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Coronavirus-Hit US Manufacturing Suffers Worst Drop in 74 Years

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The coronavirus pandemic seems to have brought the U.S manufacturing sector to a standstill.  Per the Federal Reserve, industrial production slumped 5.4% in March — the worst drop since January 1946, as several factories had to suspend operations thanks to the pandemic. This follows a 0.5% rise in February and a 0.5% dip in January. Overall for first-quarter 2020, industrial production contracted 7.5% — the steepest since second-quarter 2009.

Manufacturing output dropped 6.3% in March, marking its steepest decline since February 1946. Performance was dragged down by decline in most major industries, especially in motor vehicles and parts. Manufacturing output slumped at an annual rate of 7.1% in the first quarter, the sharpest since first-quarter 2009, after decreasing 0.5% in fourth-quarter 2019. Capacity utilization for the industrial sector was down 4.3 percentage points to 72.7% in March and came in 7.1 percentage points lower than its long-run average for 1972-2019.

Meanwhile, the Manufacturing Purchasing Managers’ Index (PMI) as per the Institute for Supply Management remained below 50 (indicating contraction) for five months in a row till December. The index climbed to 50.9 in January followed by 50.1 in February but contracted again in March to 49.1%. Notably, contraction was noted in production, new orders, and employment. The manufacturing sector has clearly been impacted by the coronavirus pandemic and energy market volatility.

Per the World Health Organization’s situation report as of Apr 14, 2020, the United States is currently the worst affected by the virus, with 578,268 cases. Globally, so far 1.9 million people have been infected by the virus with the death toll at 123,010.

Around 6.6 million Americans have filed for unemployment benefits in the week ended Apr 4 taking the three-week total to an unprecedented 16.8 million amid the stay at home orders issued to curb the spread of the virus outbreak, which has compelled several businesses to cease operations. These figures show that the virus has cast a pall over the U.S economy. Notably, manufacturing accounts for 11% of the U.S. economy.

The coronavirus outbreak has dealt a massive blow to the U.S manufacturing sector, which was already reeling under the protracted U.S.-China trade tensions and waning global demand. The pandemic has impacted global manufacturing activities and the supply chain. The industrial companies are temporarily suspending manufacturing activity at facilities around the world, primarily due to low demand or to comply with government mandates to curb the spread.

Due to the rapid pace and uncertainty 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.

Thus there has been a spate of guidance withdrawals in the sector lately. Players in the Manufacturing – Construction and Mining industry like Caterpillar Inc. CAT, Terex Corporation TEX and The Manitowoc Company, Inc. MTW revoked their 2020 guidances. Terex has suspended all share repurchases for the time being. Farm equipment manufacturers, Deere & Company DE and AGCO Corporation AGCO have withdrawn their guidances as well.

Over the past year, the Industrial Products sector has fallen 21.6% compared with the S&P 500’s decline of 2.6%.

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. Moreover, low oil prices due to weak demand and excess supply will also weigh on the sector.

Consequently, the companies in the sector are likely to 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, the companies 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 21.2% in first-quarter 2020. In fact, 11 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 35.4% in earnings followed by a fall of 20.7% in the third quarter and 4.7% in the fourth. Overall for 2020, the sector’s earnings are expected to decline 20.2% following growth of 0.6% in 2019. In 2021, the scenario looks promising with the sector’s earnings expected to rise 13.9%.

One promising stock in the sector is Sharps Compliance Corp SMED, 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 50% in the past 90 days. The company has a long-term estimated earnings growth of 22.5%. In a year’s time, the company’s shares have soared 113%.

5 Stocks Set to Double

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