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Near-Term Outlook for Manufacturing Tools Industry Gloomy

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The Zacks Manufacturing-Tools & Related Products industry comprises companies that develop and distribute hand and mechanics tools, hydraulic tools, engineered fastening systems and motion control systems. Arc welding products, oxy-fuel cutting equipment, plasma cutters, storage system and other related products are also produced by some tool makers.

The highly advanced tools are used in industrial, commercial, oil & gas, mining, automotive, and other industries. Providers of electronic security solutions cater to demand in the commercial, retailers, government, financial and healthcare markets.

Here are the industry’s three major themes:

  • Weakness in industrial production in the United States is a concern. On a month-over-month basis, the metric declined 0.2% in July versus 0.2% gain recorded in both May and June. In addition, the industry is suffering from adverse impacts of global uncertainties, strained trade relations, unfavorable movements in foreign currencies and weakness in the housing market in the United States, among others. It is worth noting here that the International Monetary Fund has lowered its growth projection for the global economy by 10 basis points (bps) for both 2019 and 2020.
     
  • The industry players are currently dealing with the adverse impacts of disturbed trade relations of the United States with other nations, especially China. Imposition of tariffs (by the United States) on the import of steel, aluminum and an array of other products triggered the tensions. Tariffs have escalated costs of raw materials for many companies. Commodity (base metal, steel, batteries and others) inflation, high labor costs and freight charges have also added to the woes. The industry’s cost of sales increased 10.2% in 2018 and 2.4% in the first half of 2019.
     
  • Despite the prevailing uncertainties, focus on infrastructural development in the country, increasing use of sophisticated technologies in manufacturing process and demand for remodeling activities are aiding the industry. Also, the growing adoption of e-retailing has created business opportunities for tool makers. Added to these, favorable changes in tax policy, introduced in December 2017, worked wonders for U.S. corporates, including industrial companies. In 2018, the industry’s revenues increased 7.6% and roughly 0.9% in the first half of 2019.


Zacks Industry Rank Indicates Bleak Prospects

The Manufacturing-Tools & Related Products industry is a five-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #223, which places it in the bottom 13% 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 prospects in the near term. 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is the result of cloudy 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 have declined 10.1%.

Before we discuss a few stocks in the industry, let’s take a look at the industry’s shareholder returns and current valuation.

Industry Lags S&P 500 But Outperforms Sector

The Zacks Manufacturing-Tools & Related Products industry has underperformed the S&P 500 over the past year. While the industry players have collectively declined 8.5%, the S&P 500 has gained 0.2% in the past year.

However, the industry’s performance relative to its own sector was better. Over the past year, the sector has declined 11.6%.

                                            One-Year Price Performance



 

Manufacturing-Tools & Related Products Industry’s Valuation

EV/EBITDA ratio is one of the commonly used methods for valuing manufacturing tools and related products stocks.

The industry’s forward 12-month EV/EBITDA ratio is 7.89. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 11.49 and the sector’s 14.78.

Over the past five years, the industry has traded at the highest level of 11.02X forward 12-month EV/EBITDA and lowest level of 7.15X. The median level, over the same period, was 8.78X.

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



       Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus Sector



Bottom Line

We believe that prevalent headwinds, including tariffs, commodity inflation, forex woes, and high labor and freight charges, pose serious threats to corporate margins and profitability. Considering the magnitude of the adverse impact, we believe that the industry might not be able to tide over it in the near term.

Nonetheless, we present three stocks that investors might prefer to retain in their portfolio based on their impressive results in the past quarters.

Actuant Corporation : The stock of this Menomonee Falls, WI-based company has gained 4.6% year to date. The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company delivered positive earnings surprise in the last four quarters, with the average being 12.05%. In the last reported quarter, it delivered positive earnings surprise of 12.5%.

                                  Price and Earnings Surprise: ATU



Stanley Black & Decker, Inc. (SWK - Free Report) : This stock of this New Britain, CT-based company has increased 15.6% year to date. The stock currently carries a Zacks Rank #3.

The company’s earnings surpassed estimates by 4.31% in the last reported quarter. Its average positive earnings surprise in the last four quarters is 9.09%.

                                Price and Earnings Surprise: SWK



Lincoln Electric Holdings, Inc. (LECO - Free Report) : This stock of this Cleveland, OH-based company has increased 4.9% year to date.

This Zacks Rank #3 stock delivered better-than-expected results in one of the last four quarters, lagged estimates in two and posted in-line results in one. Average positive earnings surprise in the last four quarters was 0.27%.

                                Price and Earnings Surprise: LECO



Meanwhile, there are two stocks in the industry that can be avoided by investors.

Kennametal Inc. (KMT - Free Report) : The stock of this Latrobe, PA-based tool maker has decreased 13.4% year to date. The stock currently carries a Zacks Rank #4 (Sell). The company delivered weaker-than-expected results in the last two quarters.

Also, its earnings estimates for both the current and next year declined roughly 12% from the respective figures 60 days ago.

                                Price and Earnings Surprise: KMT



Sandvik AB (SDVKY - Free Report) : The stock of this Stockholm, Sweden-based company has decreased 0.4% year to date. The stock currently carries a Zacks Rank #4. The company delivered weaker-than-expected results in the last quarter, with earnings lagging estimates by 6.25%.

Also, its earnings estimates for the current and next year declined roughly 8.3% and 4.6% from the respective figures 60 days ago.

                                 Price and Earnings Surprise: SDVKY



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