Players in the Zacks Diversified Operations industry are gaining from the solid demand for personal safety products and medical equipment due to the pandemic. Also, businesses in the defense markets are healthy, adding to growth opportunities.
Focus on product innovation, expansion of e-commerce businesses and reviving manufacturing activities in the country are acting as tailwinds. Three companies, namely Danaher Corporation (DHR - Free Report) , ITT Inc. (ITT - Free Report) and Raven Industries, Inc. (RAVN - Free Report) , are poised to benefit in the present environment.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end-markets like oil & gas, industrial, aviation, technology, finance, healthcare, and transportation. Such companies manufacture and provide equipment, solutions and related services to a vast customer base.
In addition, there are a few companies that provide services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions.
What’s Shaping the Future of Diversified Operations Industry
Demand in Medical and Safety Markets: Industry players, having business operations in personal safety and medical equipment end markets, are enjoying healthy demand for medical sensors, personal protective equipment, sanitizers, face masks and various other protective gears. To mention, the Diagnostic’s segment of Danaher will likely benefit from the healthy demand for acute care diagnostic and molecular diagnostic products in the third quarter of 2020. Also, Beckman Coulter Diagnostic serology test (the latest launch) will likely be a tailwind. Also, a surge in demand for scanning and monitoring products (like mobile X-ray systems, CTs, patient monitors, ventilators and ultrasound devices) are benefiting General Electric Company (GE - Free Report) .
Other Tailwinds: Reviving manufacturing activities — evident from improving ISM’s Purchasers Manufacturing Index — in the United States are likely to aid players with exposure to industrial manufacturing. In September, the ISM’s Purchasers Manufacturing Index was at 55.4%, reflecting growth from 41.5% in April. Also, despite the pandemic, businesses from defense customers have been quite healthy for companies like Honeywell International Inc. (HON - Free Report) . In addition to these, growing online businesses and the government’s development efforts are likely to bode well for the industry.
Persistent Woes: Despite showing resiliency, some players in the industry are still skeptical about the extent the pandemic will impact their operations. The lack of clarity has forced some players to either suspend or refrain from giving financial projections. For instance, 3M Company (MMM - Free Report) suspended its financial projections for 2020 due to the pandemic worries. In addition, some players are dealing with highly leveraged balance sheets, strained trade relations and unfavorable movements in foreign currencies.
Zacks Industry Rank Suggests Bright Prospects
The Zacks Diversified Operations industry is a 23-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 38% 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 promising 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 top 50% of the Zacks-ranked industries is a result of strong earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2020 have increased 3.7% since July-end.
We will present a few stocks that you may consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500
The Zacks Diversified Operations industry’s performance has been worse than the S&P 500 over the trailing 12 months. The stocks in the industry have collectively gained 8.7% against the S&P 500’s growth of 16.2%.
Past Year Price Performance
Diversified Operations Industry’s Valuation
EV/EBITDA ratio is commonly used for valuing companies with diversified operations.
The industry’s forward 12-month EV/EBITDA ratio is 30.94. This multiple is way above the S&P 500’s 17.21.
Over the past five years, the industry has traded at the highest level of 33.82x forward 12-month EV/EBITDA and lowest level of 16.97x. The median level was 22.14x over the same period.
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus S&P 500
3 Diversified Operations Stocks Poised for Growth
Below we have discussed three stocks from the industry that have solid growth opportunities despite the prevalent pandemic uncertainties. The chosen stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Danaher: The company makes and sells industrial, consumer, professional and commercial products. It benefits from growth opportunities within the Life Sciences and Diagnostics segments.
Shares of this Washington, DC-based company have gained 19.9% in the past three months. It reported better-than-expected results in the last four quarters, with an earnings surprise of 10.83%, on average. Also, the company’s earnings estimates have improved by 0.9% for 2020 and by 0.8% for 2021 in the past 60 days. In the next five years, its earnings are expected to increase 11.6%.
Price and Consensus: DHR
ITT: The company is primarily engaged in designing, manufacturing and selling engineered products, and also provides related services. It is poised to benefit from a healthy liquidity position, supply-chain initiatives, diversified operations and cost-reduction measures.
The stock of this New York City-based company gained 4.8% in the past three months. It delivered better-than-expected results in the last four quarters, the earnings surprise being 20.46%, on average. In the past 60 days, the company’s earnings estimates have moved up by 4.1% for 2020 and 3.2% for 2021. Earnings are predicted to grow 6.9% in the next five years.
Price and Consensus: ITT
Raven: The Sioux Falls, SD-based technology company engages in providing various products in aerospace/defense, agricultural, construction, industrial, and other markets. Solid product offerings, investments for enhancing technological capabilities, acquired assets and gradually improving market conditions are boons.
Shares of this company have gained 6.4% in the past three months. It reported better-than-expected results in the last reported quarter, with an earnings surprise of 212.50%. Also, the company’s earnings estimates have improved by 8.6% for fiscal 2021 (ending January 2021) and by 4.5% for fiscal 2022 (ending January 2022). In the next five years, its earnings are expected to increase 10%.
Price and Consensus: RAVN