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Drab Near-Term Prospects for Industrial Manufacturing Stocks
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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 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 addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.
These companies provide services to original equipment manufacturing, and maintenance, repair and overhaul 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. Some of the notable companies belonging to this industry are IDEX Corporation (IEX - Free Report) , Illinois Tool Works Inc. (ITW - Free Report) , Parker-Hannifin Corporation (PH - Free Report) and Roper Technologies, Inc. (ROP - Free Report) .
Here are the industry’s three major themes:
The U.S. industrial manufacturing companies have been benefiting from the technological advancement in manufacturing processes and the U.S. government's emphasis on infrastructure development. Also, economic policies adopted by the Trump administration, including its corporate tax overhaul and impetus to streamline business regulations, will continue aiding industrial manufacturing companies. In addition, the massive emergency relief package, passed by the Senate to combat the U.S. economy slowdown amid the coronavirus pandemic, will benefit the manufacturing industry.
The COVID-19 pandemic has dealt a severe blow to the manufacturing industry, which was already reeling under U.S.-China trade tensions and weak global demand. Factory closures across the country, supply-chain disruptions, low demand for goods and services along with the impacts of the restrictions imposed by the government, among others, have affected the sector. Several of the industry participants, including Barnes Group, Inc. (B - Free Report) , Flowserve Corporation (FLS - Free Report) and Xylem Inc. (XYL - Free Report) , have lately withdrawn their annual guidance on account of the volatile situation arising from the pandemic. Also, per the latest Manufacturing ISM Report published on Apr 1, the Purchasing Managers’ Index (PMI) for March 2020 declined to 49.1%. Notably, any PMI reading below 50 indicates contraction of manufacturing activities. It’s worth noting here that the manufacturing sector contracted for five consecutive months since August 2019. In addition, the uncertain demand environment created by the trade tariffs amid the pandemic is likely to continue hurting profits of manufacturing companies in the near term.
The slowdown in manufacturing activities has resulted in job losses and reduction in workweek. Notably, in March, the employment in the manufacturing domain declined 18,000, while the workweek declined by 0.3 hour to 40.4 hours. In addition, owing to the shortage of truck drivers, the U.S. manufactures are currently experiencing supply-side challenges related to higher freight charges. These issues are likely to continue bumping up costs and hurting profits of manufacturing companies in the near term.
Zacks Industry Rank Indicates Bleak Prospects
The Manufacturing – General Industrial industry is a 42-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% 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 gloomy 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. Notably, the industry’s earnings estimates for the current year are down roughly 25.6% year over year.
Before we discuss a few stocks from the industry, it’s worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Underperforms S&P 500, Outperforms Sector
While the Zacks Manufacturing – General Industrial industry has underperformed the S&P 500, it has outperformed its sector in the past year. While stocks in this industry have collectively lost 17.6%, the S&P 500 has dropped 5.5% and the Zacks Industrial Products sector has declined 22.6%.
One-Year Price Performance
Manufacturing – General Industrial Industry’s Valuation
P/E ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 20.17. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 16.22, and the S&P 500’s 18.03.
Over the past five years, the industry has traded at the highest level of 23.5x forward 12-month P/E and the lowest level of 15.6x. The median level, over the same period, was 19.42x.
Manufacturing–General Industrial Industry’s Valuation Versus S&P 500
Manufacturing–General Industrial Industry’s Valuation Versus Sector
Bottom Line
On account of the prevalent headwinds, we believe that investing in the industry may not be prudent at the moment. However, we present some stocks from the industry which sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and possess the potential to sail through the tough market conditions
A brief discussion on the chosen stocks is provided below:
The company has outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the positive earnings surprise being 26.60%, on average. Also, the Zacks Consensus Estimate for 2020 earnings has risen 37.4% to $4.08 in the past 60 days, while the same for 2020 earnings has climbed 27.1% to $4.50.
Price and EPS Surprise: TNC
Broadwind Energy, Inc. (BWEN - Free Report) : The stock of this Cicero, IL-based company currently carries a Zacks Rank #2. Over the past year, the stock has lost 4.1%.
The company has a positive earnings surprise of 10.42%, on average, for the trailing four quarters, meeting estimates thrice and surpassing once. The Zacks Consensus Estimate for 2020 earnings has remained stable at 17 cents in the past 60 days, while the same for 2021 earnings has moved up 9.1% to 12 cents.
Price and EPS Surprise: BWEN
Kadant Inc (KAI - Free Report) : The stock of this Westford, MA-based company currently carries a Zacks Rank #2. Over the past year, the stock has declined 19.5%.
Notably, this company has an established record of topping earnings estimates in the trailing four quarters, beating estimates all through. The company boasts an average earnings surprise for the past four quarters of 12.95%.
The Zacks Consensus Estimate for 2020 earnings has remained stable at $5.07 in the past 60 days, while the same for 2021 earnings has stayed at $5.53.
Price and EPS Surprise: KAI
We also present one company that investors may prefer holding on to at current levels:
Ingersoll Rand Inc. (IR - Free Report) : The stock of this Davidson, NC-based company carries a Zacks Rank #3 (Hold). The company’s stock has lost 3.9% over the past year.
The company has outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the positive earnings surprise being 9.64%, on average.
Price and EPS Surprise: IR
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Drab Near-Term Prospects for Industrial Manufacturing Stocks
The Zacks Manufacturing – General Industrial industry comprises companies that are engaged in producing a wide range of industrial equipment tools.
Some 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 addition, industrial manufacturing companies reconstruct and assemble pumps, valves, speed reducers and hydraulic motors.
These companies provide services to original equipment manufacturing, and maintenance, repair and overhaul 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. Some of the notable companies belonging to this industry are IDEX Corporation (IEX - Free Report) , Illinois Tool Works Inc. (ITW - Free Report) , Parker-Hannifin Corporation (PH - Free Report) and Roper Technologies, Inc. (ROP - Free Report) .
Here are the industry’s three major themes:
Zacks Industry Rank Indicates Bleak Prospects
The Manufacturing – General Industrial industry is a 42-stock group within the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% 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 gloomy 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are keeping less faith in this group's earnings growth potential. Notably, the industry’s earnings estimates for the current year are down roughly 25.6% year over year.
Before we discuss a few stocks from the industry, it’s worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Underperforms S&P 500, Outperforms Sector
While the Zacks Manufacturing – General Industrial industry has underperformed the S&P 500, it has outperformed its sector in the past year. While stocks in this industry have collectively lost 17.6%, the S&P 500 has dropped 5.5% and the Zacks Industrial Products sector has declined 22.6%.
One-Year Price Performance
Manufacturing – General Industrial Industry’s Valuation
P/E ratio is commonly used for valuing manufacturing stocks.
The industry’s forward 12-month P/E ratio is 20.17. This clearly shows that the industry is trading above the sector’s forward 12-month P/E ratio of 16.22, and the S&P 500’s 18.03.
Over the past five years, the industry has traded at the highest level of 23.5x forward 12-month P/E and the lowest level of 15.6x. The median level, over the same period, was 19.42x.
Manufacturing–General Industrial Industry’s Valuation Versus S&P 500
Manufacturing–General Industrial Industry’s Valuation Versus Sector
Bottom Line
On account of the prevalent headwinds, we believe that investing in the industry may not be prudent at the moment. However, we present some stocks from the industry which sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and possess the potential to sail through the tough market conditions
A brief discussion on the chosen stocks is provided below:
Tennant Company (TNC - Free Report) : The stock of this Minneapolis, MN-based company currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. Over the past year, the stock has declined 6.9%.
The company has outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the positive earnings surprise being 26.60%, on average. Also, the Zacks Consensus Estimate for 2020 earnings has risen 37.4% to $4.08 in the past 60 days, while the same for 2020 earnings has climbed 27.1% to $4.50.
Price and EPS Surprise: TNC
Broadwind Energy, Inc. (BWEN - Free Report) : The stock of this Cicero, IL-based company currently carries a Zacks Rank #2. Over the past year, the stock has lost 4.1%.
The company has a positive earnings surprise of 10.42%, on average, for the trailing four quarters, meeting estimates thrice and surpassing once. The Zacks Consensus Estimate for 2020 earnings has remained stable at 17 cents in the past 60 days, while the same for 2021 earnings has moved up 9.1% to 12 cents.
Price and EPS Surprise: BWEN
Kadant Inc (KAI - Free Report) : The stock of this Westford, MA-based company currently carries a Zacks Rank #2. Over the past year, the stock has declined 19.5%.
Notably, this company has an established record of topping earnings estimates in the trailing four quarters, beating estimates all through. The company boasts an average earnings surprise for the past four quarters of 12.95%.
The Zacks Consensus Estimate for 2020 earnings has remained stable at $5.07 in the past 60 days, while the same for 2021 earnings has stayed at $5.53.
Price and EPS Surprise: KAI
We also present one company that investors may prefer holding on to at current levels:
Ingersoll Rand Inc. (IR - Free Report) : The stock of this Davidson, NC-based company carries a Zacks Rank #3 (Hold). The company’s stock has lost 3.9% over the past year.
The company has outperformed the Zacks Consensus Estimate in each of the trailing four quarters, the positive earnings surprise being 9.64%, on average.
Price and EPS Surprise: IR
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
See their latest picks free >>