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4 Top Industrial Manufacturing Stocks Amid Industry Woes

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The Zacks Manufacturing – General Industrial industry has been benefiting from the increase in domestic and export orders for industrial products and the surge in the e-commerce business. Efforts to digitalize business operations have been enhancing the industry players' competitiveness.

The impacts of supply-chain disruptions, inflation in raw materials and difficulty in sourcing skilled labor have marred the outlook of the industry participants. Also, the requirement of frequent innovation investments to stay competitive in the market adds to woes. IDEX Corporation (IEX - Free Report) , Applied Industrial Technologies, Inc. (AIT - Free Report) , Helios Technologies, Inc. (HLIO - Free Report) and Luxfer Holdings PLC (LXFR - Free Report) are stocks with healthy prospects.

About the Industry

The Zacks Manufacturing – General Industrial industry comprises companies engaged in the production of a wide range of industrial equipment. Some industry players offer power transmission products, bearings, engineered fluid power components and systems, industrial rubber products, vapor-abrasive blasting equipment, vehicle-powered truck refrigeration systems, adhesive, flow-control components, safety products and linear motion components. Industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.

The companies provide services to original equipment manufacturing and maintenance, repair and overhaul customers. These end users belong to industries such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation and utilities.

What's Shaping the Future of Manufacturing General Industrial Industry

Favorable Trends:  The industry has been benefiting from the consistent growth in manufacturing activities, supported by a rise in domestic and export orders for industrial products. The industrial production increased 1.1% in April for the fourth successive month with a 0.8% rise in manufacturing output. Notably, the ISM’s manufacturing index registered 55.4% in April 2022, indicating expansion of the U.S. manufacturing activity for the 23rd month in a row. The U.S. industrial manufacturing companies have been focusing on digitizing their business operations with new technologies and business models. Digitization has been enabling several manufacturers to boost their competitiveness with enhanced operational productivity, product quality and lower costs. A surge in the e-commerce business has been proving beneficial for the companies.

Supply-Chain & Inflation Concerns: The industry participants have been suffering from persistent supply-chain challenges, logistic issues and inflation in raw materials and other expenses, which have been affecting their production capacity and sales, thus weighing on their margins and profitability. The shortage of skilled workers in the United States has remained a persistent concern for the industry players. The imposition of pandemic-related restrictions in a few parts of the world, including China, has raised concerns for the overseas businesses of several industry players.

High Leverage: The focus on product innovation remains a priority for the industry players. The companies bank on the frequent upgrade of products and services to stay competitive in the market, thus making steady investments necessary.  However, these frequent investments adversely impact the margins and profitability of the companies. Also, the companies often make acquisitions to strengthen then businesses, expand their product portfolio and extend regional presence. Such frequent investments often leave many companies with a highly leveraged balance sheet.

Zacks Industry Rank Indicates Bleak Prospects

The Manufacturing – General Industrial industry is a 39-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #150, which places it in the bottom 41% 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 weak near-term 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of bleak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry’s earnings estimates for the current year have moved down 5.1% since the end of August 2021.

Before we discuss a few stocks from the industry, it is worth taking a look at the industry’s shareholder returns and its current valuation.

Industry Underperforms S&P 500 & Outperforms Sector

The Zacks Manufacturing – General Industrial industry has underperformed the S&P 500 but outperformed the sector in the past year. While stocks in the industry have collectively lost 20%, the S&P 500 and the Zacks Industrial Products sector have declined 7% and 20.4%, respectively.

One-Year Price Performance

Manufacturing - General Industrial Industry's Valuation

Price/Earnings (P/E) ratio is commonly used for valuing manufacturing stocks.

The industry’s forward 12-month P/E is 16.39x. This clearly shows that the industry is trading above the sector’s forward 12-month P/E of 14.82x and below the S&P 500’s 16.91x.

Over the past five years, the industry has traded at the highest level of 26.90x forward 12-month P/E and the lowest level of 14.91x. The median level over the same period was 20.31x.

Manufacturing–General Industrial Industry’s Valuation Versus S&P 500

Manufacturing–General Industrial Industry’s Valuation Versus Sector

4 Manufacturing-General Industrial Stocks Leading the Pack

Here we have discussed four stocks from the industry that have solid growth opportunities despite the prevalent headwinds. The stocks currently carry either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

IDEX: Headquartered in Northbrook, IL, IDEX is an applied solutions company specializing in a diverse range of applications such as fluid and metering technologies, health and science technologies and fire, safety and other products built to customer specifications. The company stands to benefit from a diversified business structure, solid product portfolio, execution abilities and growth investments in the quarters ahead. Also, its KZvalve acquisition (completed in May 2022) is expected to boost its position in the agricultural product market. For 2022, it anticipates organic sales growth of 6-8% year-over-year.

Shares of the Zacks Rank #2 company have declined 16.5% in the past year. It reported better-than-expected results twice while missing estimates twice in the trailing four quarters, with earnings surprise being 2.8%, on average. The company’s earnings estimates have improved 3.2% for 2022 and 3.5% for 2023 in the past 60 days.

Price and Consensus: IEX

Applied Industrial Technologies: Based in Cleveland, OH, the company is a distributor of value-added industrial products — including engineered fluid power components, bearings, specialty flow control solutions and power transmission products. It is poised to benefit from a solid demand environment, healthy cross-selling actions and growth investments. Also, its product development initiative, buyouts and shareholder-friendly policies raise its attractiveness. For fiscal 2022, Applied Industrial predicts organic sales growth of 13.6-14.1% year over year.

The Zacks Rank #1 company has gained 2.6% in the past year. It reported better-than-expected results thrice in the last four quarters, with the earnings surprise being 25.4%, on average. In the past 60 days, the company’s earnings estimates have moved up 5.9% for fiscal 2022 (ending June 2022) and increased 10.2% for fiscal 2023 (ending June 2023).

Price and Consensus: AIT

Helios Technologies: Based in Sarasota, FL, Helios is engaged in developing, manufacturing, and supplying solutions for the hydraulics and electronics markets worldwide. The company stands to benefit from a solid product portfolio, growth in demand for its products and solutions and acquired assets.

The shares of the Zacks Rank #2 company have lost 9.5% in the past year. It reported better-than-expected results in each of the trailing four quarters, with earnings surprise being 29%, on average. The company’s bottom-line estimates have improved 0.7% for 2022 and 0.4% for 2023 in the past 60 days.

Price and Consensus: HLIO

Luxfer Holdings: Based in Milwaukee, WI, Luxfer is a materials technology company specializing in the design, manufacture and supply of high-performance materials, components and gas cylinders. The company stands to benefit from solid demand for its products and solutions, acquired assets and shareholder-friendly policies.

The shares of the Zacks Rank #2 company have lost 29.1% in the past year. LXFR reported better-than-expected results thrice while meeting estimates once in the trailing four quarters, with earnings surprise being 11.2%, on average. The company’s bottom-line estimates have improved 4.3% for 2022 and remained stable for 2023 in the past 60 days.

Price and Consensus: LXFR