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 players 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.
Let's take a look at the three major themes currently governing the industry:
- The coronavirus pandemic has impacted the industry’s supply chain and weakened demand in many of its end markets including transportation, mining and industrial. The global energy market weakness has aggravated the scenario further. Several customers worldwide had to temporarily idle their manufacturing facilities amid the restrictions imposed by the respective governments. Players in the Metal Products - Procurement and Fabrication industry had to thus adjust production schedules in response to weak demand. The Fed’s latest industrial production report revealed that aggregate production of fabricated metal products in the United States fell 2.7% in first-quarter 2020 followed by a decline of 11.2% in April and a meager rise of 1.5% in May. Per the Institute for Supply Management’s latest Manufacturing Report, fabricated metal products witnessed decline in new orders, production, employment and backlog during the March to May period.
- In the wake of the pandemic, the industry players are taking every action to bolster financial condition, conserve cash and optimize profitability. These companies are implementing cost reduction actions, which include limiting discretionary spending, temporarily furloughing employees or reducing work hours, reducing short-term executive pay, delaying salary increases, scaling back advertising spend, eliminating non-essential travel, delaying hiring and deferring certain discretionary capital expenditures. These initiatives are likely to help the industry sustain margins in the wake of weak demand.
- 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 in the days ahead. According to a report by Transparency Market Research, the global metal fabrication market is anticipated to see a CAGR 3.5% to $23.05 billion to 2027 from 2019. Given that fabricated metals are utilized in diversified end-markets, effects of cyclic nature of the metal fabrication market are mitigated. Growth in end-use sectors 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 #194, which places it at the bottom 23% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook 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. Over a year’s time, the industry’s earnings estimates for the current year has gone down 62%.
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 18.0% compared with the sector’s decline of 7.7%. Meanwhile, the Zacks S&P 500 composite has rallied 5%.
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 7.94 compared with the S&P 500’s 13.44 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 19.13. 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 20.86 and as low as 5.01, with the median being at 7.86.
While the global COVID-19 pandemic has impacted supply chain, order levels, and customer demand; prudent cost management and automation will drive the industry.
We are presenting one stock with a Zacks Rank #1 (Strong Buy), two with Zacks Rank #2 (Buy) and two Zacks Ranked #3 (Hold) stocks that investors may focus on.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Century Aluminum Company (CENX - Free Report) : This Chicago, IL-based company sports a Zacks Rank #1. The company has a trailing four-quarter positive earnings surprise of 36.3%, on average. The Zacks Consensus Estimate for earnings for fiscal 2020 indicates year-over-year growth of 50.4%.
Price and Consensus: CENX
CIRCOR International, Inc. (CIR - Free Report) : Burlington, MA-based CIRCOR carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2020 has moved up 27% over the past 60 days.
Price and Consensus: CIR
Norsk Hydro ASA (NHYDY - Free Report) : Oslo, Norway-based Norsk Hydro has a Zacks Rank #2. The company has a long-term estimated earnings growth rate of 49.6%. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year growth of 133%. The estimates have moved up 180% in the past 60 days.
Price and Consensus: NHYDY
Mueller Industries, Inc. (MLI - Free Report) : This Collierville, TN-based company currently carries a Zacks Rank #3. The company has a trailing four-quarter positive earnings surprise of 32.9%, on average.
Price and Consensus: MLI
NN, Inc. (NNBR - Free Report) : This Charlotte, NC-based company has a Zacks Rank #3. The company has a trailing four-quarter positive earnings surprise of 33.1%, on average.
Price and Consensus: NNBR