Players in the Zacks Manufacturing-Tools & Related Products industry are gaining from improved manufacturing activities as the severity of the pandemic has softened from the second quarter of 2020. Also, a surge in business in the e-commerce platform and a heightened demand for DIY products are acting as tailwinds.
However, existing end-market challenges due to the pandemic are clouding the industry players’ growth momentum. Also, a highly leveraged balance sheet is concerning. Two companies namely Stanley Black & Decker, Inc. (SWK - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) are selected to watch for now.
About the Industry
The Zacks Manufacturing-Tools & Related Products industry comprises companies that develop and distribute hand and mechanics tools, hydraulic tools, engineered fastening systems and motion-control systems. Arc welding products, oxy-fuel cutting equipment, plasma cutters, storage system and other related products are also produced by some tool-makers.
The highly-advanced tools are used in industrial, commercial, oil & gas, mining, automotive, and other industries. Providers of electronic security solutions cater to commercial, retailers, government, financial and healthcare markets.
What’s Shaping the Future of Manufacturing Tools Industry
Lingering Pandemic Woes: The industry players are worried about the uncertainties associated with the actual impact of the pandemic on its operations. So, a few players have either suspended or refrained from providing their financial projections. For instance, Kennametal Inc. (KMT - Free Report) is wary of the end-market challenges due to the pandemic and thus did not provide any projections for fiscal 2021 (ending June 2021).
High Leverage: In the present environment, it becomes vital for companies to address the changing needs of their customers. This makes innovation of products as well as constant upgradation of existing products and services almost unavoidable. Investments in these fronts along with engagement in other endeavors like acquisitions often leave companies with a highly leveraged balance sheet. Notably, Stanley Black & Decker had long-term debt of $4.7 billion at the end of second-quarter 2020.
Slowly Improving Operating Environment: It seems that the industry players are slowly benefitting from improved manufacturing activities in the country. Since May 2020, the U.S. industrial production started recovering from the relaxation in the COVID-19-related restrictions. Manufacturing output recorded monthly gain of 3.8% in May 2020, while the same expanded 7.4% in June and 3.4% in July. Also, the ISM Purchasing Managers' Index (“PMI”) of the U.S. increased from 43.1% in May to 56% in August. New orders, production and new export orders are growing fast, based on the past three months’ trend. Notably, the industry’s revenues dipped 0.8% sequentially as compared to the decline of 13.4% recorded in the first quarter.
Pandemic-Induced Tailwinds: Amid the pandemic, preferences for do-it-yourself products as well as those related to security and health have been rising. Stanley Black & Decker is well-placed to benefit from the trend. It intends on making investments in the second half of 2020 to gain from opportunities within its Tools & Storage, and Security segments. Also, the pandemic made e-commerce an important growth avenue for companies like Enerpac Tool Group Corp. (EPAC - Free Report) .
Zacks Industry Rank Indicates Gloomy Prospects
The Manufacturing-Tools & Related Products industry is a five-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #225, which places it in the bottom 10% 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 bleak prospects in the near term. 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 resulted from weakening earnings prospects 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. In the past year, the industry’s earnings estimates for the current year have been lowered by 28.1%.
Before we discuss a few stocks in the industry, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing-Tools & Related Products industry has underperformed both the S&P 500 and the sector in the past year.
While the industry players have collectively lost 11.7%, the sector has gained 7.3%. The S&P 500 has rallied 13.9% in the said time frame.
One-Year Price Performance
Manufacturing-Tools & Related Products Industry’s Valuation
EV/EBITDA ratio is one of the commonly used methods for valuing manufacturing tools and related products stocks.
The industry’s forward 12-month EV/EBITDA ratio is 9.32. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 15.28 and the sector’s 20.26.
Over the past five years, the industry has traded at the highest level of 11.62X forward 12-month EV/EBITDA and lowest level of 5.76X. The median level over the same period was 9.01X.
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus S&P 500
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus Sector
2 Industrial Tool Stocks to Keep Close Eye On
Below we have discussed two stocks from the industry, carrying a Zacks Rank #3 (Hold), which can be on the investors’ watch list.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stanley Black & Decker: The company specializes in making industrial tools (power and hand tools) and related accessories. It also provides electronic security solutions, healthcare solutions, engineered fastening systems and other services. Solid product offerings, efforts to innovate, surge in the e-commerce business, and a shift in customer preferences for security and health-related products are set to benefit the company. However, end-market challenges remain concerning.
Shares of this New Britain, CT-based company have gained 22.7% in the past three months. It reported better-than-expected results in the last four quarters, with an earnings surprise of 9.64%, on average. Also, the company’s earnings estimates have improved by 26.7% for 2020 and 16% for 2021 in the past 60 days. In the next five years, its earnings are expected to increase 5.8%.
Price and EPS: SWK
Lincoln Electric Holdings: The company engages in making welding and cutting products for use in multiple industries, including petrochemical, transportation, fabrication and others. The launch of innovative products, synergistic gains from buyouts, the use of digital platform and cost management initiatives are likely to benefit it in the quarters ahead. However, the COVID-19-related woes might continue hurting.
The stock of this Cleveland, OH-based company gained 17.4% in the past three months. It delivered better-than-expected results in two of the last four quarters, met estimates in one and lagged in another. Average earnings surprise for the last four quarters was 31.07%. In the past 60 days, the company’s earnings estimates have moved up by 20% for 2020 and 6.5% for 2021. Earnings are predicted to grow 10% in the next five years.
Price and EPS: LECO