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Manufacturing - Construction & Mining Industry: Prospects Dim

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The Zacks Manufacturing - Construction And Mining industry primarily includes companies which manufacture and sell construction, mining, and utility equipment. The industry caters to a diverse range of customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry also supports customers in oil and gas, power generation, marine, rail and industrial applications.
 
Let us take a look at the three major themes currently governing the industry:
 
  • The announcement of the tariffs on steel imports into the United States earlier this year was a big blow for the Manufacturing - Construction And Mining industry. Given that steel is a primary raw material, every manufacturing company bore the brunt of rising steel prices owing to the tariffs. Though this was mitigated to some extent with price increases, it might not always be feasible to pass on the price increase to customers. Further, the industry has been plagued with shortage of skilled laborers, higher wage costs and flaring-up transportation expenses. Impact of tariffs, supply-chain challenges stemming from lead-time expansions and elevated freight charges may continue to aggravate costs and dent profits of Manufacturing - Construction And Mining companies in the near future.
     
  • Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (“PMI”) for November rose 59.3% — exhibiting strong growth in manufacturing for the 27th consecutive month. The upbeat performance continues to be led by strong production output and continued strength in new orders, signaling strong economic momentum.  The sector has been witnessing growth in new orders for 35 straight months. The PMI has remained above 50 since the beginning of 2018, averaging 59.2% over the last 12 months ranging from a low of 57.3% in April 2018 to a high of 61.3% in August 2018. Notably, a reading above 50% indicates expansion in manufacturing economy. Moreover, U.S. manufacturing companies are not hiring more and offering relatively higher wages in the market.
     
  • Continued improvement in residential and non-residential construction and revival in infrastructure demand bode well for the industry. Mining companies are also resuming capital spending due to the improvement in commodity prices. Notably, oil and gas extraction is driving the improvement in the mining sector. Further, the recently passed tax reform is likely to act as a catalyst by expediting manufacturing investment in factories, new equipment and other capital goods.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Manufacturing - Construction And Mining industry, which is part of the broader Industrial Products Sector, currently carries a Zacks Industry Rank #231, which places it at the bottom 11% of 256 Zacks industries. 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 over the past seven weeks.
 
 
Despite the bleak near-term prospects of the industry, we will present a few Manufacturing - Construction And Mining stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
 
Industry Outperforms Sector but Lags S&P 500
 
The Manufacturing - Construction And Mining industry has outperformed its own sector over the past year. However, it has underperformed the Zacks S&P 500 composite over the same time frame.
 
Over this period, the industry has fallen 24.1% compared with the sector’s decline of 24.7%. Meanwhile, the Zacks S&P 500 composite has declined 9.9%.
 
One-Year Price Performance
 
 
Manufacturing - Construction And Mining Industry’s Valuation 
 
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Manufacturing - Construction And Mining companies, we see that the industry is currently trading at 7.3x compared with the S&P 500’s 10.4x and the Industrial Products sector’s forward 12-month EV/EBITDA of 11.4. This is shown in the charts below.
 
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
 
 
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
 
 
Over the last five years, the industry has traded as high as 14.7x to as low as 7.0x, recording the median of 10.9x.
 
Bottom Line
 
Despite material cost inflation owing to tariffs, spiked wage costs and elevated transportation expenses, improvement in its end markets like residential and non-residential construction; mining driven by ongoing recovery in the commodities, oil and gas industry along with economic growth will continue to drive the industry. Further, with the U.S. Purchasing Managers Index remaining above 50 since the beginning of 2018, this instils optimism in the space.
 
None of the stocks in the Manufacturing – Construction and Mining space currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we are presenting four stocks with Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Caterpillar Inc. (CAT - Free Report) : The Zacks Consensus Estimate for the current-year earnings per share (EPS) for this Deerfield, IL-based mining and construction equipment manufacturer reflects a year-over-year growth of 69%. The company has delivered a positive average earnings surprise history of 17.10% over the trailing four quarters. The company has an estimated long-term earnings growth rate of 20.7%.
 
Price: CAT
 
 
The Manitowoc Company, Inc. (MTW - Free Report) : The Zacks Consensus EPS estimate for this Manitowoc, WI-based crane manufacturer projects growth of 312% for fiscal 2018. The company has a positive average earnings surprise history of 21.44% over the trailing four quarters.
 
Price: MTW
 
 
H&E Equipment Services, Inc. (HEES - Free Report) : This Baton Rouge, LA based integrated equipment services company has a positive average earnings surprise history of 32.10% over the trailing four quarters. The company has estimated long-term earnings growth rate of 14.4%. 
 
Price: HEES
 
 
Hitachi Construction Machinery Co., Ltd. : This Tokyo, Japan based company manufactures, sells, services, and rents construction machinery worldwide. The company’s Zacks Consensus Estimate for earnings reflects growth of 2.50% for fiscal 2018.The company has estimated long-term earnings growth rate of 4.1%. 
 
Price: HTCMY
 
 
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