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 commercial, retailers, government, financial and healthcare markets. Two important players in the industry are Lincoln Electric Holdings, Inc. (LECO - Free Report) and Sandvik AB (SDVKY - Free Report) .
Here are the three major industry themes:
- The restrictions imposed to contain the spread of coronavirus have severely impacted product demand, supply-chain activities, manufacturing actions and marketing techniques of many industry players. Industrial tool maker, Stanley Black & Decker, Inc. (SWK - Free Report) suspended its projections for 2020 due to the uncertainties related to the duration and severity of the pandemic. Also, it temporarily halted share buyback and buyout activities. For the second quarter, it expects sales to be the lowest in 2020. In addition to the pandemic-woes, the companies are dealing with the impacts of strained trade relations and unfavorable movements in foreign currencies.
- Weakness in industrial production and Purchasing Managers' Index (“PMI”) of the United States indicates difficult operating conditions faced by the industrial players. For instance, industrial production in March fell 5.4% (month over month) in March mainly due to pandemic-related woes. The country’s PMI fell from 49.1% in March to 41.5% in April. The index’s value below 50% indicates a contraction in manufacturing activities. Also, reduced global prospects are concerning. Per the IMF, global economy will decrease 3% in 2020 but grow 5.8% in 2021. For the United States, the financial institution predicts 5.9% decline in 2020 and growth of 4.7% in 2021.
- Increased focus on infrastructural development in the country, increasing use of sophisticated technologies in manufacturing process and demand for remodeling activities will aid the industry going forward. Also, the growing popularity of e-retailing is a boon for industry players. The industry’s revenues increased 1.7% year over year in 2019 and 3% in the first quarter of 2020. Added to these, favorable actions taken in the past — including corporate tax overhaul — will continue to aid players. Further, a healthy liquidity position — enabling the companies to meet their financial obligations — as well as cost-reduction measures will help the companies mitigate some financial pressure caused by the pandemic.
Zacks Industry Rank Indicates Gloomy 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 #236, which places it in the bottom 7% 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 bleak 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 a result of dull 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 49.6%.
Before we discuss a few stocks in the industry, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Underperforms S&P 500 & Sector
The Zacks Manufacturing-Tools & Related Products industry has underperformed both the S&P 500 and the sector over the past year.
While the industry players have collectively lost 13.5%, the sector has declined 13.1%. The S&P 500 has rallied 4% in the said time frame.
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 10.24. This clearly shows that the industry is trading below the S&P 500’s forward 12-month EV/EBITDA ratio of 12.89 and the sector’s 13.52.
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 5.77X. The median level, over the same period, was 8.91X.
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus S&P 500
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus Sector
Prevalent headwinds — including end-market uncertainties caused by the pandemic, restrictions imposed to contain the spread of the virus, tariffs and forex woes — pose serious threats to corporate revenues, margins and profitability. Considering the magnitude of the adverse impacts, we believe that tough roads are ahead for the industry players. However, solid liquidity and cost-reduction measures might benefit, to some extent, in the near term.
Nonetheless, we present one stock that investors might prefer to retain in their portfolio at present.
Enerpac Tool Group Corp. (EPAC - Free Report) : The stock of this Menomonee Falls, WI-based company currently carries a Zacks Rank #3 (Hold). Its shares have decreased 33.8% in the past year while its earnings estimates have been lowered by 10% for fiscal 2020 (ending August 2020) and 1.3% for fiscal 2021 (ending August 2021) in the past 30 days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company delivered positive earnings surprise in three of the last four quarters, while lagging estimate in one. Its average earnings surprise for the last four quarters is positive 9.38%. Going forward, focus on growth initiatives, solid product portfolio, cost-saving actions and effective commercial actions might be positives.
Price and EPS: EPAC
There are three stocks in the industry that can be avoided by investors presently.
Stanley Black & Decker, Inc.: This stock of this New Britain, CT-based company has decreased 13.5% in the past year. The stock currently carries a Zacks Rank #5 (Strong Sell).
The company recorded better-than-expected results in the last four quarters, with average positive earnings surprise of 4.22%. However due to the pandemic-woes, the company’s earnings estimates have been lowered by 35.4% for 2020 and 26.2% for 2021 in the past 30 days.
Price and EPS: SWK
Kennametal Inc. (KMT - Free Report) : The stock of this Pennsylvania-based tool maker has decreased 28.1% in the past year. The stock currently carries a Zacks Rank #4 (Sell).
The company delivered weaker-than-expected results in two of the last four quarters, met estimates in one and surpassed estimates in another. Average earnings surprise for the last four quarters was positive 7.72%.
In the past 30 days, the company’s earnings estimates remained stable for fiscal 2020 (ending June 2020) but decreased 14.6% for fiscal 2021 (ending June 2021).
Price and EPS: KMT
Lincoln Electric Holdings, Inc.: The stock of this Cleveland, OH-based company has decreased 2.7% in the past year. The stock currently carries a Zacks Rank #4.
The company delivered weaker-than-expected results in two of the last four quarters, met estimates in one and surpassed estimates in another. Average earnings surprise for the last four quarters was negative 3.14%.
In the past 30 days, the company’s earnings estimates decreased 20.1% for 2020 and 4.8% for 2021.
Price and EPS: LECO