The Zacks Diversified Operations industry includes companies that operate in various end-markets like oil & gas, industrial, aviation, technology, finance, healthcare, and transportation, among others. Such companies manufacture and provide equipment, solutions and related services to a vast customer base.
In addition, there are a few companies that provide services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions.
Here are the industry’s three major themes:
- The coronavirus outbreak has been severely impacting multiple end markets — including commercial aerospace, general industrial, energy, finance, transportation and others. Measures to contain the spread of the coronavirus have jeopardized marketing techniques, supply-chain activities, product demand and manufacturing actions of the majority of corporates. 3M Company (MMM - Free Report) suspended its financial projections for 2020 due to pandemic worries. The conglomerate’s monthly sales data shows an 11% year-over-year decline in April. The company has also withdrawn its share buyback activities for now. Further, General Electric Company (GE - Free Report) expects the performance to decline sequentially in second-quarter 2020. Notably, the diversified operations industry’s revenues in the first quarter of 2020 have declined 1.5% sequentially.
- Product innovation — a priority for many industry players as it helps in tapping demand from existing and new customers — is adding to risks emanating from high debt levels. A highly leveraged balance sheet increases financial obligations and might prove detrimental to profitability. Also, the companies are dealing with the impacts of strained trade relations (that mainly started with the imposition of tariffs on the import of goods) and unfavorable movements in foreign currencies. Per the IMF, the global economy will decrease 3% in 2020 but grow 5.8% in 2021. For the United States, the financial institution predicts a 5.9% decline for 2020 and growth of 4.7% for 2021.
- Notwithstanding the adverse impacts, the pandemic has boosted demand for many products, including face masks, personal protective equipment, sanitizers, medical sensors and others. For instance, Danaher Corporation (DHR - Free Report) believes that the healthy demand for products related to molecular diagnostics and acute care diagnostics will aid its Diagnostics segment in the quarters ahead. General Electric’s Healthcare segment too has scaled up the production of scanning and other monitoring products — including mobile X-ray systems, ventilators, CTs, patient monitors and ultrasound devices. Also, high demand for medical sensors, hand sanitizers and personal protective gears are anticipated to benefit Honeywell International Inc.’s (HON - Free Report) Safety and Productivity Solutions segment. In addition, solid demand from the defense end market is a tailwind for Honeywell.
Zacks Industry Rank Suggests Bleak Prospects
The Zacks Diversified Operations industry is a 21-stock group within the broader Zacks Conglomerates sector. The industry currently carries a Zacks Industry Rank #207, which places it in the bottom 18% 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 dull 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 weak earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates have decreased 48.8% for 2020.
We will present a few stocks that you may consider for your portfolio. But it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500
The Zacks Diversified Operations industry’s performance has been worse than the S&P 500 over the trailing 12 months. The stocks in the industry have collectively declined 8.6% against the S&P 500’s growth of 6.6%.
Past Year Price Performance
Diversified Operations Industry’s Valuation
EV/EBITDA ratio is commonly used for valuing companies with diversified operations.
The industry’s forward 12-month EV/EBITDA ratio is 29.89. This multiple is way above the S&P 500’s 13.11.
Over the past five years, the industry has traded at the highest level of 99x forward 12-month EV/EBITDA and lowest level of 16.98x. The median level was 21.75x over the same period.
Industry’s EV/EBITDA Ratio (Forward 12-Month) Versus S&P 500
Business opportunities seem restricted for the Diversified Operations industry. Many conglomerates are suffering from the adverse impacts of the pandemic, while many are witnessing a sudden hike in demand for products. The majority of the stocks within the industry currently carry a Zacks Rank #3 (Hold) or 4 (Sell).
We present three stocks, with a Zacks Rank #3, which investors might consider holding at present. Also, we provide a Zacks #2 (Buy) Ranked stock, which might interest investors.
A brief discussion on the chosen stocks is provided below.
Hitachi, Ltd. (HTHIY - Free Report) : The company is based in Japan. Its shares have declined 7.6% in the trailing 12 months. It currently carries a Zacks #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company’s average earnings surprise for the last fourth quarters is 96.61%. Also, in the past 30 days, the Zacks Consensus Estimate for its earnings has been unchanged for fiscal 2021 (ending March 2021). However, the estimate suggests growth of 444.1% from the year-ago reported figure.
Price and EPS Surprise: HTHIY
General Electric: Shares of this Boston, MA-based company have declined 27.3% in the past year. It currently carries a Zacks Rank #3.
The company delivered a positive earnings surprise in three of the last four quarters, while lagged estimates in one. Its positive earnings surprise for the quarters, on average, is 16.67%. The company’s earnings estimates for 2020 suggest a decline of 93.9% year over year, while that for 2021 suggests growth of 806.3%.
Price and EPS Surprise: GE
Honeywell International Inc.: Shares of this Morris Township, NJ-based company have declined 12.3% in the past year. It currently carries a Zacks Rank #3.
The company delivered better-than-expected results in the last four quarters. Its average positive earnings surprise is 4.26%. Also, its earnings estimates for 2020 indicate a decline of 15.1% from the previous year’s reported figure and that for 2021 suggests growth of 10.6% year over year.
Price and EPS Surprise: HON
LSB Industries, Inc. (LXU - Free Report) : Shares of this Oklahoma-based company have declined 69.9% in the trailing 12 months. It currently carries a Zacks Rank #3.
The company delivered a positive average earnings surprise of 6.51% in the last four quarters. Its bottom-line estimates reflect year-over-year growth of 21.6% for 2020 and 44.6% for 2021.
Price and EPS Surprise: LXU