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3 Manufacturing Tool Stocks With Earnings Growth Potential

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Players in the Zacks Manufacturing-Tools & Related Products industry have been gaining from the pandemic-induced demand for do-it-yourself, health, home & garden, security and other products. Also, strengthening e-commerce businesses as well as overall recovery in the country’s manufacturing activities have been beneficial. Any incremental spending on infrastructural development in the United States will be added advantage. However, the prevailing pandemic-related challenges, cost inflation and constraints in the supply chain (related to semiconductors) are concerning for the industry players.

Some industry players with healthy earnings prospects are Stanley Black & Decker, Inc. (SWK - Free Report) , Lincoln Electric Holdings, Inc. (LECO - Free Report) and Kennametal Inc. (KMT - Free Report) .

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 heavy-lifting technology solutions. Arc-welding products, robotic welding packages, fume extraction equipment, oxy-fuel cutting equipment, plasma cutters, healthcare solutions, electronic security solutions and other 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. Talking about international operations, some of the industry players provide products and services to customers in North and South America, Japan, Europe, Canada, Asia, and the Middle East.

What's Shaping the Future of Manufacturing Tools Industry

Improving Operating Environment: The industry players seem to be benefiting from the recovery in manufacturing and economic activities, both domestic and international. Key indicators are the Unites States’ industrial production and growth projections provided by the International Monetary Fund (“IMF”). In April, the country’s industrial production advanced 16.5% year over year, with a 23% increase in manufacturing output. In April, the IMF raised its projections for the United States to 6.4% for 2021 and 3.5% for 2022. Also, the world economy’s growth expectations were raised to 6% for 2021 and 4.4% for 2022. Further, any incremental investments in infrastructural development under the Joe Biden government might be added tailwind for the industry players.

Pandemic-Induced Tailwinds: Amid the pandemic, customer’s preferences for do-it-yourself, home & garden, security, health, and home improvement products have been rising. Such a trend is favorable for Stanley Black & Decker. For 2021, the company expects healthy organic sales growth in its Security, Tools & Storage, and Industrial segments. Also, the pandemic made e-commerce an important growth avenue for the industry players.

Pandemic Woes: The pandemic-related uncertainties and its possible impact on operations are still concerning for the industry players. For instance, Enerpac Tool Group Corp.’s (EPAC - Free Report) performance in second-quarter fiscal 2021 (ended Feb 28, 2021) severely suffered from the adverse impacts of the pandemic. Also, the prevalent challenges in the supply chain, especially those related to semiconductors, are worrisome for Kennametal. Further, rising commodity, raw material, freight and labor costs can dent margins and profitability of the industry players. For instance, Stanley Black & Decker expects cost-inflation-related headwinds to lower earnings by 80 cents per share in 2021.

High Debts: The industry players’ efforts to satisfy the changing needs of customers make innovation and constant upgradation of existing products unavoidable. Huge investments are being made in these fronts by some players. Notably, Enerpac Tool introduced three product families in the first quarter and two product families in the second quarter of fiscal 2021. Also, engagement in endeavors like acquisitions requires huge funds. The aforementioned activities along with other capital-intensive actions often leave companies with a highly leveraged balance sheet. Exiting the first quarter of 2021, the industry’s long-term debt was $2,107 million, reflecting an increase of 22.5% from the previous quarter.

Zacks Industry Rank Mirrors Promising 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 #66, which 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 healthy 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 top 50% of the Zacks-ranked industries resulted from strengthening earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in the group’s earnings growth potential. The industry’s earnings estimates for 2021 have been increased by 48.7% in the past year.

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 gained 19%, the sector has grown 54%. The S&P 500 has rallied 38.5% in the said time frame.

One-Year Price Performance

Zacks Investment Research

Manufacturing-Tools & Related Products Industry's Valuation

P/E ratio is one of the commonly used methods for valuing manufacturing tools and related product stocks.

The industry’s forward 12-month P/E ratio is 14.45. This clearly shows that the industry is trading below the S&P 500’s forward 12-month P/E ratio of 21.84 and the sector’s 22.33.

Over the past five years, the industry has traded at the highest level of 21.45X forward 12-month P/E and the lowest level of 12.49X. The median level over the same period was 16.77X.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

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 Industry’s P/E Ratio (Forward 12-Month) Versus Sector

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3 Industrial Tool Stocks Worth Considering or Keeping a Close Watch on

Below we have discussed three stocks from the industry, carrying a Zacks Rank #2 (Buy) or a Zacks Rank #3 (Hold), which can be on 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, a surge in the e-commerce business, and a shift in customer preferences for security and health-related products are set to benefit the company in the quarters ahead. However, inflation in commodity prices is concerning. The company currently carries a Zacks Rank #3.

Shares of this New Britain, CT-based company have gained 65.3% in the past year. It reported better-than-expected results in the last four quarters, with an earnings surprise of 16.72%, on average. Also, the company’s earnings estimates have improved by 7.9% for 2021 in the past 60 days. In the next five years, its earnings are expected to increase 11.1%.

Price and EPS: SWK

Zacks Investment Research

Lincoln Electric: The company engages in making welding and cutting products for use in multiple industries, including petrochemical, transportation and fabrication. Innovative products, synergistic gains from buyouts, the use of digital platforms and cost-management initiatives are expected to benefit it in the quarters ahead. However, the lingering impacts of the pandemic as well as an increase in material and freight costs are headwinds. The company currently carries a Zacks Rank #2.

Shares of this Cleveland, OH-based company have gained 54% in the past year. It delivered better-than-expected results in the last four quarters, with an average of 51.63%. In the past 60 days, the company’s earnings estimates have moved up by 10.7% for 2021. Earnings are predicted to grow 10% in the next five years.

Price and EPS: LECO

Zacks Investment Research

Kennametal: The company specializes in making and distributing high-speed metal cutting tools, tooling systems and wear-resistant parts. Its diversified business structure, simplification/modernization initiatives, innovation abilities and restructuring measures will likely benefit it in the quarters ahead. The lingering impacts of the pandemic and the constraints in the supply chain are concerning. The company presently carries a Zacks Rank #3.

Shares of this Latrobe, PA-based company have gained 31.4% in the past year. It reported better-than-expected results in the last four quarters, with an earnings surprise of 46.85%, on average. Also, the company’s earnings estimates have improved by 23.3% for fiscal2021 (ending June 2021) in the past 60 days. In the next five years, its earnings are expected to increase 5%.

Price and EPS: KMT

Zacks Investment Research

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