Prevailing market conditions seem to point toward a recession, if not this year, then in 2024. Whether there will technically be a recession or simply continued contraction in manufacturing output may be debatable. But in either situation, there will be negative implications for industrial product suppliers this year.

Companies with a focus on the manufacturing sector will have to contend with both demand and supply side challenges that manufacturers continue to face. Last year, manufacturers saw their costs increase as inflation hit historical highs, higher interest rates pushed up the cost of borrowing, and supply chain imbalances and labor shortages affected production.

This year is shaping up to be not too different with inflation remaining sticky at a relatively high level, interest rates set to move even higher and the labor situation being just as tight, even as supply chains ease up. An added problem this year is demand, which is likely to be increasingly sluggish, making cost recovery that much more challenging.

Despite these negatives, there are companies and segments that will benefit from secular growth trends such as industrial automation, digitization, reshoring initiatives, packaging innovation, etc. These, as well as segments that focus on or supply into the Consumer Staples sector, are likely to be safer bets. Let’s take a look at some examples:

Belden Inc. (BDC Quick QuoteBDC - Free Report)

St. Louis, MO-based Belden designs, manufactures and sells cable, connectivity and networking products that find application in the industrial automation, enterprise, education, healthcare, entertainment and broadcasting, sound and security, transportation, infrastructure, consumer electronics and other industries. Belden has manufacturing capabilities in North America, Europe and Asia, and a market presence in nearly every region of the world.

With key focus areas being automation in discrete manufacturing, process facilities, energy and mass transit, it’s easy to see why the company may not fare as badly during this downturn. The increased cost of capital, reshoring and the tight labor market are developing into trends supporting its business because automation tends to ease production constraints. Some of the areas of particular strength are automation within the food and beverage, and energy markets.

Analysts expect the company to generate revenue growth of 3.4% in 2023 and 5.6% in 2024. Earnings growth is expected to be 6.7% and 5.7%, respectively. In the last 30 days, analysts have raised their 2023 estimate by 43 cents (6.7%) and 2024 estimate by 8 cents (1.1%).

The shares are still slightly overvalued, although the recent selloff has made them a lot more attractive. The P/E of 12.6X, although more than its median value over the past year is a 29.8% discount to the S&P 500. They have always traded at a premium to the industry, but the current 56.8% premium to the industry is above the 34.8% average over the past year.

Graphic Packaging Holding Co. (GPK Quick QuoteGPK - Free Report)

Atlanta, Georgia-based Graphic Packaging, together with its subsidiaries, provides fiber-based packaging to food, beverage, foodservice and other consumer products companies in the Americas, Europe, and the Asia Pacific.

Its coated unbleached kraft (CUK), coated recycled paperboard (CRB), and solid bleached sulfate paperboard (SBS) products are sold to various paperboard packaging converters and brokers; its folding cartons, cups, lids and food containers primarily to consumer packaged goods, quick-service restaurants and foodservice companies.

It also sells barrier packaging products that protect against moisture, hot and cold temperature, grease, oil, oxygen, sunlight, insects and other potential product-damaging factors, as well as various laminated, coated and printed packaging structures sourced from third-party suppliers. Additionally, it designs and manufactures specialized packaging machines that package bottles and cans, and non-beverage consumer products; and installs and provides aftersales support for its packaging machines at customer.

Packaging especially for staple consumer products is a segment that should remain relatively stable during the expected downturn. Additionally, demand for paper packaging remains very high because of the continued increase in online retail and the delivery that goes along with it. Online food ordering and takeaway is accelerating across the world and the moving away from plastics makes paper the obvious alternative. Therefore, this is an attractive segment to be in right now.

Overall, Graphic Packaging continues to develop innovative packaging solutions, which along with the strong demand, strong pricing, improving productivity, recent acquisition in Europe that is expanding its geographic reach are contributing to year upon year of stronger-than-expected sales growth. Since it caters to the market for essential goods, its good fortunes should extend into the foreseeable future.

In the last 30 days, analysts have taken their 2023 EPS estimates up 20 cents (7.9%) and their 2024 EPS estimates up 7 cents (2.5%). The resultant 17.6% increase in 2023 earnings will come on revenue growth of 4.9%. The 2024 earnings growth of 3.9% is expected to come off revenue growth of 2.1%.

On a P/E basis, GPK is trading at a 9.3% discount to its median value over the past year. It is also trading at a discount of 34.0% to its industry and a 53.2% discount to the S&P 500. Therefore, the shares are cheap.

O-I Glass, Inc. (OI Quick QuoteOI - Free Report)

Perrysburg, Ohio-based O-I Glass is the largest manufacturer of glass containers in the world and a leader in glass container innovation. The company has 72 glass manufacturing plants spread over 20 countries. The revenue contribution between the Americas-Europe-Asia Pacific is 55-41-4%.

Its glass containers are used for packaging alcoholic beverages, including beer, flavored malt beverages, spirits and wine. It also produces glass packaging for a variety of food items, soft drinks, teas, juices and pharmaceuticals.

Some of the positives explained above for Graphic Packaging also apply to O-I Glass. For one, it operates in segments of the economy (food and beverage, healthcare) that tend to be relatively stable even in down markets. And second, glass is a good alternative to plastic, therefore the broad trend moving away from plastics also favors glass. The company is invested in a Glass Advocacy Campaign targeted at the US market and management is optimistic that it is redefining the dialogue on glass.

Pricing actions and solid execution are driving its strong results and capex investments are expected to bring online much-needed new capacity to further drive growth. Its recent restructuring efforts have also helped improve the capital structure.

Analysts are also positive about O-I Glass. Therefore the last 30 days have seen a 31 cent (13.7%) increase in its 2023 earnings estimate and a 17 cent (6.9%) increase in its 2024 estimate. At these levels, revenue and EPS growth for 2023 are 5.4% and 11.7%, respectively. For 2024, expected revenue growth is currently 3.6% and earnings growth 2.1%.

OI trades at a 20.4% premium to its own median value over the past year, a 49.6% discount to the industry and a 53.4% discount to the S&P 500. Therefore, it makes sense to grab some shares.

One-Month Price Performance

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