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4 Metal Fabrication Stocks to Watch in a Challenging Industry
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The Zacks Metal Products - Procurement and Fabrication industry has been witnessing improved demand in its end markets. However, the industry has been struggling to keep pace with high levels of demand due to labor shortages and the ongoing supply issue constraints. High raw material and freight costs have added to their margin pressures.
In this scenario, industry players like The Timken Company (TKR - Free Report) , Century Aluminum (CENX - Free Report) , Worthington Industries, Inc. (WOR - Free Report) and Northwest Pipe Company (NWPX - Free Report) are expected to gain from their efforts to manage costs, focus on improving efficiency and investment in automation.
About the Industry
The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers that transform metal into metal parts, machinery, or components used across various other industries. Their processes include forging, stamping, bending, forming and machining, which are used to shape individual pieces of metal, and welding and assembling to join parts. The companies either use one of these processes or a combination of these. The most common raw materials utilized by metal fabrication companies include plate metal, formed or expanded metal, tube stock, welding wire or rod, and casting. The industry players serve an 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
Strong Demand in End-Markets to Support Growth: The pandemic had weakened the demand in several of the industry’s end markets, including transportation, mining and industrial. However, the fabricated metal products industry eventually came out of the slump, backed by the gradual business reopening and has been witnessing growth in new orders, production and backlog levels since July 2021. However, lately, the pace has slackened. Even though the overall manufacturing sector continues to witness strong demand, it is being constrained by supply chain issues. Per the Fed’s latest industrial production report, the aggregate production of fabricated metal products in the United States was up 1.2% in the second quarter of 2022, a deceleration from a 5% growth noted in the first quarter of 2022 and 10% in the fourth quarter of 2021. Nevertheless, over the course of the 12-month period ended June, production of fabricated metal products was up 3.6%. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.
High Costs & Supply-Chain Woes Persist: The industry is currently facing input cost inflation (mainly steel) and transport and logistic costs. It has been struggling to keep up with the increase in demand due to the shortage of labor, supply-chain issues, high raw material lead times and persistent shortages of critical materials. Labor shortage remains an issue. The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Automation & End-Market Growth to Act as Catalysts: The industry’s customer-focused approach to providing cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of the latest and innovative products will drive growth in the days ahead. Growth in end-use sectors such as manufacturing, aerospace and automotive is anticipated to benefit the metal fabrication market over the next few years. Developing countries hold promise, courtesy of rapid industrialization, which is likely to 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 dim prospects in the near term. The Zacks Metal Products - Procurement and Fabrication industry, which is a 12-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #177, which places it at the bottom 29% of 251 Zacks industries. 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has gone down 30%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Metal Products - Procurement and Fabrication industry has underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has fallen 23.6% compared with the sector’s decline of 20.3%. Meanwhile, the Zacks S&P 500 composite has lost 10.6%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement and Fabrication companies, the industry is currently trading at 7.88 compared with the S&P 500’s 20.08 and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.89. 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 20.89 and as low as 5.01, with the median being at 7.93.
4 Metal Products - Procurement and Fabrication Stocks to Keep a Tab on
Century Aluminum: The company has seen an improvement in demand across various intermediate and end markets. Strong manufacturing activities, especially in the United States, and higher aluminum demand bode well for the company. CENX is taking actions to increase production to capitalize on the sustained strength in global aluminum markets. The company has been benefiting from the management of controllable costs, and these initiatives are expected to support its bottom line in the near future. CENX recently announced that it is temporarily idling its smelter in Hawesville due to skyrocketing energy costs, which led to a 10.5% drop in its share price over the past month. The company, however, expects energy prices to moderate in the next year and believes strongly in the future prospects of the Hawesville smelter, given its recent performance and the crucial role it plays in U.S. national security.
Century Aluminum has a trailing four-quarter earnings surprise of 5.07%, on average. CENX currently carries a Zacks Rank #2 (Buy).
Timken: The company continues to witness new business wins in new markets and regions. Its diversity in terms of end market, customer and geography, product innovation, and engineering expertise provides it with a competitive edge. Underlying customer demand and end-market momentum remain strong across most sectors. Apart from strong demand, earnings growth will be supported by benefits from price realization, growth initiatives and operational excellence initiatives. The company’s shares have appreciated 9.4% over the past month. Timken continues to pursue strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products, and related services. Over the past three years, the company has been focused on building its renewable energy portfolio through innovation and acquisitions. Renewable energy is currently Timken’s largest individual end-market sector generating 12% of sales, and the company has plans to make it a bigger part of its portfolio in the future to capitalize on the expected growth in the sector.
The Zacks Consensus Estimate for Timken’s current-year earnings has moved up 2.5% over the past 90 days. The company has a trailing four-quarter earnings surprise of 5.07%, on average. TKR currently carries a Zacks Rank #3 (Hold).
Price and Consensus: TKR
Worthington: 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 innovation angle is focused on product development, while acquisitions help augment product offerings and add higher-margin businesses. The buyout of the U.S. BlankLight business of Shiloh Industries, Inc. last year broadened the capacity and capabilities of its laser-welded products business. The addition of Tempel Steel Company made WOR a leader in the rapidly growing electrical steel market, which includes transformers, machine motors and electric vehicle motors. The company recently acquired Level5 Tools, LLC, which expands its consumer products brands and offerings in its tools category. The company is building on its capabilities in automation, analytics and advanced technologies, which in turn will help it stay ahead of the curve. Its proactive steps to cut costs and strong end-market demand will aid results. The company’s shares have gained 3% over the past month. The Zacks Consensus Estimate for Worthington’s current-year earnings has moved up 0.6% over the past 90 days. The company has a trailing four-quarter earnings surprise of 34%, on average. WOR currently carries a Zacks Rank #3.
Price and Consensus: WOR
Northwest Pipe: The company ended the first quarter of 2022 with a backlog of $200 million, including confirmed orders of $341 million for the Engineered Steel Pressure Pipe segment — setting a quarterly record. The Precast business continued to perform well and ended the first quarter with a record order book of $66 million. Its order levels are expected to grow in the near term leading to further margin expansion, backed by a very strong precast market. The rising demand for developed water sources and the pressing need to upgrade, repair and replace aging U.S water and wastewater systems present a huge opportunity for the company. Backed by a strong balance sheet and solid liquidity position, Northwest Pipe continues to execute its growth strategy. Last year, NWPX acquired ParkUSA, a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. It is expected to be accretive to the company’s earnings. The company’s shares have declined 3.8% over the past month.
The Zacks Consensus Estimate for Northwest Pipe’s current year earnings has moved up 5.3% over the past 90 days. The company has a trailing four-quarter earnings surprise of 23.3%, on average. NWPX currently carries a Zacks Rank #3.
Price and Consensus: NWPX
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4 Metal Fabrication Stocks to Watch in a Challenging Industry
The Zacks Metal Products - Procurement and Fabrication industry has been witnessing improved demand in its end markets. However, the industry has been struggling to keep pace with high levels of demand due to labor shortages and the ongoing supply issue constraints. High raw material and freight costs have added to their margin pressures.
In this scenario, industry players like The Timken Company (TKR - Free Report) , Century Aluminum (CENX - Free Report) , Worthington Industries, Inc. (WOR - Free Report) and Northwest Pipe Company (NWPX - Free Report) are expected to gain from their efforts to manage costs, focus on improving efficiency and investment in automation.
About the Industry
The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers that transform metal into metal parts, machinery, or components used across various other industries. Their processes include forging, stamping, bending, forming and machining, which are used to shape individual pieces of metal, and welding and assembling to join parts. The companies either use one of these processes or a combination of these. The most common raw materials utilized by metal fabrication companies include plate metal, formed or expanded metal, tube stock, welding wire or rod, and casting. The industry players serve an 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
Strong Demand in End-Markets to Support Growth: The pandemic had weakened the demand in several of the industry’s end markets, including transportation, mining and industrial. However, the fabricated metal products industry eventually came out of the slump, backed by the gradual business reopening and has been witnessing growth in new orders, production and backlog levels since July 2021. However, lately, the pace has slackened. Even though the overall manufacturing sector continues to witness strong demand, it is being constrained by supply chain issues. Per the Fed’s latest industrial production report, the aggregate production of fabricated metal products in the United States was up 1.2% in the second quarter of 2022, a deceleration from a 5% growth noted in the first quarter of 2022 and 10% in the fourth quarter of 2021. Nevertheless, over the course of the 12-month period ended June, production of fabricated metal products was up 3.6%. Once the situation normalizes, strong demand in the diverse end markets will drive the industry’s growth.
High Costs & Supply-Chain Woes Persist: The industry is currently facing input cost inflation (mainly steel) and transport and logistic costs. It has been struggling to keep up with the increase in demand due to the shortage of labor, supply-chain issues, high raw material lead times and persistent shortages of critical materials. Labor shortage remains an issue. The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Automation & End-Market Growth to Act as Catalysts: The industry’s customer-focused approach to providing cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of the latest and innovative products will drive growth in the days ahead. Growth in end-use sectors such as manufacturing, aerospace and automotive is anticipated to benefit the metal fabrication market over the next few years. Developing countries hold promise, courtesy of rapid industrialization, which is likely to 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 dim prospects in the near term. The Zacks Metal Products - Procurement and Fabrication industry, which is a 12-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #177, which places it at the bottom 29% of 251 Zacks industries. 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has gone down 30%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Metal Products - Procurement and Fabrication industry has underperformed its sector and the Zacks S&P 500 composite over the past year.
Over this period, the industry has fallen 23.6% compared with the sector’s decline of 20.3%. Meanwhile, the Zacks S&P 500 composite has lost 10.6%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement and Fabrication companies, the industry is currently trading at 7.88 compared with the S&P 500’s 20.08 and the Industrial Products sector’s forward 12-month EV/EBITDA of 18.89. 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 20.89 and as low as 5.01, with the median being at 7.93.
4 Metal Products - Procurement and Fabrication Stocks to Keep a Tab on
Century Aluminum: The company has seen an improvement in demand across various intermediate and end markets. Strong manufacturing activities, especially in the United States, and higher aluminum demand bode well for the company. CENX is taking actions to increase production to capitalize on the sustained strength in global aluminum markets. The company has been benefiting from the management of controllable costs, and these initiatives are expected to support its bottom line in the near future. CENX recently announced that it is temporarily idling its smelter in Hawesville due to skyrocketing energy costs, which led to a 10.5% drop in its share price over the past month. The company, however, expects energy prices to moderate in the next year and believes strongly in the future prospects of the Hawesville smelter, given its recent performance and the crucial role it plays in U.S. national security.
Century Aluminum has a trailing four-quarter earnings surprise of 5.07%, on average. CENX 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: CENX
Timken: The company continues to witness new business wins in new markets and regions. Its diversity in terms of end market, customer and geography, product innovation, and engineering expertise provides it with a competitive edge. Underlying customer demand and end-market momentum remain strong across most sectors. Apart from strong demand, earnings growth will be supported by benefits from price realization, growth initiatives and operational excellence initiatives. The company’s shares have appreciated 9.4% over the past month. Timken continues to pursue strategic acquisitions to broaden its portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products, and related services. Over the past three years, the company has been focused on building its renewable energy portfolio through innovation and acquisitions. Renewable energy is currently Timken’s largest individual end-market sector generating 12% of sales, and the company has plans to make it a bigger part of its portfolio in the future to capitalize on the expected growth in the sector.
The Zacks Consensus Estimate for Timken’s current-year earnings has moved up 2.5% over the past 90 days. The company has a trailing four-quarter earnings surprise of 5.07%, on average. TKR currently carries a Zacks Rank #3 (Hold).
Price and Consensus: TKR
Worthington: 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 innovation angle is focused on product development, while acquisitions help augment product offerings and add higher-margin businesses. The buyout of the U.S. BlankLight business of Shiloh Industries, Inc. last year broadened the capacity and capabilities of its laser-welded products business. The addition of Tempel Steel Company made WOR a leader in the rapidly growing electrical steel market, which includes transformers, machine motors and electric vehicle motors. The company recently acquired Level5 Tools, LLC, which expands its consumer products brands and offerings in its tools category. The company is building on its capabilities in automation, analytics and advanced technologies, which in turn will help it stay ahead of the curve. Its proactive steps to cut costs and strong end-market demand will aid results. The company’s shares have gained 3% over the past month.
The Zacks Consensus Estimate for Worthington’s current-year earnings has moved up 0.6% over the past 90 days. The company has a trailing four-quarter earnings surprise of 34%, on average. WOR currently carries a Zacks Rank #3.
Price and Consensus: WOR
Northwest Pipe: The company ended the first quarter of 2022 with a backlog of $200 million, including confirmed orders of $341 million for the Engineered Steel Pressure Pipe segment — setting a quarterly record. The Precast business continued to perform well and ended the first quarter with a record order book of $66 million. Its order levels are expected to grow in the near term leading to further margin expansion, backed by a very strong precast market. The rising demand for developed water sources and the pressing need to upgrade, repair and replace aging U.S water and wastewater systems present a huge opportunity for the company. Backed by a strong balance sheet and solid liquidity position, Northwest Pipe continues to execute its growth strategy. Last year, NWPX acquired ParkUSA, a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. It is expected to be accretive to the company’s earnings. The company’s shares have declined 3.8% over the past month.
The Zacks Consensus Estimate for Northwest Pipe’s current year earnings has moved up 5.3% over the past 90 days. The company has a trailing four-quarter earnings surprise of 23.3%, on average. NWPX currently carries a Zacks Rank #3.
Price and Consensus: NWPX