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Metal Fabrication Industry Outlook: Near Term Prospects Dim

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The Zacks Metal Products - Procurement And Fabrication industry primarily comprises metal processing and fabrication services providers. These companies are engaged in the conversion, manufacturing and fabrication of metal into end products. Important fabricated metal processes include forging, stamping, bending, forming, and machining which are used to shape individual pieces of metal while other processes, such as welding and assembling are used to join separate parts together.
 
The products are utilized in a variety of applications across a gamut of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer markets.
 
Let's take a look at the three major themes currently governing the industry:
  • The largest material purchases for the industry are resins, steel, aluminum, copper, other metals and energy (electricity, natural gas and fuel). Of late, higher material costs, primarily related to oil and metal-based commodities have been hurting the industry. Costs escalated as a result of imposition of tariffs. Nevertheless, some players in the industry have been successful in mitigating cost inflation through price hikes, resourcing to alternate suppliers to secure better pricing or avoid import and transportation costs. However, these measures take time and it might not be always feasible to pass on higher costs to customers, given the competitive environment. This in turn could adversely impact industry’s margins. In addition, finding skilled labor is becoming increasingly difficult with the industry steadily embracing technology.
     
  • The latest industrial production report of the Federal Reserve revealed that aggregate production of fabricated metal products in the United States logged growth of 3.8% in the third quarter of 2018. Overall production has gone up 4.5% in the 12-month ended November 2018. Further, per the Institute for Supply Management’s latest Manufacturing ISM Report, fabricated metal products reported growth in December aided by improvement in new orders, production, employment levels and backlog. This upbeat performance despite cost inflation and supply chain challenges that the Metal Products - Procurement And Fabrication industry is currently facing, indicate it is on a firm footing.
     
  • With the wide range of markets served, the Metal Products - Procurement And Fabrication industry’s prospects are closely aligned with that of the economy. In the United States, business investment is likely to expand supported by favorable financial conditions and an improving regulatory climate. Developing countries particularly hold promise on account of rapid industrialization auguring well for demand. Further, the industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, development of new products and innovative products will help sustain growth. According to a report published by Transparency Market Research, the global metal fabrication market was valued at around $17 Billion in 2017 and is anticipated to expand at a CAGR of over 3% from 2018 to 2026. Growth will likely be spurred by the construction segment followed by the automotive segment.
 
Zacks Industry Rank Indicates Dismal Prospects
 
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Metal Products - Procurement And Fabrication industry, which is a 14-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #206, which places it at the bottom 20% of 256 Zacks industries. 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the end of the third quarter, the industry’s earnings estimate for the current year has gone down 5%.
 
Despite the bleak near-term prospects of the industry, we will present a few Metal Products - Procurement And Fabrication that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
 
Industry Lags S&P 500 and Sector on Shareholder Returns
 
The Metal Products - Procurement And Fabrication industry has underperformed its own sector and S&P 500 composite over the past year.
 
Over this period, the industry has fallen 40.9% compared with the sector’s decline of 22.6%. Meanwhile, the Zacks S&P 500 composite has declined 6.4%.
 
One-Year Price Performance
 
 
Metal Products - Procurement And Fabrication Industry’s Valuation 
 
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement And Fabrication companies, we see that the industry is currently trading at 5.1 compared with the S&P 500’s 9.8x and the Industrial Products sector’s forward 12-month EV/EBITDA of 10.9. This is shown in the charts below.
 
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
 


Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)

 
 
Over the last five years, the industry has traded as high as 15.1 to as low as 5.0, recording the median of 7.5.
 
Bottom Line
 
Mounting concerns over higher material costs, impact of tariffs, soaring transportation cost and supply constraints have weighed the industry down. Nevertheless, strong end-markets, supply chain initiatives, operational cost management, continued focus on driving profitable growth, and advancement of strategic initiatives will drive the industry’s growth. A lower tax rate due to the recently passed tax reform will aid margins.
 
Below we have discussed four stocks from this space that investors may want to buy or retain for the time being due to their growth prospects.
 
Norsk Hydro ASA (NHYDY - Free Report) :  Based in Oslo, Norway, Norsk Hydro has a positive average earnings surprise history of 30.77% over the trailing four quarters. Its estimates for earnings fiscal 2019 has gone up 36% over the past 90 days. The Zacks Consensus Estimate for earnings per share projects growth of 30% fiscal 2019. It has an estimated long-term earnings growth of 9.17%. The company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
Price and Consensus: NHYDY
 
 
TriMas Corp. (TRS - Free Report) : Bloomfield Hills, MI-based TriMas has a Zacks Rank #3 (Hold) and an estimated long-term earnings growth of 5%. The company’s Zacks Consensus Estimate for earnings for fiscal 2019 have moved north 1% over the past 90 days. The estimate for earnings per share projects growth of 7.5% for fiscal 2019. TriMas has a positive average earnings surprise history of 3.37% over the trailing four quarters.
 
Price and Consensus: TRS
 
 
Century Aluminum Co. (CENX - Free Report) : Based in Chicago, IL, the company carries a Zacks Rank #3. The company has a positive average earnings surprise history of 57.3% over the trailing four quarters. The Zacks Consensus Estimate for earnings per share for fiscal 2019 projects growth of 372%.
 
Price and Consensus: CENX
 
 
GrafTech International Ltd. (EAF - Free Report) : This Independence, OH-based company has a positive average earnings surprise history of 21.7% over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 2% over the past 90 days. The estimate for earnings per share projects growth of 22.8% for fiscal 2019. The stock carries a Zacks Rank #3.
 
Price and Consensus: EAF
 
 
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