The Zacks Metal Products - Procurement and Fabrication industry primarily comprises metal processing and fabrication services providers. Most of the industry participants are engaged in conversion, manufacturing and fabrication of metal into end products. Important fabricated metal processes include forging, stamping, bending, forming, and machining. Meanwhile, other processes such as welding and assembling are utilized to join separate parts together.
The industry participants serve a wide array of markets, including construction, mining, aerospace and defense, automotive, agriculture, oil and gas, electronics/electrical components, industrial equipment and general consumer markets.
Let's take a look at the three major themes currently governing the industry:
- The industry’s primary material purchases include resins, steel, aluminum, copper, other metals and energy (electricity, natural gas and fuel). Of late, higher material costs, thanks to imposition of tariffs, have been hurting the industry. Nevertheless, some of the industry participants have been successful in mitigating cost inflation through price hikes, and resourcing to alternate suppliers to secure better pricing or avoid import and transportation costs. However, these measures take time and it might not be always feasible to pass on higher costs to customers, given the competitive environment. This, in turn, could adversely impact the industry’s margins. Additionally, finding skilled labor is becoming increasingly difficult.
- The Fed’s latest industrial production report revealed that aggregate production of fabricated metal products in the United States declined 0.6% in fourth-quarter 2019. Overall production has gone down 1.5% in the 12-months ended December 2019. Per the Institute for Supply Management’s latest Manufacturing Report, fabricated metal products reported growth in production in January 2020 following a decline for eight consecutive months. The industry has commenced 2020 on a brighter note despite a dramatic downturn in orders over the last four months of 2019. However, even though orders levels have improved this year, it still remains below prior-year levels.
- The industry’s customer-focused approach to provide cost-effective technical solutions, automation to increase efficiency and lower labor costs, and development of new products and innovative products will help drive growth. According to a report by Transparency Market Research, the global metal fabrication market is anticipated to see a CAGR 3.3% from 2018 to 2026. Given that fabricated metals are used in diversified end-markets, effects of cyclic nature of the metal fabrication market are negated. Growth of end-use industries such as aerospace and automotive is anticipated to drive the metal fabrication market in the next few years. Developing countries hold promise on account of rapid industrialization, which will create demand.
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 Metal Products - Procurement and Fabrication industry, which is a 13-stock group within the broader Industrial Products Sector, currently carries a Zacks Industry Rank #197, which places it at the bottom 22% 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 for the past seven weeks.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised downward by 20%.
Despite the bleak near-term prospects of the industry, we will present a few Metal Products - Procurement and Fabrication 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 Lags S&P 500 and Sector on Shareholder Returns
The Metal Products - Procurement and Fabrication industry has underperformed its own sector and S&P 500 composite over the past year. Over this period, the industry has fallen 0.7% against the sector’s growth of 8.3%. Meanwhile, the Zacks S&P 500 composite has rallied 20.2%.
One-Year Price Performance
Metal Products - Procurement and Fabrication Industry’s Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Metal Products - Procurement and Fabrication companies, we see that the industry is currently trading at 7.5 compared with the S&P 500’s 12.7 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 17.8. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry has traded as high as 20.9 and as low as 5.0, with the median being at 7.5.
Despite mounting concerns over higher material costs, continued demand from end-markets, supply chain initiatives, operational cost management and automation will drive the industry.
We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and three with Zacks Rank #3 (Hold) that investors may focus on.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Mueller Industries, Inc. (MLI - Free Report) : This Collierville, TN-based company currently carries a Zacks Rank #1. The company beat estimates in the trailing four quarters by 24.2%, on average. The Zacks Consensus Estimate for fiscal 2020 earnings has moved up 2% over the past 30 days.
Price and Consensus: MLI
Northwest Pipe Company (NWPX - Free Report) : This Vancouver, WA-based company is also a Zacks Ranked #1 stock. The company beat estimates in the trailing four quarters by 20.1%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year growth of 23.1%.
Price and Consensus: NWPX
Century Aluminum Company (CENX - Free Report) : This Chicago, IL-based company sports a Zacks Rank #3. The company beat estimates in the trailing four quarters by 4.68%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year growth of 136.4%. The estimate has moved up 16% over the past 30 days.
Price and Consensus: CENX
CIRCOR International, Inc. (CIR - Free Report) : Burlington, MA.-based CIRCOR has a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year growth of 61.7%. The estimate has moved up 1% over the past 30 days. The company beat estimates in the trailing four quarters by 11.9%, on average.
Price and Consensus: CIR
Kaiser Aluminum Corporation (KALU - Free Report) : Based in Foothill Ranch, CA, the company carries a Zacks Rank #3. The company beat estimates in the trailing four quarters by 3.3%, on average. The Zacks Consensus Estimate for earnings per share for fiscal 2020 suggests growth of 12.2%.
Price and Consensus: KALU