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U.S. Manufacturing Thriving Amid Supply Bottleneck: 5 Picks

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U.S. manufacturing industries are at the forefront of the economy's revival from the unprecedented coronavirus-led devastations. In the last 12 months, U.S. manufacturing has shown a V-shaped recovery. 

Notably, it was not only the pandemic, which hurt manufacturing activities. This segment had struggled throughout 2019 due to an intense trade war between the United States and China. Therefore, the ongoing recovery of U.S. manufacturing is highly commendable.

U.S. Manufacturing Flourishing

On Jun 1, the Institute of Supply Management (ISM) reported that its manufacturing Purchasing Managers' Index (PMI) increased to 61.2% in May from 60.7% in April. The consensus estimate was 60.8%. Notably, any reading above 50% indicates expansion in manufacturing activities and a reading above 60% is generally recognized as exceptional. The reading for May reflects the 12th consecutive month of growth.

The new orders index jumped to 67% in May from 64.3% in April, marking a nearly 17-year high. However, the production index dropped to 58.5% in May from 62.5% in April and the employment index decreased to 50.9% in May from 55.1% in the previous month.

Despite growing demand, manufacturers are facing pricing pressure due to  higher input costs owing to the supply-chain destruction during the pandemic and shortage of skilled labor. Consequently, the backlog of orders index rose to 70.6% in May from 68.2% in April. Notably, 16 out of 18 manufacturing industries reported growth in May.

Moreover, the IHS Markit reported that the final reading of its U.S. manufacturing PMI for May came in at 62.1% compared with 61.5% in the preliminary reading and 60.5% in April. May's reading was the highest in its 14-year history. New orders and production grew sharply in May. However, supply-side bottlenecks significantly affected manufacturers.

Near-Term Drivers

The United States has witnessed a sharp decline in new coronavirus cases as the government has ramped up COVID-19 vaccinations nationwide. With this, the U.S. regulatory authorities are gradually removing lockdown-related restrictions to restore normal economic activities.

Most of the businesses that were closed due to lockdowns have reopened with new social distancing norms. These positives have strengthened the forward-looking sentiments of manufacturers.

As U.S. and major global economies reopen, the manufacturing sector should strengthen as export demand for high-tech manufacturing products of the country will likely increase.

The Fed has decided to keep the benchmark interest rate as low as 0-0.25% for a longer period. A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making the country's products more competitively priced.

Despite the elimination of government stimulus, consumer spending rose 0.5% in April, in line with the consensus estimate, after jumping to an upwardly revised 4.7% in March.

Notably, Americans saved a historic high of around $2.3 trillion during lockdowns. This should be the key driver of demand that was pent up despite the systematic termination of government or Fed stimulus.

Our Top Picks

At this stage, it will be prudent to invest in manufacturing stocks with a favorable Zacks Rank. We have narrowed down our search to five stocks with strong growth potential for 2021 that have witnessed robust earnings estimate revisions within the last 30 days.

Moreover, these companies are regular dividend payers and will act as an income stream during the market's downturn. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment ResearchImage Source: Zacks Investment Research

Deere & Co. (DE - Free Report) manufactures and distributes farm equipment worldwide. It operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services.

The company has an expected earnings growth rate of more than 100% for the current year (ending October 2021). The Zacks Consensus Estimate for current-year earnings has improved 3.7% over the last 7 days. The stock has a current dividend yield of 1% and soared 35.5% year to date.

Caterpillar Inc. (CAT - Free Report) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide.

The company has an expected earnings growth rate of 47.3% for the current year. The Zacks Consensus Estimate for the current year has improved 17.1% over the last 30 days. The stock has a current dividend yield of 1.71% and jumped 33.3% year to date.

Xylem Inc. (XYL - Free Report) is engaged in the design, manufacture, and servicing of engineered products and solutions for the water and wastewater applications in the United States, Europe, the Asia Pacific, and internationally. It operates in three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions.

The company has an expected earnings growth rate of 31.1% for the current year. The Zacks Consensus Estimate for the current year has improved 5.1% over the last 30 days. The stock has a current dividend yield of 0.95% and climbed 17.1% year to date.

Parker-Hannifin Corp. (PH - Free Report) manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. It operates through two segments, Diversified Industrial and Aerospace Systems.

The company has an expected earnings growth rate of 36.4% for the current year (ending June 2021). The Zacks Consensus Estimate for the current year has improved 3.8% over the last 30 days. The stock has a current dividend yield of 1.34% and advanced 14.9% year to date.

Illinois Tool Works Inc. (ITW - Free Report) manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding; Polymers & Fluids, Construction Products, and Specialty Products.

The company has an expected earnings growth rate of 26.7% for the current year. The Zacks Consensus Estimate for the current year has improved 5.8% over the last 30 days. The stock has a current dividend yield of 1.97% and surged 14.4% year to date.

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Free: See Our Top Stock and 4 Runners Up >>