The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining, and utility equipment. The industry participants serve customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry participants also provide support to oil and gas, power generation, marine, rail and industrial applications.
Let us take a look at the three major themes in the industry:
- The U.S.-China trade war and waning global demand had already taken a toll on the U.S manufacturing sector, and the coronavirus pandemic has only aggravated the scenario. Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) came in at 41.5 for April — the lowest since April 2009 when it registered 39.9%. Further, per the Federal Reserve, industrial production slumped 11.2% in April — the worst drop in the 101-year history of the index. This slump can be attributed to factory closures and suspension of operations due the pandemic. Manufacturing output fell 13.7% in April — the steepest decline on record. Mining customers are expected to remain disciplined with their capital expenditures this year due to low commodity prices. Demand will be particularly weak in the oil and gas sector on account of the slump in oil prices and sluggish capital spending. The Construction sector is also expected to slow down in the near term.
- The industry players are taking every action to bolster financial condition, conserve cash and optimize profitability amid low demand. The industry participants are implementing cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees or reducing work hours, freezing salary hikes, scaling back advertising spend and deferring certain discretionary capital expenditures. These are likely to help the industry in sustaining margins in the wake of weak demand.
- Given that steel is a primary raw material in manufacturing, the implementation of tariffs on steel imports into the United States impacted the industry’s margins. Caterpillar Inc. (CAT - Free Report) , a dominant industry player, resorted to pricing actions and cost control to sustain margins in the wake of the input cost inflation. Further, these companies are making efforts to streamline operations and realign around high growth key markets or customer segments to drive results. These companies are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. This enables manufacturers to make rapid changes to operations to respond to market-based threats or opportunities.
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 Manufacturing - Construction and Mining industry, which is part of the broader Industrial Products Sector currently, carries a Zacks Industry Rank #208, which places it at the bottom 14% of 255 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over a year’s time, the industry’s earnings estimate for the current year has plunged 65%.
Despite the bleak near-term prospects of the industry, we will present a few Manufacturing - Construction and Mining stocks that can be retained in one’s portfolio given their prospects in the long haul. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector but Lags S&P 500
The Manufacturing - Construction and Mining industry has outperformed its own sector over the past year. However, it has underperformed the Zacks S&P 500 composite over the same time frame.
Over this period, the industry has fallen 1.3% compared with the sector's decline of 3.1%. Meanwhile, the Zacks S&P 500 composite gained 8.7%.
One-Year Price Performance
Manufacturing - Construction and Mining Industry’s Valuation
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 10.55 compared with the S&P 500’s 13.11 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 18.2. 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 14.71 and as low as 7.04, with the median being at 10.91x.
The near-term prospects for the Manufacturing - Construction and Mining industry look dim in the wake of the impact of coronavirus pandemic on its operations, supply chain and end markets. However, cost and cash saving initiatives, efforts to streamline operations and investment in digital initiatives are likely to drive results.
Only one stock in the Manufacturing - Construction and Mining industry space sports a Zacks Rank #2 (Buy). We have also mentioned two stocks from the same industry, which investors can retain as they carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Astec Industries, Inc. (ASTE - Free Report) : This Chattanooga, TN-based company carries a Zacks Rank #2 currently. The company has beat estimates in each of the trailing four quarters, the average positive surprise being 6.7%. The Zacks Consensus Estimate for fiscal 2020 earnings has moved up 144% over the past 30 days.
Price and Consensus: ASTE
The Manitowoc Company, Inc. (MTW - Free Report) : This Manitowoc, WI-based company has a long-term expected earnings growth rate of 10%. The company has a trailing four-quarter positive earnings surprise of 22.3%, on average. The company has a Zacks Rank of 3.
Price and Consensus: MTW
Terex Corporation (TEX - Free Report) : The Westport, CT-based company currently carries a Zacks Rank #3. The company has an estimated long-term earnings growth rate of 4.6%.
Price and Consensus: TEX