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Manufacturing: A Good Bet for 2013?

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The manufacturing sector ended 2012 on a positive note despite the fiscal cliff crisis constantly posing a threat to its fortunes. According to a report released this week by the Institute for Supply Management (ISM), its index for factory activity increased to 50.7 in December from 49.5 in November.

This follows a contraction in the month of November where it had declined to a 40-month low. The employment index increased to 52.7 from 48.4 in November. The forward-looking new orders component was flat at 50.3.

Data released by financial information services company Markit also reflects similar trends. The company’s U.S. Manufacturing Purchasing Managers Index increased to 54.0 from 52.8 recorded in November. This was its highest reading since May.

The company’s chief economist, Chris Williamson, said growth is picking up in key economies such as Brazil and China and the euro zone crisis is easing. This could boost US exports in early 2013 as companies capitalize on higher demand for their products.

If the tax increases and spending cuts inherent in the fiscal crisis had come into effect, it would have resulted in a bitter beginning in 2013. Fears were gaining strength that another recession was in the offing. An agreement was finalized only late on Tuesday which averted most tax increases, though the issue of spending cuts is still pending. Additionally, a new conflict could arise over raising the debt ceiling in the months to come.    

However, the consensus is that the manufacturing sector has been witnessing resurgence and could be a good investment option for the year.

Since 2002, IndustryWeek magazine releases an annual ranking of the top 50 public manufacturers in the US based on their financial performance over three years. Here we examine 5 stocks which feature among its top 20 in the list published in the July 2012 issue.

Lorillard, Inc. , ranked 6th on the list, is the third largest manufacturer of cigarettes in the United States. Despite an industry slowdown, its domestic retail market share increased to 14.1% in 2011. By acquiring e-cigarette company Blu Cigs, the company has tackled the issue of declining tobacco demand while also expanding into the profitable electronic cigarette market. Meanwhile, it has substantially increased its dividend from $631 million in 2009 to $723 million in 2011. The company has a short-term Zacks #2 rank (Buy).

At Rank 12, Coach, Inc. is a leading US marketer of fine accessories and gifts. Its fiscal first-quarter 2013 earnings of $0.77 per share exceeded the Zacks Consensus Estimate by a couple of cents. Now with a presence in Europe, it plans to enter countries like Australia, Thailand, Vietnam and Indonesia via distribution partners. Meanwhile it continues to maintain significantly high cash balance and a negligible debt load. The company holds a short-term Zacks #2 rank (Buy).

Colgate-Palmolive Co. (CL - Free Report) , ranked 14th, is the world leader in the oral care and personal care product categories. Earnings for the third quarter of 2012 increased 5% from the prior-year period to $1.38 per share, in line with the Zacks Consensus Estimate. The company launched a four-year Global Growth and Efficiency Program in 2012 which is anticipated to save $365 to $435 million annually from its fourth year. The company is also looking at acquisitions which can boost growth and profitability. The company carries a short-term Zacks #2 rank (Buy).
Ranked 19th, The Hershey Company (HSY - Free Report) is the largest chocolate manufacturer in North America. In the third quarter of 2012, the company’s earnings increased 3.6% from the prior-year quarter driven by revenue growth and improved gross margins. Its continuing investments in core brand marketing, which includes advertising and promotional campaigns gives it a clear edge over competitors. It is significantly expanding its business in important international markets like China and India where the demand for confectionary is growing exponentially. The company has a short-term Zacks #2 rank (Buy).

Hollyfrontier Corporation (HFC - Free Report) , ranked 20th, is an independent oil refiner and a distributor of petroleum products. Earnings per share for the third quarter of 2012 have grown 23.01% over the last quarter and by 17.13% year over year. As of December 2012, its debt to equity ratio was low at 0.21. It also maintains a sufficiently high quick ratio of 1.51, which reflects its ability to meet its short term cash requirements effectively. Meanwhile, its share price has grown by 22.9% in the last 12-week period. With the U.S. markets now having access to lower priced crude and natural gas, the company will be in an even stronger position in the year ahead. The company has a short-term Zacks #2 Rank (Buy).

The year ahead promises to be a good one for manufacturing. An economist at the investment banking division of Wells Fargo & Company (WFC - Free Report) is of the view that significant demand has already been created in the economy. As firms prepare to cater to this, manufacturing will make a larger contribution to overall economic growth.

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