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Is U.S. Manufacturing Showing Signs of Recovery? 5 Top Picks

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The U.S. manufacturing industry, which faced severe challenges in 2019 owing to the lingering trade conflict and tariff war with China, is showing signs of recovery. Moreover, 2020 should bring good tidings as the two countries recently agreed to sign a phase-one deal to resolve the tariff war in the first half of January.

U.S. Manufacturing Showing Signs of Improvement

On Dec 17, the Department of Commerce reported that industrial production jumped 1.1% in November, surpassing the consensus estimate of 0.8% and reversing a 0.9% reduction in October. November’s metric marks the biggest gain in more than two years.

Notably, within overall industrial production, manufacturing output jumped 1.1% in November supported by a 12.4% gain in production of cars and trucks and related parts. Excluding this component, industrial production and manufacturing output grew 0.5% and 0.3% in the last month.

Overall, industrial production rose 2.1% for consumer goods and 1.7% for business equipment. Additionally, capacity utilization, which is a measure of how firms are using their resources, increased to 77.3% to 76.6 in October. However, the metric is still below the pre-recession level of 80%. This will prevent production cost and prices to rise exorbitantly.  

Is Slowdown in Business Spending Bottoming Out?

The imposition of tariff on China-made, low-cost intermediary products raised the input cost of U.S. manufacturers. Consequently, U.S. business spending dropped significantly in 2019. The Institute of Supply Management reported that U.S. manufacturing activities contracted for four consecutive months from August to November.

On Nov 27, the Department of Commerce reported that new orders for manufactured durable goods increased $1.5 billion or 0.6% to $248.7 billion in October. More important information from the report was that the core durable goods order (which excludes defense aircraft) jumped 1.2% in October.

The core durable goods data for October indicate that business spending is likely to continue although the pace may decline considerably. Therefore, stabilization of business investment in October will act as a relief to the manufacturing sector. Additionally, new orders for core capital goods is a leading metric to calculate equipment spending in the U.S. government’s GDP measurement. Notably, manufacturing activities constituted nearly 12% of U.S. GDP.

U.S-China Phase-One Trade Deal

On Dec 13, both United States and China declared that they have reached a phase-one trade deal likely to be signed by the two presidents in the first half of January. Per the deal, the United States will reduce the tariff rate from 15% to 7.5% on $120 billion Chinese exports. Moreover, the Trump administration will also cancel the imposition of 15% tariff on fresh $160 billion Chinese products mainly used for making consumer goods.

On the other hand, China has pledged to purchase $40 billion agricultural products from the United States per year. U.S. officials are still trying to raise the threshold to $50 billion per annum. Moreover, China will also rollback on some tariffs imposed on U.S. exports. U.S. Trade Representative Robert Lighthizer said the deal will address intellectual-property issues along with strong enforcement provisions and financial services and currency issues.

Our Top Picks

At this stage, we have narrowed down our search to five manufacturing stocks that popped in 2019 and still have momentum for the next year. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Ultra Clean Holdings Inc. UCTT designs, develops, prototypes, engineers, manufactures, and tests production tools, modules and subsystems for the semiconductor and display capital equipment industries primarily in North America, Asia, and Europe. The company has an expected earnings growth rate of 47.4% for next year. The Zacks Consensus Estimate for next year improved 28.4% over the last 60 days. The Zacks Rank #1 stock has rallied 172% year to date.

Tennant Co. TNC is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. The company has an expected earnings growth rate of 1% for next year. The Zacks Consensus Estimate for the 2020 improved 4.4% over the last 60 days. The Zacks Rank #1 stock has soared 50.1% year to date.

Cohu Inc. COHU is a leading supplier of semiconductor test and inspection handlers, micro-electro mechanical system test modules, test contactors and thermal sub-systems used by global semiconductor manufacturers and test subcontractors. It operates through two segments, Semiconductor Test and Inspection Equipment, and PCB Test Equipment. The company has an expected earnings growth rate of 681% for next year. The Zacks Consensus Estimate for next year improved 5.8% over the last 60 days. The Zacks Rank #1 stock has climbed 32.3% year to date.

DXP Enterprises Inc. DXPE is engaged in distributing maintenance, repair, and operating products, equipment, and services to energy and industrial customers in the United States. It operates in three segments: Service Centers, Supply Chain Services, and Innovative Pumping Solutions. The company has an expected earnings growth rate of 10.5% for next year. The Zacks Consensus Estimate for next year improved 1.9% over the last 60 days. The Zacks Rank #2 stock has surged 49.3% year to date.

H&E Equipment Services Inc. (HEES - Free Report) is one of the largest integrated equipment services companies in the United States. It operates in five segments: Equipment Rentals, New Equipment Sales, Used Equipment Sales, Parts Sales, and Repair and Maintenance Services. The company has an expected earnings growth rate of 7% for next year. The Zacks Consensus Estimate for next year improved 3.8% over the last 60 days. The Zacks Rank #2 stock has jumped 58.8% year to date.

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