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3 Top Industrial Manufacturing Stocks to Beat Industry Woes
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The Zacks Manufacturing – General Industrial industry is grappling with supply chain challenges. Inflation in raw material and freight costs is squeezing margins. The persistent shortage of skilled labor is an added concern for the industry. Stepped-up investments in product innovation pose a threat to the bottom line. These headwinds dull the near-term prospects of the industry.
However, a strong demand environment, thanks to continued expansion in manufacturing activities, is expected to drive growth of RBC Bearings Incorporated , Applied Industrial Technologies, Inc. (AIT - Free Report) and Graham Corporation (GHM - Free Report) .
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, gel coat equipment, flow-control components and linear motion components. In addition, 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 the mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities industries.
3 Trends Shaping the Future of the Manufacturing General Industrial Industry
Strong Demand Environment: With the continued expansion of manufacturing activities, strong demand across end-markets such as technology, metals, refining, chemicals, automation, utilities, mining, oil & gas, power and general industries bodes well. The Institute for Supply Management’s manufacturing index touched 52.8% in August, indicating expansion in U.S. manufacturing activities for the 27th consecutive month. It is supported by an increase in new order rates and a backlog of orders. As companies ramp up production to recover from the pandemic-induced slump, manufacturing output is expected to continue to increase. This should foster growth of the industry participants. Digitization amid the pandemic has been enabling several manufacturers to boost their competitiveness with enhanced operational productivity, product quality and lower costs.
Supply Chain & Cost Woes: Persisting supply chain constraints are weighing on volumes and also increasing lead times for industrial manufacturing companies. Inflation in raw material and freight costs and logistics problems are hurting the margins of these companies. The shortage of skilled workers in the United States has been a perennial problem for industry participants. Although supply chain constraints will continue through 2022, there are signs that the situation is gradually improving, which will provide some relief to the players.
Investments in Product Innovation: Industry players are continually making investments in automation, product development and innovation, capacity expansion, new technologies and manufacturing processes to stay competitive in the market. These frequent investments often dent the bottom line and hurt profitability. However, they are beneficial for long-term growth. Focus on an acquisition-based growth strategy to expand network and product offerings should contribute to the top-line growth of industrial manufacturing companies.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Manufacturing – General Industrial industry housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #148. This rank 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 dull 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 negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2022 earnings per share has decreased 1.5% since the end of June.
Despite the industry’s drab near-term prospects, we will present a few stocks, worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Lags Sector & S&P 500
The Zacks Manufacturing – General Industrial industry has underperformed both the sector and the Zacks S&P 500 composite index in the past year.
Over this period, the industry has declined 18.5% compared with the sector and the S&P 500 Index’s decrease of 17.9% and 12.6%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 16.87X compared with the S&P 500’s 16.78X. It is also above the sector’s P/E ratio of 14.67X.
Over the past five years, the industry has traded as high as 26.76X, as low as 14.89X and at the median of 19.36X as the chart below shows.
Price-to-Earnings Ratio
Price-to-Earnings Ratio
3 Manufacturing-General Industrial Stocks Leading the Pack
Here we have discussed three stocks from the industry that have solid growth opportunities despite the prevalent headwinds. Each of the stocks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
RBC Bearings: The company is poised to benefit from its product development initiatives and improving demand for commercial aircraft components. Recovery in its OEM and aftermarket defense businesses is also a boon. The buyout of ABB Ltd’s DODGE mechanical power transmission division (in November 2021) for $2.9 billion expanded ROLL’s exposure in the industrial, aerospace and defense markets. The acquisition is expected to significantly contribute to bottom-line growth. Backed by these tailwinds, shares of the company have gained 15.5% in the past six months.
Headquartered in Oxford, CT, the company manufactures and distributes engineered bearings and precision components. The Zacks Consensus Estimate for RBC Bearings’ fiscal 2023 (ended March 2023) earnings has been revised northward by 32.7% in the past 60 days.
Price and Consensus: ROLL
Applied Industrial: Strengthening demand in the technology, metals, refining, chemicals, automation, utilities, aggregates, rubber & plastics, lumber & wood, pulp & paper, plus utilities and mining end-markets are likely to drive the company’s growth. Pricing actions and cost-control measures should fuel AIT’s bottom line. Shares of the company have increased 4.5% in the past six months.
Based in Cleveland, OH, AIT is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions and power transmission products. The Zacks Consensus Estimate for Applied Industrial’s fiscal 2023 (ended June 2023) earnings has been revised upward by 6.7% in the past 60 days.
Price and Consensus: AIT
Graham: Strong orders and backlog levels support growth of the company. The Barber-Nichols acquisition (June 2021) is strengthening GHM’s top line. Strength across the space and commercial aftermarket places the company well for future growth. Cost-control measures to tackle supply chain woes should drive the bottom line. Shares of GHM have rallied more than 21% in the past six months.
Headquartered in Batavia, NY, Graham designs and manufactures mission-critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries. The Zacks Consensus Estimate for Graham’s fiscal 2023 (ended March 2023) earnings has doubled in the past 60 days.
Price and Consensus: GHM
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3 Top Industrial Manufacturing Stocks to Beat Industry Woes
The Zacks Manufacturing – General Industrial industry is grappling with supply chain challenges. Inflation in raw material and freight costs is squeezing margins. The persistent shortage of skilled labor is an added concern for the industry. Stepped-up investments in product innovation pose a threat to the bottom line. These headwinds dull the near-term prospects of the industry.
However, a strong demand environment, thanks to continued expansion in manufacturing activities, is expected to drive growth of RBC Bearings Incorporated , Applied Industrial Technologies, Inc. (AIT - Free Report) and Graham Corporation (GHM - Free Report) .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, gel coat equipment, flow-control components and linear motion components. In addition, 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 the mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation, and utilities industries.
3 Trends Shaping the Future of the Manufacturing General Industrial Industry
Strong Demand Environment: With the continued expansion of manufacturing activities, strong demand across end-markets such as technology, metals, refining, chemicals, automation, utilities, mining, oil & gas, power and general industries bodes well. The Institute for Supply Management’s manufacturing index touched 52.8% in August, indicating expansion in U.S. manufacturing activities for the 27th consecutive month. It is supported by an increase in new order rates and a backlog of orders. As companies ramp up production to recover from the pandemic-induced slump, manufacturing output is expected to continue to increase. This should foster growth of the industry participants. Digitization amid the pandemic has been enabling several manufacturers to boost their competitiveness with enhanced operational productivity, product quality and lower costs.
Supply Chain & Cost Woes: Persisting supply chain constraints are weighing on volumes and also increasing lead times for industrial manufacturing companies. Inflation in raw material and freight costs and logistics problems are hurting the margins of these companies. The shortage of skilled workers in the United States has been a perennial problem for industry participants. Although supply chain constraints will continue through 2022, there are signs that the situation is gradually improving, which will provide some relief to the players.
Investments in Product Innovation: Industry players are continually making investments in automation, product development and innovation, capacity expansion, new technologies and manufacturing processes to stay competitive in the market. These frequent investments often dent the bottom line and hurt profitability. However, they are beneficial for long-term growth. Focus on an acquisition-based growth strategy to expand network and product offerings should contribute to the top-line growth of industrial manufacturing companies.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Manufacturing – General Industrial industry housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #148. This rank 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 dull 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 negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group’s 2022 earnings per share has decreased 1.5% since the end of June.
Despite the industry’s drab near-term prospects, we will present a few stocks, worth considering for your portfolio. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Lags Sector & S&P 500
The Zacks Manufacturing – General Industrial industry has underperformed both the sector and the Zacks S&P 500 composite index in the past year.
Over this period, the industry has declined 18.5% compared with the sector and the S&P 500 Index’s decrease of 17.9% and 12.6%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month Price-to-Earnings (P/E), which is a commonly used multiple for valuing manufacturing stocks, the industry is currently trading at 16.87X compared with the S&P 500’s 16.78X. It is also above the sector’s P/E ratio of 14.67X.
Over the past five years, the industry has traded as high as 26.76X, as low as 14.89X and at the median of 19.36X as the chart below shows.
Price-to-Earnings Ratio
Price-to-Earnings Ratio
3 Manufacturing-General Industrial Stocks Leading the Pack
Here we have discussed three stocks from the industry that have solid growth opportunities despite the prevalent headwinds. Each of the stocks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
RBC Bearings: The company is poised to benefit from its product development initiatives and improving demand for commercial aircraft components. Recovery in its OEM and aftermarket defense businesses is also a boon. The buyout of ABB Ltd’s DODGE mechanical power transmission division (in November 2021) for $2.9 billion expanded ROLL’s exposure in the industrial, aerospace and defense markets. The acquisition is expected to significantly contribute to bottom-line growth. Backed by these tailwinds, shares of the company have gained 15.5% in the past six months.
Headquartered in Oxford, CT, the company manufactures and distributes engineered bearings and precision components. The Zacks Consensus Estimate for RBC Bearings’ fiscal 2023 (ended March 2023) earnings has been revised northward by 32.7% in the past 60 days.
Price and Consensus: ROLL
Applied Industrial: Strengthening demand in the technology, metals, refining, chemicals, automation, utilities, aggregates, rubber & plastics, lumber & wood, pulp & paper, plus utilities and mining end-markets are likely to drive the company’s growth. Pricing actions and cost-control measures should fuel AIT’s bottom line. Shares of the company have increased 4.5% in the past six months.
Based in Cleveland, OH, AIT is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions and power transmission products. The Zacks Consensus Estimate for Applied Industrial’s fiscal 2023 (ended June 2023) earnings has been revised upward by 6.7% in the past 60 days.
Price and Consensus: AIT
Graham: Strong orders and backlog levels support growth of the company. The Barber-Nichols acquisition (June 2021) is strengthening GHM’s top line. Strength across the space and commercial aftermarket places the company well for future growth. Cost-control measures to tackle supply chain woes should drive the bottom line. Shares of GHM have rallied more than 21% in the past six months.
Headquartered in Batavia, NY, Graham designs and manufactures mission-critical fluid, power, heat transfer and vacuum technologies for the defense, space, energy and process industries. The Zacks Consensus Estimate for Graham’s fiscal 2023 (ended March 2023) earnings has doubled in the past 60 days.
Price and Consensus: GHM