

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5. Investor Relations

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Analysts favor a cohesive story that encompasses market leadership, margin expansion, secular growth, and innovation. Companies can combine their story with enhanced IR resources, such as online shareholder letters and video presentations). Companies also can benefit from a strong presence at industry conferences. Blue-chip investors are attracted by analyst coverage and prefer sharp messaging on profitability and returns.

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***

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The industrial sector shows solid fundamentals but faces uneven growth and productivity challenges, underscoring the urgent need for resilience and transformation. Top-performing small-scale industrial companies demonstrate that rapid performance improvements, adaptable cost structures, strong investor engagement, and recurring revenue streams drive higher valuations and sustained success.

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To thrive amid tariffs, labor shortages, and inflation, industrial firms must leverage tailwinds like reshoring, AI adoption, and supportive policies. Key actions include embracing digital innovation (e-commerce, AI), focusing on customer centricity, optimizing portfolios through targeted M&A, and delivering clear, compelling investor narratives.

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Ultimately, resilience and agility are critical. Companies that adopt a holistic, fast-paced transformation approach will navigate turbulence effectively and unlock long-term value in a rapidly evolving industrial landscape.

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