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Near-Term View Bleak for Industrial Manufacturing Industry

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The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in producing a wide range of industrial equipment tools.

Some of these companies sell 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, safety products and linear motion components in the market. In addition to these, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.

These companies provide services to original equipment manufacturing (OEM) as well as maintenance, repair and overhaul (MRO) customers. These end users belong to different types of industries, such as mining, oil and gas, forest products, agriculture and food processing, fabricated metals, chemicals and petrochemicals, transportation and utilities.

Here are the industry’s three major themes:

  • Technological advancement in manufacturing processes has been key to driving demand in the industrial manufacturing industry. Also, the Republic-led government’s emphasis on infrastructure development, impetus to streamline business regulations, spur in new construction and remodeling activities and growing popularity of e-retailing has been adding strength. Further, the government’s corporate tax overhaul enacted in December 2017 was welcoming. This move has left unused corpus for companies to be utilized for growth investments. Over the last three years, the industry’s revenues witnessed a CAGR of 4.3%.
  • Weakness in the broader market took its toll on the industry. To begin with, a protectionism policy (imposition of import tariffs) of the Trump-government has strained trade relations with foreign nations (especially with China). Also, inflationary pressure and unfavorable movements in foreign currencies are hurting margins.
  • Companies in this industry are constantly looking for innovative techniques, involving highly sophisticated equipment for manufacturing processes. Naturally, demand is generally high for skilled labor, which due to the current shortage has been a disturbing factor. The tight supply of skilled labor is also spiking wage rates in the market. To add to the woes, problems within the trucking industry — like shortage of truck drivers and soaring truck fuel surcharges — are a concern for U.S. manufacturers. These supply-side challenges have resulted in lead-time expansion and elevated freight charges. These setbacks may continue to aggravate costs and mar profits of industrial manufacturing companies in the near future.

Zacks Industry Rank Indicates Bleak Prospects

The Manufacturing – General Industrial industry is a 37-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 36% 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 cloudy 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 majority of the past eight weeks.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of disappointing 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 estimates for the current year have moved roughly 2.6% down.

Before we present a few industrial manufacturing stocks that are well positioned to outperform the market based on a strong earnings outlook, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Underperforms S&P 500, Outperforms Sector

The Zacks Manufacturing – General Industrial industry has underperformed the S&P 500 over the past year. Stocks in this industry have collectively gained 0.7% against the S&P 500’s growth of 7.4%.

On the contrary, the industry has outperformed its own sector in the same timeframe, with a decline of 5.3% recorded by the latter.

                                           One-Year Price Performance

Industry’s Current Valuation

EV/EBITDA ratio is commonly used for valuing manufacturing stocks.

The industry’s forward 12-month EV/EBITDA ratio is 10.75. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 11.65 and the sector’s 13.68.

Over the past five years, the industry has traded at the highest level of 12.28x forward 12-month EV/EBITDA and the lowest level of 8.25x. The median level, over the same period, was 10x.

         Manufacturing – General Industrial’s Valuation Versus Sector

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

Bottom Line

We expect an impressive top-line performance from industrial manufacturing companies in the quarters ahead. However, material cost inflation (on account of tariffs), skilled workforce shortage, flaring-up of wage costs, elevated transportation expenses and waning international demand might dent margins in the near term.

Below, we have picked five top-ranked industrial manufacturing stocks that will likely strengthen your portfolio. We believe supply-side setbacks will not mar the growth potential of these companies.

Here we discuss in brief five stocks:

DXP Enterprises, Inc. (DXPE - Free Report) : The stock of this Cincinnati, OH-based company currently sports a Zacks Rank #1 (Strong Buy). The company has rallied 38.2% so far in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, the Zacks Consensus Estimate for earnings has increased 2.2% for 2019.

                                            Price and Consensus: DXPE

Sun Hydraulics Corporation SNHY: The stock of this Sarasota, FL-based company currently sports a Zacks Rank #1. Year to date, the stock has gained 35.2%. Sentiments are positive for the company, as evident from approximately 23.2% increase in earnings estimates for 2019 in the past 60 days.

                                     Price and Consensus: SNHY

Dover Corporation DOV: The stock of this Illinois-based company currently carries a Zacks Rank #2 (Buy). The stock has gained 29.8% so far this year.

In the past 60 days, earnings estimates for 2019 have been risen 1.2%.

                                          Price and Consensus: DOV

Roper Technologies, Inc. ROP: The stock of this Lakewood Ranch, FL-based company carries a Zacks Rank #2. Year to date, the company’s stock has risen 25.8%.

In the past 60 days, the Zacks Consensus Estimate for earnings has been increased 0.8% for 2019.

                                          Price and Consensus: ROP

Tennant Company TNC: The stock of this Minneapolis, MN-based company currently carries a Zacks Rank #2. The stock has gained 20.2% so far in 2019.

In the past 60 days, earnings estimates for 2019 have been increased 0.8%.

                                      Price and Consensus: TNC

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