The coronavirus pandemic has induced significant volatility in the financial, commodity and global capital markets, which in turn has created an uncertain economic scenario globally. While the outbreak has ravaged several industries, measures like lockdown to curb the spread of the deadly virus have nearly crippled industries like airline, entertainment and tourism. Notably, the Industrial Products sector has not been spared either as evident from a spate of announcements from industrial companies lately regarding temporary shutdowns, production curtailments, and withdrawal of 2020 guidance. The underlying reason remains the same — coronavirus-induced uncertainties such as the supply chain impact or concerns over the end-market customer situation.
Originating in China, the coronavirus rapidly took the shape of a global pandemic. Per the World Health Organization’s report as of Mar 31, 2020, number of infected people across the globe is at 750,890 with the death toll at 57,610. The United States is currently the worst affected, with 140,640 cases, followed by Italy with 101,739 and Spain with a tally of 85,195.
The pandemic has impacted global manufacturing activities and the supply chain. The industrial companies are either temporarily suspending manufacturing activity at facilities around the world, primarily due to low demand or per government mandates to curb the spread. Due to the rapid pace of developments associated with the pandemic, the companies cannot reasonably estimate the magnitude of the impact on their financial and operational performance at this time. Ultimately, their financial results for 2020 will be determined by the time span of the pandemic, geographic spread, effect on the demand for products and services, supply chain, and impact of governmental regulations imposed in response to the outbreak.
Mining and Construction equipment behemoth, Caterpillar Inc. (CAT - Free Report) recently withdrew its 2020 guidance. The company stated that its supply chain has been disrupted and it is temporarily suspending operations at certain facilities. The company will also be impacted by low oil prices. Other players in the Manufacturing – Construction and Mining industry, Terex Corporation (TEX - Free Report) and The Manitowoc Company, Inc. (MTW - Free Report) also revoked their guidances. Terex has suspended all share repurchases for the time being.
Farm equipment manufacturers, Deere & Company (DE - Free Report) and AGCO have withdrawn their guidances as well. Pentair plc, has also revoked first-quarter and full year 2020 outlook as it had to lower production in several key facilities as a result of "shelter in place" orders and suspensions of operations in several facilities on account of the coronavirus crisis.
The coronavirus outbreak has dealt a further blow to the manufacturing sector, which was already reeling under the protracted U.S.-China trade tensions and waning global demand. The U.S Purchasing Managers’ Index (PMI) released by the Institute for Supply Management had been below 50 (indicating contraction) for five consecutive months till December 2019. Even though the index climbed to 50.9 in January and came in at 50.1 in February, it seems unlikely that this recovery will stay, considering that manufacturing has been impacted by the coronavirus outbreak.
For the time being, challenges associated with COVID-19 will continue to weigh on the sector. These include — factory closures worldwide due to impact of the restrictions imposed by different governments, supply chain disruptions, low demand for goods, availability of employees and workers, and logistic costs.
Over the past year, the Industrial Products sector has fallen 23.8% compared with the S&P500’s decline of 10.0%.
The companies in the sector are likely face end market pressure as capital expenditures in oil & gas, mining and construction are likely to be restrained. Impact of the factory closures will also reflect on their top line performance. Meanwhile they should focus on extensive cost cutting and lean manufacturing actions that will help sustain margins despite the volume declines.
Projections for the Sector
Per the latest Earnings Trends report, earnings for the Industrial Products sector is expected to decline 14.5% in first-quarter 2020. In fact, 10 of the 16 Zacks sectors are expected to log decline in first-quarter earnings with Autos, Aerospace and Energy being the worst performers. In the second quarter, the Industrial Products sector is expected to suffer a decline of 11.9% in earnings followed by a 1.9% dip in the fourth quarter. The scenario for the first quarter of 2021 looks promising with a 2% growth. Overall for 2020, the sector’s earnings are expected to decline 6.8% following growth of 0.6% in 2019. In 2021, the sector’s earnings are expected to rise 9.5%.
One promising stock in the sector is Sharps Compliance Corp (SMED - Free Report) , which currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sharps Compliance has an estimated earnings growth rate of 800% for 2020. The estimate has gone up 3% in the past 60 days. The company has a long-term estimated earnings growth of 22.5%. In a year’s time, the company’s shares have soared 117%.
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