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Near-Term Outlook Bleak for Industrial Manufacturing Stocks
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The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in the production of a wide range of industrial equipment.
Some industry players offer power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, gel coat equipment, flow-control components, safety products, and linear motion components. In addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.
The companies provide services to original equipment manufacturing, and maintenance, repair and overhaul customers. These end-users belong to industries such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities.
Some of the notable companies belonging to the Manufacturing – General Industrial industry are IDEX Corporation (IEX - Free Report) , Illinois Tool Works Inc. (ITW - Free Report) , Flowserve Corporation (FLS - Free Report) and Parker-Hannifin Corporation (PH - Free Report) .
Here are the industry’s three major themes:
The COVID-19 pandemic has dealt a major blow to the manufacturing industry, which has been previously suffering from the U.S.-China trade tensions. Factory closures across the country, supply-chain disruptions, and the impacts of the restrictions imposed by the government, among others, have affected the sector. Also, the uncertain demand environment, owing to the trade tariffs and the pandemic, is likely to continue denting profits of manufacturing companies. In addition, manufacturers in the U.S. are currently experiencing challenges related to the shortage of truck drivers. These issues are likely to continue to raise expenses of manufacturing companies in the near term.
Several industrial manufacturing companies have been investing frequently in the development of products to address the shift in customer demand. Such frequent investments are hurting the margins and profitability of many industry participants. Also, several companies like Roper Technologies, Inc. (ROP - Free Report) and The Middleby Corporation, Inc. (MIDD - Free Report) have resorted to a set of financing transactions, including senior notes offerings and revolving credit facilities. Such types of transactions are expected to increase their debts and in turn, are likely to inflate financial obligations and hurt profitability.
U.S. manufacturing activity expanded for the third month in a row in July, per the latest Institute for Supply Management’s (“ISM”) report released on Aug 3. The ISM’s manufacturing index increased to 54.2 in July from 52.6 in the prior month and beat the consensus estimate of 53.5. Also, ISM’s measure of production in July rose to 62.1 from 57.3 in June, marking its highest level since August 2018. Also, new orders increased to 61.5 from 56.4 in June. Notably, July witnessed the fastest expansion in manufacturing activities since March 2019, depicting the recovery of economic activities in the sector as more companies are ramping up the production with firm orders. In addition to these, the industry is witnessing growth in the e-commerce business, particularly amid the coronavirus outbreak, which opened up opportunities for the industrial manufacturing companies.
Zacks Industry Rank Indicates Dull Prospects
The Manufacturing – General Industrial industry is a 40-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. Notably, the industry’s earnings estimates for the current year are down 36.9% year over year.
Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing – General Industrial industry has underperformed both the S&P 500 and its sector in the past year. While stocks in the industry have collectively gained 9.6%, the S&P 500 and the Zacks Industrial Products sector have grown 15.8% and 13.3%, respectively.
One-Year Price Performance
Manufacturing – General Industrial Industry’s Valuation
P/E ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 28.3. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 22.35, and the S&P 500’s 22.87.
Over the past five years, the industry has traded at the highest level of 28.3x forward 12-month P/E and the lowest level of 15.6x. The median level over the same period was 19.7x.
Manufacturing–General Industrial Industry’s Valuation Versus S&P 500
Manufacturing–General Industrial Industry’s Valuation Versus Sector
Bottom Line
On account of the prevalent headwinds, we believe that investing in the industry may not be prudent at the moment. However, we present some stocks from the industry, which sport a Zacks Rank #1 (Strong Buy) and have strong growth prospects, based on the signs of recovery in manufacturing activities.
A brief discussion on the chosen stocks is provided below:
The company reported an earnings beat of 31.43%, on average, for the trailing four quarters, surpassing estimates thrice and missing once. The Zacks Consensus Estimate for 2020 earnings has been raised 18.8% to $2.21 in the past 30 days, while the same for 2021 earnings has moved up 8% to $2.70.
Price and EPS Surprise: AIMC
Chart Industries, Inc. (GTLS - Free Report) : The Ball Ground, GA-based company currently sports a Zacks Rank #1. Over the past year, its share price has increased 13.1%.
The company reported an earnings beat of 10.17%, on average, for the trailing four quarters, surpassing and missing estimates twice each. Also, the Zacks Consensus Estimate for 2020 earnings has been raised 22.1% to $3.15 in the past 30 days, while the same for 2021 earnings has climbed 19.1% to $3.99.
Price and EPS Surprise: GTLS
Tennant Company (TNC - Free Report) : The Minneapolis, MN-based company currently flaunts a Zacks Rank #1. Over the past year, the stock has gained 1.7%.
The company’s earnings outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the surprise being 107.12%, on average. Also, the Zacks Consensus Estimate for 2020 earnings has risen 37.2% to $2.69 in the past 30 days, while the same for 2021 earnings has climbed 7.3% to $3.40.
Price and EPS Surprise: TNC
Helios Technologies, Inc. (HLIO - Free Report) : The Sarasota, FL-based company currently sports a Zacks Rank #1. Over the past year, the company’s share price has increased 0.5%.
It has an earnings surprise of 46.04%, on average, for the trailing four quarters, surpassing estimates all through. Also, the Zacks Consensus Estimate for its 2020 earnings has been raised 21% to $1.90 in the past 30 days, while the same for 2021 earnings has climbed 14.7% to $2.26.
Price and EPS Surprise: HLIO
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Image: Bigstock
Near-Term Outlook Bleak for Industrial Manufacturing Stocks
The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in the production of a wide range of industrial equipment.
Some industry players offer power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, gel coat equipment, flow-control components, safety products, and linear motion components. In addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.
The companies provide services to original equipment manufacturing, and maintenance, repair and overhaul customers. These end-users belong to industries such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities.
Some of the notable companies belonging to the Manufacturing – General Industrial industry are IDEX Corporation (IEX - Free Report) , Illinois Tool Works Inc. (ITW - Free Report) , Flowserve Corporation (FLS - Free Report) and Parker-Hannifin Corporation (PH - Free Report) .
Here are the industry’s three major themes:
Zacks Industry Rank Indicates Dull Prospects
The Manufacturing – General Industrial industry is a 40-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. Notably, the industry’s earnings estimates for the current year are down 36.9% year over year.
Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing – General Industrial industry has underperformed both the S&P 500 and its sector in the past year. While stocks in the industry have collectively gained 9.6%, the S&P 500 and the Zacks Industrial Products sector have grown 15.8% and 13.3%, respectively.
One-Year Price Performance
Manufacturing – General Industrial Industry’s Valuation
P/E ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 28.3. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 22.35, and the S&P 500’s 22.87.
Over the past five years, the industry has traded at the highest level of 28.3x forward 12-month P/E and the lowest level of 15.6x. The median level over the same period was 19.7x.
Manufacturing–General Industrial Industry’s Valuation Versus S&P 500
Manufacturing–General Industrial Industry’s Valuation Versus Sector
Bottom Line
On account of the prevalent headwinds, we believe that investing in the industry may not be prudent at the moment. However, we present some stocks from the industry, which sport a Zacks Rank #1 (Strong Buy) and have strong growth prospects, based on the signs of recovery in manufacturing activities.
A brief discussion on the chosen stocks is provided below:
Altra Industrial Motion Corp. : The Braintree, MA-based company currently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. Over the past year, the stock has gained 58.2%.
The company reported an earnings beat of 31.43%, on average, for the trailing four quarters, surpassing estimates thrice and missing once. The Zacks Consensus Estimate for 2020 earnings has been raised 18.8% to $2.21 in the past 30 days, while the same for 2021 earnings has moved up 8% to $2.70.
Price and EPS Surprise: AIMC
Chart Industries, Inc. (GTLS - Free Report) : The Ball Ground, GA-based company currently sports a Zacks Rank #1. Over the past year, its share price has increased 13.1%.
The company reported an earnings beat of 10.17%, on average, for the trailing four quarters, surpassing and missing estimates twice each. Also, the Zacks Consensus Estimate for 2020 earnings has been raised 22.1% to $3.15 in the past 30 days, while the same for 2021 earnings has climbed 19.1% to $3.99.
Price and EPS Surprise: GTLS
Tennant Company (TNC - Free Report) : The Minneapolis, MN-based company currently flaunts a Zacks Rank #1. Over the past year, the stock has gained 1.7%.
The company’s earnings outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the surprise being 107.12%, on average. Also, the Zacks Consensus Estimate for 2020 earnings has risen 37.2% to $2.69 in the past 30 days, while the same for 2021 earnings has climbed 7.3% to $3.40.
Price and EPS Surprise: TNC
Helios Technologies, Inc. (HLIO - Free Report) : The Sarasota, FL-based company currently sports a Zacks Rank #1. Over the past year, the company’s share price has increased 0.5%.
It has an earnings surprise of 46.04%, on average, for the trailing four quarters, surpassing estimates all through. Also, the Zacks Consensus Estimate for its 2020 earnings has been raised 21% to $1.90 in the past 30 days, while the same for 2021 earnings has climbed 14.7% to $2.26.
Price and EPS Surprise: HLIO
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>