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Near-Term Prospects Bleak for Diversified Operations Industry

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The Zacks Diversified Operations industry includes companies that operate in various end-markets like oil & gas, industrial, aviation, technology, finance, healthcare, transportation and many others. Such companies manufacture and provide equipment, solutions and related services to a vast customer base.

In addition, there are a few companies that provide services in the agriculture, marine and telecommunications markets and are also engaged in providing environmental and safety solutions.

Here are the three major themes in the industry:

  • Multi-sector companies’ prospects are closely linked to operating conditions of the end markets. Factors that currently work in favor of the industry are rising global demand for air travel, improving operations in the oil and gas industry, demand from the defense and governmental front, infrastructure development, technological upgrade in manufacturing processes and others. On a broader note, sound growth in domestic economy — from 2.2% in 2017 to 2.9% estimated in 2018 — as well as favorable labor market conditions, changes in tax policies, growth in manufacturing activities and governmental development plan are boons for multi-sector companies.
     
  • Efforts to keep pace with the rising demand for technologically-advanced products are prompting multi-sector companies to invest in innovative projects. Though such initiatives help in tapping demand from existing and new customers, they often make the companies more leveraged, exerting extra burden on margins. Also, companies these days are dealing with the adverse impacts of trade disputes between the United States and other nations due to the imposition of import tariffs on steel, aluminum and other array of products by the U.S. government. In addition, inflationary pressure, rising freight charges, scarcity of skilled workforce, geopolitical tensions and unfavorable movements in foreign currencies are adding to the woes.
     
  • We believe that profits in one or more businesses of multi-sector companies can make up for losses incurred by others. However, diversification, if not handled properly, can be concerning. Industrial giant General Electric Company (GE - Free Report) is currently facing problems in its power, transportation and finance-related businesses. However, the company has resorted to restructuring measures — including splitting the power business in two, divesting transportation business, limiting exposure to finance-related operations among others — to overcome difficulties. Another conglomerate United Technologies Corporation (UTX - Free Report) has planned to divide its businesses into three independent companies — United Technologies, Otis and Carrier — to bring in more customised solutions for customers and create greater shareholders’ value.   


Zacks Industry Rank Indicates Bleak Prospects

The Zacks Diversified Operations industry is a 20-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #151, which places it in the bottom 42% 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 outperforms the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half of the rank list for the majority of the past eight weeks.


 

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of shrouded earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has been moved roughly 9% down.

We will present a few stocks that may be considered for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms S&P 500 on Shareholders Return

The Zacks Diversified Operations Industry’s performance has not been as good as the S&P 500 in the past year. While stocks in this industry have collectively declined 23.6%, the S&P 500 has lost 5% over the same time frame.

                                            One-Year Price Performance



 

Diversified Operations Industry’s Valuation

EV/EBITDA ratio is commonly used for valuing companies with diversified operations.

The industry’s forward 12-month EV/EBITDA ratio is 26.75. This multiple is way above the S&P 500’s forward 12-month EV/EBITDA ratio of 10.37.

Over the past five years, the industry has traded at the highest level of 81.18x forward 12-month EV/EBITDA ratio and lowest level of 16.65x. The median level, over the same period, was 20.68x.

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



 

Bottom Line

Business opportunities seem impressive for the Diversified Operations industry as many conglomerates are gaining from improved demand across various end-markets served, favorable governmental policies and others. However, prevalent problems — both on macro and micro levels — have fogged up the near-term prospects of the industry.

Investment in the industry might not be a wise move at the moment. Majority of the stocks within this 20-stock industry currently carry a Zacks Rank #3 (Hold) or 4 (Sell) or 5 (Strong Sell). Nonetheless, we present four stocks, with favorable rank and bright earnings prospects, that investors might be interested in.

A brief discussion on the chosen stocks is provided below:

HC2 Holdings, Inc. (HCHC - Free Report) : This New York-based company currently sports a Zacks Rank #1 (Strong Buy). Over the past year, the stock has lost nearly 49.4%. Notwithstanding this, the company’s prospects appear bright as the Zacks Consensus Estimate has improved from a loss of 20 cents to earnings of $3.61 per share in the past 60 days.

(You can see the complete list of today’s Zacks #1 Rank stocks here.)


                                          Price and Consensus: HCHC



Barloworld Ltd. (BRRAY - Free Report) : The stock of this Sandton, South Africa-based company has declined 41% in the past year. However, it’s worth mentioning that the company current carries a Zacks Rank #2 (Buy). Also, the Zacks Consensus Estimate for earnings has improved 3.5% in the past 60 days.

                                     Price and Consensus: BRRAY


 
Crane Co. (CR - Free Report) : The stock of this Stamford, CT-based company has declined 16.6% over the past year. However, the Zacks Consensus Estimate for current-year earnings has been revised 2.3% upward over the past 60 days. The stock currently carries a Zacks Rank #2.
 
                                           Price and Consensus: CR



ITT Inc. (ITT - Free Report) : The stock of this White Plains, NY-based company has declined 8.3% in the past year. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings has improved 0.3% in the past 60 days.

                                                Price and Consensus: ITT

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