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4 Top Stocks to Pick From a Promising Diversified Operations Industry
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The Zacks Diversified Operations industry has been benefiting from strength across aerospace, defense and oil & gas industries. Higher infrastructure development and technological advancements in manufacturing processes have proved beneficial for the industry participants. Recovery in the commercial aviation sector, product innovation efforts and growth in the e-commerce business have been other tailwinds.
However, challenges in the manufacturing sector amid inflationary pressure have been weighing on the performance of some industry players. 3M Company (MMM - Free Report) , ITT Inc. (ITT - Free Report) , Federal Signal Corporation (FSS - Free Report) and Griffon Corporation (GFF - Free Report) are a few stocks with healthy prospects.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
Major Trends Shaping the Future of the Diversified Operations Industry
Strength in Aerospace and Defense Markets: The prospects of multi-sector companies are closely linked to the operating conditions of end markets. Some factors that currently work in favor of the industry are healthy demand from the defense and governmental sectors, higher exploration activities in the oil and gas industry, infrastructure development and technological advancements in manufacturing processes. Also, industry players with exposure to commercial aviation markets are poised to benefit from the rising global demand for air travel.
Easing Supply-Chain Disruptions: Although supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the 14th straight month in November. Easing supply-chain issues should support diversified operation companies’ growth going forward. In addition, the digitalization of business operations has enabled industry participants to boost their competitiveness with enhanced operational productivity and product quality. Also, growing online businesses and the government’s development efforts are likely to aid the industry.
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management report, in November, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.7%, contracting for the 13th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. However, the manufacturing sector has been showing signs of gradual improvement. In November, the New Order Index increased 2.8 percentage points from the figure recorded in October.
Inflationary Pressure: Companies with exposure to the electronics, healthcare and consumer verticals are experiencing lower demand due to tepid consumer spending as a result of inflationary pressure. Within the electronics division, there is softness, particularly for smartphones, tablets and other electronic gadgets. Given the high inflation levels, consumer spending is likely to remain suppressed in the near term, weighing on the top line of these companies. Reduced demand in the residential end market is also a concern for the industry.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #67. This rank places it in the top 27% 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 robust prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Given the bullish near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. However, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags the S&P 500
Over the past year, the Zacks Diversified Operations industry has underperformed the Zacks S&P 500 composite. The industry has declined 1.2% compared to the S&P 500 Index’s 25.4% increase.
One-Year Price Performance
Industry's Current Valuation
On the basis of EV/EBITDA (TTM), which is the commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 13.73X compared with the S&P 500’s 13.82.
Over the past five years, the industry has traded as high as 24.67X, as low as 5.84X and at the median of 11.06X, as the chart below shows:
EV/EBITDA Ratio (TTM) Versus S&P 500
4 Diversified Operations Stocks to Buy
Federal Signal: This Oak Brook, IL-based company provides a suite of products and integrated solutions for municipal, governmental and commercial customers. Federal Signal is well-poised to benefit from robust aftermarket demand, a higher production level supported by an improvement in supply-chain conditions, recent acquisitions and effective pricing actions.
Shares of this Zacks Rank #1 (Strong Buy) company have surged 65.4% over the past year. The Zacks Consensus Estimate for 2023 earnings has been revised 3.3% upward over the past 60 days. Its earnings surprise in the last four quarters was 8.09%, on average, surpassing estimates throughout. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: FSS
Griffon: The New York-based company is a leading provider of consumer and professional, and home and building products. Product innovation, specialized household and building products, solid manufacturing capabilities and a surge in the e-commerce business are expected to drive GFF’s performance in the quarters ahead.
Shares of this Zacks Rank #1 company have surged 62.2% in the past year. It delivered an earnings surprise of 28.61%, on average, beating estimates thrice in the last four quarters. In the past 60 days, the company’s earnings estimates have increased 13.5% for fiscal 2024 (ending September 2024).
Price and Consensus: GFF
3M: Headquartered in St. Paul, MN, 3M, together with its subsidiaries, operates as a diversified technology firm. Strength in auto OEM (Original Equipment Manufacturer) and medical solutions businesses augurs well for 3M. Solid momentum in the roofing granules business is also likely to drive its Safety and Industrial unit. An improvement in supply chains and the easier availability of labor and raw materials should drive MMM’s performance moving ahead.
The Zacks Consensus Estimate for 3M’s 2023 earnings has been revised upward by 2.1% in the past 60 days. It delivered an earnings surprise of 16.67%, on average, beating estimates thrice in the last four quarters. Although shares of this Zacks Rank #2 (Buy) company have declined 14.7% in the past year, it has rebounded 6.8% in the past three months.
Price and Consensus: MMM
ITT: Headquartered in New York City, ITT is a global multi-industry leader in high-technology engineering and manufacturing projects. Strength across the industrial, aerospace and defense end markets and strong operational execution are expected to drive the company’s growth. Also, solid momentum in the aftermarket business, driven by strength in energy and mining markets, bodes well. Investments in product innovation across its friction technologies, connectors and pump businesses are expected to fuel ITT’s growth.
The Zacks Consensus Estimate for ITT’s 2023 earnings has been revised upward by 2% in the past 60 days. Its earnings surprise in the last four quarters was 7.99%, on average, surpassing estimates throughout. This Zacks Rank #2 company’s shares have rallied 45.3% in the past year.
Price and Consensus: ITT
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4 Top Stocks to Pick From a Promising Diversified Operations Industry
The Zacks Diversified Operations industry has been benefiting from strength across aerospace, defense and oil & gas industries. Higher infrastructure development and technological advancements in manufacturing processes have proved beneficial for the industry participants. Recovery in the commercial aviation sector, product innovation efforts and growth in the e-commerce business have been other tailwinds.
However, challenges in the manufacturing sector amid inflationary pressure have been weighing on the performance of some industry players. 3M Company (MMM - Free Report) , ITT Inc. (ITT - Free Report) , Federal Signal Corporation (FSS - Free Report) and Griffon Corporation (GFF - Free Report) are a few stocks with healthy prospects.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
Major Trends Shaping the Future of the Diversified Operations Industry
Strength in Aerospace and Defense Markets: The prospects of multi-sector companies are closely linked to the operating conditions of end markets. Some factors that currently work in favor of the industry are healthy demand from the defense and governmental sectors, higher exploration activities in the oil and gas industry, infrastructure development and technological advancements in manufacturing processes. Also, industry players with exposure to commercial aviation markets are poised to benefit from the rising global demand for air travel.
Easing Supply-Chain Disruptions: Although supply-chain disruptions persist, especially related to the availability of electronic components, the situation has improved. This is evident from the latest ISM report’s Supplier Deliveries Index, which reflected faster deliveries for the 14th straight month in November. Easing supply-chain issues should support diversified operation companies’ growth going forward. In addition, the digitalization of business operations has enabled industry participants to boost their competitiveness with enhanced operational productivity and product quality. Also, growing online businesses and the government’s development efforts are likely to aid the industry.
Weakness in the Manufacturing Sector: Persistent weakness in the manufacturing sector has been weighing on demand in the industry. Per the Institute for Supply Management report, in November, the Manufacturing PMI (Purchasing Manager’s Index) touched 46.7%, contracting for the 13th consecutive month. A figure less than 50% indicates a contraction in manufacturing activity. However, the manufacturing sector has been showing signs of gradual improvement. In November, the New Order Index increased 2.8 percentage points from the figure recorded in October.
Inflationary Pressure: Companies with exposure to the electronics, healthcare and consumer verticals are experiencing lower demand due to tepid consumer spending as a result of inflationary pressure. Within the electronics division, there is softness, particularly for smartphones, tablets and other electronic gadgets. Given the high inflation levels, consumer spending is likely to remain suppressed in the near term, weighing on the top line of these companies. Reduced demand in the residential end market is also a concern for the industry.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #67. This rank places it in the top 27% 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 robust prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Given the bullish near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. However, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags the S&P 500
Over the past year, the Zacks Diversified Operations industry has underperformed the Zacks S&P 500 composite. The industry has declined 1.2% compared to the S&P 500 Index’s 25.4% increase.
One-Year Price Performance
Industry's Current Valuation
On the basis of EV/EBITDA (TTM), which is the commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 13.73X compared with the S&P 500’s 13.82.
Over the past five years, the industry has traded as high as 24.67X, as low as 5.84X and at the median of 11.06X, as the chart below shows:
EV/EBITDA Ratio (TTM) Versus S&P 500
4 Diversified Operations Stocks to Buy
Federal Signal: This Oak Brook, IL-based company provides a suite of products and integrated solutions for municipal, governmental and commercial customers. Federal Signal is well-poised to benefit from robust aftermarket demand, a higher production level supported by an improvement in supply-chain conditions, recent acquisitions and effective pricing actions.
Shares of this Zacks Rank #1 (Strong Buy) company have surged 65.4% over the past year. The Zacks Consensus Estimate for 2023 earnings has been revised 3.3% upward over the past 60 days. Its earnings surprise in the last four quarters was 8.09%, on average, surpassing estimates throughout. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: FSS
Griffon: The New York-based company is a leading provider of consumer and professional, and home and building products. Product innovation, specialized household and building products, solid manufacturing capabilities and a surge in the e-commerce business are expected to drive GFF’s performance in the quarters ahead.
Shares of this Zacks Rank #1 company have surged 62.2% in the past year. It delivered an earnings surprise of 28.61%, on average, beating estimates thrice in the last four quarters. In the past 60 days, the company’s earnings estimates have increased 13.5% for fiscal 2024 (ending September 2024).
Price and Consensus: GFF
3M: Headquartered in St. Paul, MN, 3M, together with its subsidiaries, operates as a diversified technology firm. Strength in auto OEM (Original Equipment Manufacturer) and medical solutions businesses augurs well for 3M. Solid momentum in the roofing granules business is also likely to drive its Safety and Industrial unit. An improvement in supply chains and the easier availability of labor and raw materials should drive MMM’s performance moving ahead.
The Zacks Consensus Estimate for 3M’s 2023 earnings has been revised upward by 2.1% in the past 60 days. It delivered an earnings surprise of 16.67%, on average, beating estimates thrice in the last four quarters. Although shares of this Zacks Rank #2 (Buy) company have declined 14.7% in the past year, it has rebounded 6.8% in the past three months.
Price and Consensus: MMM
ITT: Headquartered in New York City, ITT is a global multi-industry leader in high-technology engineering and manufacturing projects. Strength across the industrial, aerospace and defense end markets and strong operational execution are expected to drive the company’s growth. Also, solid momentum in the aftermarket business, driven by strength in energy and mining markets, bodes well. Investments in product innovation across its friction technologies, connectors and pump businesses are expected to fuel ITT’s growth.
The Zacks Consensus Estimate for ITT’s 2023 earnings has been revised upward by 2% in the past 60 days. Its earnings surprise in the last four quarters was 7.99%, on average, surpassing estimates throughout. This Zacks Rank #2 company’s shares have rallied 45.3% in the past year.
Price and Consensus: ITT