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The Zacks Diversified Operations industry is experiencing weakness due to a slowdown in the manufacturing sector and lower customer demand. Persistent supply chain disruptions, raw material cost-inflation and labor shortages are added headwinds in the industry. These factors point to a bleak outlook for the industry in the near term.
Despite the slowdown in the manufacturing sector, strength across some prominent end-markets should drive growth of ITT Inc. and Griffon Corp.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end-markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction, and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines, and engineered fluid-process equipment.
The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
3 Trends Shaping the Future of the Diversified Operations Industry
Slowdown in Manufacturing Activities: Amid growing economic uncertainties, thanks to the Federal Reserve's monetary policy tightening, a slowdown in the manufacturing sector weighs on consumer demand in the industry. Per the Institute for Supply Management (ISM) report, economic activity contracted for the second consecutive month in December 2022.
The Manufacturing Purchasing Manager's Index dipped 0.6 percentage points to 48.4% last December, with a decline in New Orders Index and Production Index. A figure below 50 indicates a contraction in manufacturing activity. As the impact of interest rate hikes becomes more prominent and manufacturing activities exhibit signs of continued contraction in the near term, customer demand is likely to remain depressed.
Supply Chain & Cost Woes: Supply chain disruptions, primarily related to electronic component shortages, continue to plague the industry. Labor shortages are added headwinds in the industry. High raw material, logistics and freight costs are hurting the margins and profitability of industry participants. Pricing actions and cost-control measures are partly offsetting the adversity.
Strength Across Key End-Markets: Despite the slowdown in manufacturing activities, strong demand across some prominent end-markets, like automotive, electronics, safety, commercial aerospace and defense, rail and general industrial, should help the industry stay afloat. Companies offering construction materials are expected to benefit from the strengthening reroofing market in the United States, owing to new construction activity.
Companies with exposure to the life sciences vertical should benefit from robust activity in the bioprocessing business, and strength in instrument businesses, while those with exposure to the diagnostics vertical should gain from healthy demand for products related to respiratory testing. Continued recovery in the commercial market bodes well for companies operating in the Aerospace vertical, offering commercial jet engines and components, and aftermarket services.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #186. This rank places it in the bottom 26% 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 near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group's 2022 and 2023 earnings per share has decreased 8.4% and 19.6%, respectively over the past year.
Despite the industry's drab near-term prospects, we will present a few stocks for your consideration. But before that, it's worth taking a look at the industry's stock market performance and current valuation.
Industry Outperforms S&P 500
Over the past year, the Zacks Diversified Operations has outperformed the Zacks S&P 500 composite index. The industry has declined 12.7% compared with the S&P 500 Index's 14.1% decrease.
Industry's Current Valuation
On the basis of EV/EBITDA (F12M), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 9.57X compared with the S&P 500's 10.26.
Over the past five years, the industry has traded as high as 15.14X, as low as 8.45X and at the median of 10.81X.
2 Diversified Operations Stocks to Keep a Tab On
Below we discuss two stocks from the diversified operations industry that are poised for growth despite challenges in the industry. These stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Griffon: Robust growth in the Consumer and Professional Products segment owing to benefits from the January 2022 acquisition of Hunter Fan is aiding GFF. Strength in the Home and Building Products segment due to higher commercial volumes should buoy Griffon's performance in 2023. The company sports a Zacks Rank #1.
A diversified holding company, Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. The company delivered a trailing four-quarter earnings surprise of 119.1%, on average. The stock has surged 52.1% in the past six months.
ITT: Strength in end markets like chemical and industrial pumps, commercial aerospace and defense, rail and general industrial bodes well for ITT's growth. Strong demand for pumps, connectors, aerospace and defense components should drive orders, thus fueling the company's growth. Successive acquisitions to expand operations should bolster the company's top line. ITT carries a Zacks Rank #2.
Headquartered in New York City, ITT is a leader in high-technology engineering and manufacturing projects, engaging in the design, manufacture and sale of a wide range of engineered products and services. The company pulled off a trailing four-quarter earnings surprise of 1.2%. on average. It has an expected earnings growth rate of 8.4% and 10.9% for 2022 and 2023 respectively. The stock has rallied 32.8% in the past six months.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights ITT and Griffon
For Immediate Release
Chicago, IL – January 18, 2023 – Today, Zacks Equity Research discusses ITT Inc. (ITT - Free Report) and Griffon Corp. (GFF - Free Report) .
Industry: Diversified Operations
Link: https://www.zacks.com/commentary/2039941/2-diversified-operations-stocks-to-beat-industry-challenges
The Zacks Diversified Operations industry is experiencing weakness due to a slowdown in the manufacturing sector and lower customer demand. Persistent supply chain disruptions, raw material cost-inflation and labor shortages are added headwinds in the industry. These factors point to a bleak outlook for the industry in the near term.
Despite the slowdown in the manufacturing sector, strength across some prominent end-markets should drive growth of ITT Inc. and Griffon Corp.
About the Industry
The Zacks Diversified Operations industry includes companies that operate in various end-markets, including oil & gas, industrial, electronics, power, aviation, technology, finance, healthcare, chemical, non-residential construction, and transportation. Such companies manufacture and provide equipment and solutions, including bioprocessing products, molecular testing-related products, gas and steam turbines, generators, commercial jet engines, and engineered fluid-process equipment.
The industry players also provide related services to a large customer base. In addition, a few companies offer services in the agriculture, marine and telecommunications markets, and are engaged in providing environmental and safety solutions. The diversified market operators have a vast global presence, with exposure in the United States, Japan, India, China, Canada and other countries.
3 Trends Shaping the Future of the Diversified Operations Industry
Slowdown in Manufacturing Activities: Amid growing economic uncertainties, thanks to the Federal Reserve's monetary policy tightening, a slowdown in the manufacturing sector weighs on consumer demand in the industry. Per the Institute for Supply Management (ISM) report, economic activity contracted for the second consecutive month in December 2022.
The Manufacturing Purchasing Manager's Index dipped 0.6 percentage points to 48.4% last December, with a decline in New Orders Index and Production Index. A figure below 50 indicates a contraction in manufacturing activity. As the impact of interest rate hikes becomes more prominent and manufacturing activities exhibit signs of continued contraction in the near term, customer demand is likely to remain depressed.
Supply Chain & Cost Woes: Supply chain disruptions, primarily related to electronic component shortages, continue to plague the industry. Labor shortages are added headwinds in the industry. High raw material, logistics and freight costs are hurting the margins and profitability of industry participants. Pricing actions and cost-control measures are partly offsetting the adversity.
Strength Across Key End-Markets: Despite the slowdown in manufacturing activities, strong demand across some prominent end-markets, like automotive, electronics, safety, commercial aerospace and defense, rail and general industrial, should help the industry stay afloat. Companies offering construction materials are expected to benefit from the strengthening reroofing market in the United States, owing to new construction activity.
Companies with exposure to the life sciences vertical should benefit from robust activity in the bioprocessing business, and strength in instrument businesses, while those with exposure to the diagnostics vertical should gain from healthy demand for products related to respiratory testing. Continued recovery in the commercial market bodes well for companies operating in the Aerospace vertical, offering commercial jet engines and components, and aftermarket services.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Diversified Operations industry, housed within the broader Zacks Conglomerates sector, currently carries a Zacks Industry Rank #186. This rank places it in the bottom 26% 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 near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the negative earnings outlook for the constituent companies in aggregate. The Zacks Consensus Estimate for the group's 2022 and 2023 earnings per share has decreased 8.4% and 19.6%, respectively over the past year.
Despite the industry's drab near-term prospects, we will present a few stocks for your consideration. But before that, it's worth taking a look at the industry's stock market performance and current valuation.
Industry Outperforms S&P 500
Over the past year, the Zacks Diversified Operations has outperformed the Zacks S&P 500 composite index. The industry has declined 12.7% compared with the S&P 500 Index's 14.1% decrease.
Industry's Current Valuation
On the basis of EV/EBITDA (F12M), which is a commonly used multiple for valuing diversified operations stocks, the industry is currently trading at 9.57X compared with the S&P 500's 10.26.
Over the past five years, the industry has traded as high as 15.14X, as low as 8.45X and at the median of 10.81X.
2 Diversified Operations Stocks to Keep a Tab On
Below we discuss two stocks from the diversified operations industry that are poised for growth despite challenges in the industry. These stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Griffon: Robust growth in the Consumer and Professional Products segment owing to benefits from the January 2022 acquisition of Hunter Fan is aiding GFF. Strength in the Home and Building Products segment due to higher commercial volumes should buoy Griffon's performance in 2023. The company sports a Zacks Rank #1.
A diversified holding company, Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. The company delivered a trailing four-quarter earnings surprise of 119.1%, on average. The stock has surged 52.1% in the past six months.
ITT: Strength in end markets like chemical and industrial pumps, commercial aerospace and defense, rail and general industrial bodes well for ITT's growth. Strong demand for pumps, connectors, aerospace and defense components should drive orders, thus fueling the company's growth. Successive acquisitions to expand operations should bolster the company's top line. ITT carries a Zacks Rank #2.
Headquartered in New York City, ITT is a leader in high-technology engineering and manufacturing projects, engaging in the design, manufacture and sale of a wide range of engineered products and services. The company pulled off a trailing four-quarter earnings surprise of 1.2%. on average. It has an expected earnings growth rate of 8.4% and 10.9% for 2022 and 2023 respectively. The stock has rallied 32.8% in the past six months.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.