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4 Metal Fabrication Stocks Braving the Industry Challenges

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The Zacks Metal Products - Procurement and Fabrication industry’s supply chain and customer demand was impacted by the coronavirus pandemic. However, the industry is slowly regaining its lost ground as reopening of businesses has led to a pickup in orders lately. However, it remains to be seen whether this momentum will sustain considering that the pandemic shows no sign of fading.

Meanwhile, the industry players including Norsk Hydro ASA (NHYDY - Free Report) , Timken Company (TKR - Free Report) , Worthington Industries, Inc. (WOR - Free Report) and Mueller Industries, Inc. (MLI - Free Report) are banking on prudent cost management and investment in automation to increase efficiency.

About the Industry

The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers. Most of the industry participants are engaged in conversion, manufacturing and fabrication of metal into end products. Important fabricated metal processes include forging, stamping, bending, forming, and machining. Meanwhile, other processes such as welding and assembling are utilized to join separate parts together.
The industry players serve a wide array of markets including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer.

What’s Shaping the Future of Metal Products - Procurement and Fabrication industry

Industry Coming Out of COVID-19 Induced Slump: In the earlier part of 2020, the pandemic wreaked havoc on the industry’s supply chain and weakened demand in several of its end markets including transportation, mining and industrial. Several customers had to temporarily idle their manufacturing facilities amid the restrictions imposed by the respective governments. However, the fabricated metal products industry has been witnessing improvement in new orders, production and backlog levels since August 2020. Per the Fed’s latest industrial production report, aggregate production of fabricated metal products in the United States improved 10.8% in fourth-quarter 2020 and 16.2% in third-quarter 2020 following a contraction of 38.4% in second-quarter 2020 amid the pandemic. The momentum has sustained in 2021 with January production up 1.8%. The industry is expected to log growth of 20% in sales in the current year. However, resurgence of coronavirus cases might put the brakes on this momentum as it could lead to suspension of manufacturing operations and supply disruptions again.

Cost Cuts to Sustain Margins: The industry has been facing high raw material costs over the past few months, particularly steel. Steel prices are expected to be higher in 2021 amid improving demand and continued supply constraints. In the wake of the pandemic, the industry players have been making every effort to bolster financial condition, conserve cash and optimize profitability. These companies have implemented cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees, delaying salary increases and scaling back advertising spend. These initiatives are likely to help the industry maintain margins.
Automation, Growth in End-Markets to act as Catalysts: The industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of new products and innovative products will drive growth in the days ahead. According to a report by Transparency Market Research, the global metal fabrication market is anticipated to see a CAGR 3.5% to $23.05 billion to during the 2019-2027 period. Given that fabricated metals are utilized in diversified end-markets, effects of cyclic nature of the metal fabrication market have been offset. Growth in end-use sectors such as aerospace and automotive is anticipated to drive the metal fabrication market over the next few years. Developing countries hold promise courtesy of rapid industrialization, which will create demand.

Zacks Industry Rank Indicates Dim 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 Zacks Metal Products - Procurement and Fabrication industry, which is a 13-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #224, which places it at the bottom 12% 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. Over the past year, the industry’s earnings estimates for the current year has gone down 11%.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over the past seven weeks.

Despite the bleak near-term prospects, we will present a few Metal Products - Procurement and Fabrication stocks 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 Outperforms S&P 500 and Sector

The Zacks Metal Products - Procurement and Fabrication industry has outperformed its own sector and S&P 500 composite over the past year. Over this period, the industry has gained 90.3% compared with the sector’s growth of 61.4%. Meanwhile, the Zacks S&P 500 composite has rallied 42.5%.

One-Year Price Performance

Industry’s Current 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 9.29 compared with the S&P 500’s 15.29 and the Industrial Products sector’s forward 12-month EV/EBITDA of 20.69. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry has traded as high as 20.86 and as low as 5.01, with the median being at 8.00.

4 Metal Products - Procurement and Fabrication Stocks to Keep an Eye On

Norsk Hydro: Oslo, Norway-based Norsk Hydro operates as an integrated aluminum company worldwide.

In line with its endeavor to improve profitability and drive sustainability, the company has recently entered into an agreement to sell its Hydro Rolling business. The sale will strengthen its position in low-carbon aluminium and its balance sheet. Further, it will enable the company to focus on strategic growth areas of recycling, renewables and batteries. The transaction is anticipated to be completed during the second half of 2021. The company is benefiting from higher volumes driven by recovery in key segments such as automotive, can, building and construction.

The Zacks Consensus Estimate for the company’s current year earnings indicates year-over-year growth of 185%. The estimate has moved up 12% over the past 90 days. The stock has gained 92% in the past six months. The company currently has a Zacks Rank #3 (Hold) and an estimated long-term earnings growth of 38%.

Price and Consensus: NHYDY

Timken: North Canton, OH-based Timken is a global manufacturer of engineered bearings and power transmission products. The company will gain on its strategic acquisitions to broaden its portfolio and capabilities across diverse markets with a focus on bearings, adjacent power transmission products, and related services. Its diversity in terms of end market, customer and geography, product innovation, and engineering expertise provides it with a competitive edge. Cost-reduction actions will also drive margins. The company continues to expand its presence in the renewable space to support growth beyond 2020. The sector is anticipated to become a significant part of its portfolio in the future.

The Zacks Consensus Estimate for the company’s current year earnings has moved up 5.3% over the past 90 days. The company has a trailing four-quarter earnings surprise of 57.3%, on average. The company has an estimated long-term earnings growth of 7%. The stock has appreciated 45% in the past six months. The company currently 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: TKR

Worthington: This Columbus, OH-based metals manufacturing company, focuses on value-added steel processing and manufactured metal products in the United States, Austria, Canada, Mexico, Poland, and Portugal.

The company is well-poised for growth through its three-tiered strategy — Transformation, Innovation and Acquisitions. The transformation aspect concentrates on making its businesses more capital efficient and profitable. The company recently announced that it has sold its oil & gas equipment business, thus getting rid of a money-losing operation. The innovation angle, which is focused on new product development and acquisitions to augment product offerings and adding higher margin businesses, helps accelerate growth. The company is also building on its capabilities in automation, analytics and advanced technologies, which will provide it a competitive edge. Moreover, proactive steps to cut costs and improvement in end markets will aid results.

The Zacks Consensus Estimate for the company’s current year earnings indicates year-over-year growth of 57.5%. The estimate has moved up 23% over the past 90 days. The company has a trailing four-quarter earnings surprise of 19.8%, on average. The stock has gained 65% in the past six months. The company currently carries a Zacks Rank #3.

Price and Consensus: WOR

Mueller Industries: This Collierville, TN-based company is a leading manufacturer of copper, brass, aluminum, and plastic products.

The company has delivered third consecutive year of double-digit operating income growth that keeps it on track with its ambitious 2024 Strategic Plan. The company continues to focus on growth in value-added products and strategic acquisitions. The company recently closed the acquisition of the Hart & Cooley Flexible Duct business that will expand its footprint in the air quality and climate control systems markets. These markets are integral to the company’s growth strategy. The demand for investment in refrigeration/ food preservation and air conditioning/air quality, and the modernization of water management infrastructure, is on the rise. These trends will support Mueller’s long-term growth.

The Zacks Consensus Estimate for the company’s current year earnings indicates year-over-year growth of 1%. The estimate has moved up 148% over the past 90 days. The stock has gained 42% in the past six months. The company currently has a Zacks Rank #3.

Price and Consensus: MLI


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