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Industrial Manufacturing Outlook: Near Term, Cloudy

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The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in producing various types of industrial equipment tools.

Some of these companies sell power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, gel coat equipment, flow control components, safety products and linear motion components in the market. In addition to these, the industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors for their customers.

These companies provide services to original equipment manufacturing (OEM), as well as maintenance, repair and overhaul (MRO) customers. These end users belong to different types of industries, such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation and utilities.

Here are the three major themes in the industry:
 

Of late, U.S. manufacturing companies have been buoyed by sturdy domestic economic conditions, primarily due to thrust on infrastructure and stimulus provided by the Republic-led government.  Economic policies adopted by the Trump administration, including its December-enacted corporate tax overhaul and impetus to streamline business regulations, have aided in steaming up manufacturing activity. We notice that U.S. manufacturing companies are not only hiring more, but also offering relatively higher wages in the market. Notably, the manufacturing domain added 32,000 new jobs last month and offered an average weekly pay of $1,106.09, higher than $941.85 paid by the private sector taken together. The Institute for Supply Management’s (ISM) manufacturing gauge was pegged at 57.7% this October, marking the 114th consecutive month of overall economic expansion. An above-50 ISM Index indicates growth in American manufacturing. Against this backdrop, we believe corporate spending across the industrial manufacturing companies will likely shore up at a healthy pace, moving ahead. 
U.S. manufacturing companies are rife with apprehensions concerning the outcome of a full blown trade war between the United States and other countries, including China. Notably, the White House and Beijing have slapped tariffs over goods valuing billions of dollars this year, escalating fears of tighter trade conditions. We notice that these duties are resulting in material cost inflation and pulling down margins of many industrial manufacturing companies. Per the latest ISM report, the Price Index jumped 4.7 points month over month to 71.6% in October. Some manufacturers are defying inflation with selling price adjustments. Nonetheless, these amendments are making exports expensive and depressing overseas revenues of the businesses. The New-Export Index stood at 52.2% in the last month, down 3.8 points from September. 
The American manufacturing companies are also plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses. Numerous industrial manufacturing companies are currently looking for innovative technologies to drive their operational efficacy. However, in this course, these businesses are grappling with the issue of severe scarcity in skilled workforce. Additionally, a tightening labor market scenario is escalating wage rates in the market. Per the Labor Department, the 12-month rate of hourly wage gains climbed to 3.1% in October, at its nine-year peak. In addition, the state of affairs has turned complex for U.S. manufacturers due to the ongoing doldrums within the trucking industry. The industry is currently battling a number of issues like shortage of truck drivers and soaring truck fuel surcharges. On account of these issues, U.S. manufactures are now troubled with supply-side challenges relating to lead-time expansions and elevated freight charges. These setbacks may continue to aggravate costs and mar profits of industrial manufacturing companies in the near future. 
  • Of late, U.S. manufacturing companies have been buoyed by sturdy domestic economic conditions, primarily due to thrust on infrastructure and stimulus provided by the Republic-led government.  Economic policies adopted by the Trump administration, including its December-enacted corporate tax overhaul and impetus to streamline business regulations, have aided in steaming up manufacturing activity. We notice that U.S. manufacturing companies are not only hiring more, but also offering relatively higher wages in the market. Notably, the manufacturing domain added 32,000 new jobs last month and offered an average weekly pay of $1,106.09, higher than $941.85 paid by the private sector taken together. The Institute for Supply Management’s (ISM) manufacturing gauge was pegged at 57.7% this October, marking the 114th consecutive month of overall economic expansion. An above-50 ISM Index indicates growth in American manufacturing. Against this backdrop, we believe corporate spending across the industrial manufacturing companies will likely shore up at a healthy pace, moving ahead.
     
  • U.S. manufacturing companies are rife with apprehensions concerning the outcome of a full blown trade war between the United States and other countries, including China. Notably, the White House and Beijing have slapped tariffs over goods valuing billions of dollars this year, escalating fears of tighter trade conditions. We notice that these duties are resulting in material cost inflation and pulling down margins of many industrial manufacturing companies. Per the latest ISM report, the Price Index jumped 4.7 points month over month to 71.6% in October. Some manufacturers are defying inflation with selling price adjustments. Nonetheless, these amendments are making exports expensive and depressing overseas revenues of the businesses. The New-Export Index stood at 52.2% in the last month, down 3.8 points from September.
     
  • The American manufacturing companies are also plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses. Numerous industrial manufacturing companies are currently looking for innovative technologies to drive their operational efficacy. However, in this course, these businesses are grappling with the issue of severe scarcity in skilled workforce. Additionally, a tightening labor market scenario is escalating wage rates in the market. Per the Labor Department, the 12-month rate of hourly wage gains climbed to 3.1% in October, at its nine-year peak. In addition, the state of affairs has turned complex for U.S. manufacturers due to the ongoing doldrums within the trucking industry. The industry is currently battling a number of issues like shortage of truck drivers and soaring truck fuel surcharges. On account of these issues, U.S. manufactures are now troubled with supply-side challenges relating to lead-time expansions and elevated freight charges. These setbacks may continue to aggravate costs and mar profits of industrial manufacturing companies in the near future.
     

Trump’s fiscal stimulus will likely continue to steam up the pace of investments and productivity among these businesses, despite higher prices and supply-side shortages.


Zacks Industry Rank Indicates Bright Prospects


The Zacks Manufacturing – General Industrial industry is housed within the broader Zacks Industrial Products sector. It carries a Zacks Industry Rank #79, which places it at the top 31% 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 bright 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 positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group's earnings growth potential. In the past year, the industry’s earnings estimates for the current year have moved up by 8.9%and the same for2019 has improved 3.9%.

Before we present a few industrial manufacturing stocks that are well positioned to outperform the market based on a strong earnings outlook, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Lags S&P 500, Outshines Sector

The Manufacturing – General Industrial industry outperformed the broader Industrial Products sector but lagged the S&P 500 Index over the past year.

The industry has rallied 0.5% during this period compared with the S&P 500’s rise of 8.8% and broader sector’s fall of 6.1%.

One-Year Price Performance


Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is the most appropriate multiple for valuing industrial manufacturing stocks, the industry is currently trading at 10.49X compared to the S&P 500’s 9.91X. However, it is trading below the sector’s trailing-12-month EV/EBITDA of 13.02X.

Over the past five years, the industry has traded as high as 13.98X, as low as 8.80X and at the median of 11.11X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio


Bottom Line

The U.S. Purchasing Managers Index has remained above 50 since the beginning of 2018, undoubtedly verifying that the space remains in sturdy health. The industry is also adding to its payrolls at a healthy pace, with the year-to-date gains coming in at 296,000. The industrial manufacturing companies will likely keep their earnings streak alive in the upcoming quarters on the back of robust domestic demand and the Federal administration’s expansionary policies.

Nonetheless, material cost inflation (on account of tariffs), skilled workforce shortage, flaring-up wage costs, elevated transportation expenses and waning international demand might dent margins of these businesses in the near term.

Below, we have handpicked four top-ranked industrial manufacturing stocks that will likely solidify your portfolio. We believe supply-side setbacks will not derail growth potential of these companies. Our picks currently carry a favorable Zacks Rank # 2 (Buy) and have witnessed positive earnings estimate revisions for the last 60 days.  You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Applied Industrial Technologies, Inc. (AIT - Free Report) is a premium industrial product distributer of North America, Australia, New Zealand, and Singapore. The Zacks Consensus Estimate for the company’s current-fiscal earnings moved up 3.2% to $4.80 per share.
 

Graco Inc. (GGG - Free Report) manufactures, designs, and sells equipment and systems for powder and fluid materials in the global forum. The Zacks Consensus Estimate for the current-year earnings of the company moved 2.2% upward to $1.88 per share.
 

Ingersoll-Rand PLC (IR - Free Report) manufactures and sells commercial and industrial products, globally. The Zacks Consensus Estimate for the company’s 2018 earnings inched up 0.7% to $5.58 per share.
 

IDEX Corporation (IEX - Free Report) is a premium applied solutions provider in the market. The Zacks Consensus Estimate for the current-year earnings of the company moved 1% north to $5.36 per share.
 

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