Back to top

Image: Bigstock

4 Stocks to Gain From the Promising Diversified Operations Industry

Read MoreHide Full Article

The Zacks Diversified Operations industry has been benefiting from growth in manufacturing activities as the pandemic-related restrictions have eased. Solid demand for medical equipment and personal safety products has proved beneficial for the industry participants. Recovery in the commercial aviation sector, product innovation efforts and growth in the e-commerce business have been other tailwinds.

However, challenges in the defense and space sector are hurting a few players. Supply-chain issues, cost inflation and labor issues remain concerns. Danaher Corporation (DHR - Free Report) , Carlisle Companies Incorporated (CSL - Free Report) , Crane Co. (CR - Free Report) , and Griffon Corporation (GFF - Free Report) are a few stocks with healthy prospects.

About the Industry

The Zacks Diversified Operations industry includes companies that operate in various end-markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines and engineered fluid-process equipment. The industry players also provide related services to a vast customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and others.

3 Trends Shaping the Future of the Diversified Operations Industry

Strength in Medical and Safety Markets: The industry has been benefiting from healthy demand for several products and equipment in the medical and safety markets. Solid demand for bioprocessing (Cytiva and Pall Biotech) and molecular testing (Cepheid) products is expected to continue driving the performance of the industry player Danaher. High demand for vaccines (COVID-19) and therapeutics also bode well for the industry players with exposure in the medical market. Also, industry players with exposure in the commercial aviation markets are poised to gain from healthy growth in air transport flight hours.

Favorable Trends: The improvement in operating conditions, as evident from increasing manufacturing activities and strong demand, will likely act as tailwinds for companies with exposure in industrial manufacturing. It is worth noting that industrial production in the United States advanced 1.4% in January 2022 from the previous month. The digitalization of business operations has enabled industry participants to boost their competitiveness with enhanced operational productivity and product quality. Also, growing online businesses and the government’s development efforts are likely to aid the industry.

Persistent Challenges: The pandemic-related end-market challenges are still concerning. Lower demand for respirators and personal safety products has raised concerns for several industry players as it might adversely impact their performance. Also, weakness in the defense and space sector owing to moderating U.S. defense spend volumes might affect the performance of a few industry players. The companies with exposure in industrial markets have also been experiencing supply-chain disruptions, logistic issues and inflation in raw materials and other expenses, which might weigh on their margins and profitability. The shortage of skilled workers in the United States has been a perennial concern as well. In addition, some industry participants have been dealing with highly leveraged balance sheets as product development investments have become necessary for staying competitive in the market.

Zacks Industry Rank Reflects Healthy Prospects

The Zacks Diversified Operations industry is a 18-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #115, which places it in the top 46% of about 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

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 weaker than the S&P 500 over the trailing 12 months. The stocks in the industry have collectively lost 7% against the S&P 500’s increase of 14.2%.

Past Year’s Price Performance

 

Diversified Operations Industry's Valuation

The enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio is commonly used for valuing companies with diversified operations.

The industry’s forward 12-month EV/EBITDA ratio is 12.01x. This multiple is below the S&P 500’s 13.63x.

Over the past five years, the industry has traded at the highest level of 14.63x forward 12-month EV/EBITDA and the lowest level of 8.32x. The median level was 10.72x over the same period.

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

4 Diversified Operations Stocks Worth Watching

Below we have discussed four stocks from the industry, with a Zacks Rank #1 (Strong Buy), #2 (Buy) or a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Danaher: The Washington, DC-based company manufactures and supplies industrial, consumer, professional and commercial products. The company is poised to benefit from solid demand in Life Sciences, Diagnostics and Environmental & Applied Solutions segments, acquired assets and shareholder-friendly policies. However, cost inflation and woes related to supply-chain restrictions might ail. Its market capitalization is $197.8 billion, and it currently carries a Zacks Rank #3.

The company’s shares have gained 26.7% in the past year. Its earnings surprise in the last four quarters was 22.69%, on average, beating estimates all through. Also, the company’s earnings estimates have improved 2.8% for 2022 in the past 60 days.

Price and Consensus: DHR

Carlisle: Based in Scottsdale, AZ, the company engages in manufacturing and providing roofing and waterproofing products, finishing equipment and engineered products. The company is set to gain from strength in the U.S. reroofing end markets along with acquired assets in the quarters ahead. Also, strength in the medical technologies business and recovery in the commercial aerospace business bode well. The company presently has a Zacks Rank #2 and a market capitalization of $12.4 billion.

Shares of the company have gained 57.8% in the past year. Its earnings surprise in the last four quarters was 35.13%, on average, beating estimates all through. Its earnings estimates have improved 9.2% for 2022 in the past 60 days.

Price and Consensus: CSL

Crane: The company makes and sells engineered industrial products for use in automated payment solutions, aerospace, power, electronics, general industrial and other end markets. In the quarters ahead, its growth opportunities are healthy in the general industrial, chemical and pharmaceutical end markets. It currently has a Zacks Rank #3 and a market capitalization of $6 billion.

Shares of the Stamford, CT-based company have gained 16.4% in the past year. Its earnings surprise in the last four quarters was 26.99%, on average, surpassing estimates all through. The company’s earnings estimates have improved 1.5% for 2022 in the past 60 days.

Price and Consensus: CR

Griffon: The New York-based company is primarily a management and holding company operating through its subsidiaries. Product innovation, specialized household and building products, solid manufacturing capabilities and a surge in the e-commerce business are expected to drive its performance in the quarters ahead. The company presently has a market capitalization of $1.3 billion.

Although shares of this Zacks Rank #1 company have lost 7.1% in the past year, it has gained 6.4% in the past month. It delivered an earnings surprise of 56.66%, on average, beating estimates thrice in the last four quarters. In the past 60 days, the company’s earnings estimates have increased 9.9% for fiscal 2022 (ending September 2022).

Price and Consensus: GFF